Boston Scientific Corp (BSX) 2007 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 Boston Scientific earnings call.

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

(OPERATOR INSTRUCTIONS) Later, we will conduct a question and answer session.

Instructions will be given at that time.

If you should require assistance during the call, please press star then zero.

And as a reminder, this conference is being recorded.

I would now like to turn the conference over to our host Mr.

Dan Brennan, please go ahead, sir.

Thank you, Greg, and good afternoon, everyone.

Thank you for joining us.

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

We issued a press release a short time ago regarding our Q1 2007 financial results.

There was some financials attached to the release and we've also posted some schedules to our website, which you might find useful, as well.

The agenda for the call will include a review of the financial results from Larry, an update on the CR business from Jim, review of the cardiovascular and other businesses and an update on our quality initiatives from Paul.

A CEO perspective from Jim and a question and answer session.

Before we begin, we'll be making some forward-looking statements on the call today, so I'd 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 factored described in the Company's filings with the Securities and Exchange Commission.

With that, I'll turn it over to Larry for a review of the financial results.

Thank you, Dan.

And good afternoon.

Just some highlights of the quarter.

The quarter came in about as expected at the high end of our previously announced ranged or guidance that was given.

It continues to be a period of transitioning to a larger scale business at Boston Scientific.

Comparing the first quarter of 2007 with the first quarter of 2006 is not that easy because there's a lot of apples and oranges comparisons.

Last year in 2006 in the first quarter, we were on our way to acquiring Guidant Corporation, but had not closed it.

In the first quarter of 2007, obviously it's going on roughly a year since the acquisition, April 21 of last year, so we have a full quarter of Guidant in it, Guidant meaning the CRM business that we acquired and also the cardiac surgery business that we acquired.

And of course, as you all know we sold the vascular business to Abbott.

So the first quarter of 2007, is remarkably different in many ways and hardly comparable to the first quarter of 2006 because of that transforming event that occurred in the second quarter of 2006, the acquisition of Guidant.

When you look at the first quarter of 2007 with Guidant in it, what you see and feel is a much bigger company, about 30% bigger from where we were a year ago, first quarter of '06.

The other observation to be made is that we acquired the CRM business specifically.

We had to invest in it to get it -- to get the quality where it needed to be, deal with the FDA issues, and grow it from here.

We've accomplished a lot in the last year.

Jim Tobin will talk about that.

But the reason I'm focusing on the CRM numbers in this quarter is that we have not taken any significant costs out of the CRM business because of our optimism toward the CRM market and the recovery of that market as well as the health of our CRM business.

We think we're headed down the right path.

We think we're going to grow off this cost structure nicely over the next 2 or 3 years.

And therefore, we're carrying that cost or infrastructure for a significantly larger sized CRM business on which we hope to grow and expect to grow in the months and years ahead.

So you feel that weight in the first quarter of '07.

And so when you first look at first quarter of '07, first quarter of '06, you can see the two have very little in common.

So with that aside, let me begin to give you some highlights of the quarter.

First off, the easy review is the size and scale of the business this quarter verses the quarter a year ago.

Our overall worldwide business in the first quarter of '07 shows a different scale, 2 billion almost 2.1 billion in size.

That compares to 1.6 billion in the prior year or 29% increase in sales.

A lot of that obviously is a result of the Guidant acquisition.

Our domestic business is 28% larger than it was last year at this time.

Our international business is 30% larger.

Europe, specifically was 40% higher than the prior period reported, Japan 19%, and Intercontinental 7% and keep in mind most of that is just a larger scale from the Guidant acquisition offset by a softness in the DES market.

If we look at the business by franchise on a worldwide basis, our cardiovascular business is 34% larger than it was the year before, again, because of the cardiac surgery and the CRM business.

Roughly, $589 million of incremental sales base.

If you look on our endosurgery business, which is apples-to-apples, we grew 8% this quarter in endosurgery.

And we'll talk a little bit more about that in a moment.

Neurostimulation, neuromodulation grew 28%, overall, again, 29% over the prior year.

For those of you, the analysts who want to run your models, let me go quickly through the domestic sales numbers in the cardiovascular area.

Intervention cardiology, was 460, peripheral, 85, physiology 27, neurovascular 35 million, cardiac, 46 million, CRM, 349.

Again those are domestic numbers for an overall cardiovascular business, domestic of 1.2 billion.

Our endosurgery business in the quarter, domestically, again, oncology, 35 million, endoscopy,109, urology 75, overall 219.

And neuromodulation, domestically was $50 million for a total domestic business of 1.271 billion and by subtracting the relevant amounts, from that what's in the press release, you'll be able to determine the international business.

Let me move on to trying to get to an apples-to-apples comparison for the entire business.

If you look at it from a pro forma perspective, that means we assume that the guidance numbers were in our numbers in the prior year in the first quarter of '06 on a pro forma basis as if the transaction happened January 1 of 2006.

The following.

Cardiovascular business largely because of the softness in drug eluting stents, market itself was down 10% year-over-year on a pro forma basis.

Endosurgery was down -- I'm sorry up 8%, neuromodulation up 28%.

Now when you let me go back to the cardiovascular business that was down 10% from the prior year on a pro forma basis, cardiac surgery in those numbers were up 6%, CRM was down 4%, and again, most of you follow the market for CRM and can understand the 4% softness in that year-to-year comparison.

Overall intervention cardiology was down around 15% and, again, that's largely on a worldwide basis due to the softness of the drug eluting stent market that you've been following for the past several quarters.

Let me move on to the pro forma on the domestic verses international.

On a pro forma basis, our domestic business was down 11%.

And our international business was flattish up 1% for an overall total worldwide comparison down 6% on a pro forma basis, off of 2.228 billion first quarter of last year pro forma compared to the first quarter of '07 up 2.086 billion.

Looking at the two very large markets that were -- that are very significant to us.

Let me give you some numbers relative to our guidance.

The good news is overall, I think when you compare our guidance, previous guidance of coming into the top line between 2 billion and 2.1 billion, we did come in the high side of that range.

When we talk about worldwide defibrillator business, we actually gave a range, previously of 356, 356 million worldwide on the low side to 386.

We came in at 398.

We actually came in over the high range.

In the U.S.

the defibrillator sales came in at 273 million, that was above the range given.

And also outside the United States came in at 125 million in defibrillator sales and that was also above the guidance.

We look at drug eluting stents, it's a little different.

Our range was worldwide drug eluting stent range was 451 million on the low side to 508 million on the high side in terms of guidance.

We actually came at 468, so kind of in -- closer to the low-end of the range.

In the U.S.

market, we came in at 293 million.

Outside the United States we record $175 million in business.

If you note, the outside the United States DES number is actually at the high of our range.

It was really the U.S.

market where we came in at the low of the previously guided range.

So hopefully that helps.

We were grateful to come in at the higher end of the range in total for the quarter.

And we'll move on from here.

On the EPS side, we also came in at the high range.

Previously we've given you guidance that we would be at the low-end, $0.15 a share on the earnings per share line and on the high range $0.21 a share.

We came in at $0.20 a share on an adjusted earnings basis.

Excuse me.

Now, if we look at the as reported numbers GAAP, going to the earnings part of the story, we had $0.08 a share on a 2.086 billion base.

The way you we reconcile that to the adjusted earnings number is follows.

The Guidant merger and acquisition related charges was represented a $0.01, so we add that back.

The amortization and stock compensation that we adjust out of our net earnings number represented $0.10 a share.

And there was a little noise in our income tax rate represented a $0.01.

So when you adjust it over net income tax had to do with the M&A side.

We come out with a $0.20 per share on adjusted earnings basis.

If you look at our P&L on adjusted earnings, we came in the quarter with 73, roughly 73% gross margin.

Our operating margin for the quarter was 23.4%.

And our net margin for the quarter came in at 14%.

If you try to compare, again, it's purely apples and oranges.

Q1 of the prior year on a GAAP basis with Q1 of '07 on GAAP basis, you see $0.40 a share in first quarter of '06 compared to $0.08 a share in the first quarter of '07.

Here are the biggest components that reconcile those two numbers.

It's the additional interest we took on in acquiring Guidant in April of last year that represented about $0.10 a share in the quarter.

As we pay that debt down, that burden will be removed from our P&L.

Another $0.11 reconciling from the $0.40 a share to $0.08 a share representing -- represented amortization and stock comp related to the Guidant Company themselves as we merged it in.

So if you take the amortization stock comp related to Guidant, it's roughly $0.11 a share.

And then the pure share impact of the Guidant acquisition represented about $0.06 a share.

So that's a big part of the reconciling item from 40 to 8.

And the other was really operational.

The rest, at least, $0.05 was operational, meaning that because we haven't really removed costs from the CRM business, rather, we're going to grow off of it, it didn't contribute a lot to the earnings base.

But also the slow down in the DES market did take about $0.05 a share when you reconcile one quarter of GAAP to the other quarter of GAAP, '07 to '06.

In terms of cash flow, in the quarter our EBITDA our earnings before interest, taxes, depreciation, amortization came in at 561 million, so a good EBITDA number in the quarter.

And operating cash flow was affected by a tax payment connected with the Guidant acquisition and the subsequent sale to Abbott.

We had a $400 million tax payment and that affected our operating cash flow in the quarter and that's a one-type event.

In terms of net debt, we finished the quarter with $1.7 billion in cash, which brought our net debt number to 7.5 billion.

So hopefully that helps you a bit on understanding the numbers in the first quarter of '07.

Let me now turn to guidance for the second quarter.

As you know, in February this year, we decided because of the uncertainty on timing and extent of the recovery and the CRM market as well as guesstimating the recovery and movement in the drug eluting stent market, we decided to go away from the annual guidance routine and go to a quarter by quarter guidance.

Our guidance for the second quarter as we see it now and plan for the second quarter is as follows, we think we'll see a second quarter I would say flattish when compared to the first quarter.

We see a range of sales, top line sales, low the range we see is around 2 billion, high of the range 2.1 billion.

So similar type of guidance for the second quarter, 2 billion on the low side, 2.1 billion on the high side.

When we look at the two large markets, DES and defibrillators, let me give you some thinking on that, that drove us toward the guidance that I just outlined on the top line.

We expect in terms of worldwide drug eluting stents, on the low range 405 million, high range 460 million, US DES 245 to 275, low and high OUS, 160 million to 185, low and high.

If we turn now to the defibrillator market, worldwide defibrillator sales we expect in the second quarter to range on the low side of 385 million, high side 415 million, that breaks down as follows.

U.S.

defibrillators low-end 270, high-end 290 million, outside the United States low range 115 million, high range 125 million.

So that should give you some guidance for your analysis of what we expect in both drug eluting stents and defibrillators.

both in low and high range, in terms of guidance for the second quarter.

In terms of earnings, adjusted earnings EPS, again, we have a range of roughly $0.15 a share on the low side to $0.20 a share on the high side.

And that compares to the first quarter where we did come in on the high side at $0.20 per share.

So overall, we're expecting Q2 to be somewhat look alike as Q1 and that's largely due to the transitioning marketing of cardiac rhythm management as well as the softness in the drug eluting stent market, and more to come on both of those as we get a review of both the CRM market and also the cardiology market from Jim and Paul.

With that summary, let me turn it over to Jim Tobin, our Chief Executive Officer and head of our CRM business to give you some flavor and perspective on the CRM business at Boston Scientific.

Jim.

Thank you, Larry.

Before I review the CRM numbers for the first quarter, I'd like to take you back about one year ago.

We just completed the acquisition of Guidant, the largest deal in medical device history and a transforming event for Boston Scientific.

At that time, we predicted the integration process would take roughly 18 to 24 months.

Today we are well ahead of that schedule.

While there have been challenges along the way, we're very pleased with the progress we've made and the pace of that progress.

We're confident we're moving in the right direction and building momentum for the remainder of 2007.

I'll share more details of our progress in a moment, but first let me review the numbers.

The first quarter was highlighted by double-digit sequential growth in worldwide CRM sales for the second consecutive quarter.

This included defibrillators growth of 12% worldwide and 9% in the U.S.

These results build on the comparable defibrillator growth we saw from Q3 to Q4.

With two quarters of solid sequential growth behind us, I expect to see sustained recovery and continued sequential growth for the remainder of the year.

Looking at the Q1 numbers in detail, total worldwide CRM revenue for the quarter was $539 million compared to 562 in the first quarter of '06, a 4% decline from last year with a 10% increase sequentially from last quarter.

In the U.S., CRM revenue was 349 million including 273 million defibrillator revenue and 75 million in pacemaker revenue.

Total U.S.

revenue was down 10% compared to the first quarter of '06 but up sequentially over the prior quarter by 9%.

Outside the U.S., CRM revenue totalled 190 million including 125 in defibrillators and 65 in pacemaker.

Q1 revenue outside of the U.S.

was up about 9% relative to last year and up about 12% compared to Q4.

As you can see, we've made steady progress over the past two quarters.

Comparisons to 2006 figures will continue to be difficult through Q2.

However, we're pleased with our sequential sales increases and we believe the Q1 numbers provide additional evidence that the overall CRM market is starting to grow again.

For the remainder of 2007, we expect market growth in the mid to high single-digits in the U.S.

and higher in international markets which are less penetrated.

Let me provide some brief CRM updates.

As you know last week, we announced resolution of the CRM warning letter issued by the FDA to Guidant in December of 2005.

With that decision, the FDA has removed all associated regulatory restrictions on our CRM business.

Lifting the warning letter has been the number one priority for the CRM Group since acquiring Guidant a year ago.

It's significant to point out that the FDA inspector noted no observations during the reinspection of our St.

Paul facility or the inspection of any of our other facilities.

This further evidence of the fundamental improvements we made in our quality systems and another example of our company's commitment to patient safety.

The resolution of this warning letter represents a major milestone in the ongoing recovery of our CRM business and our efforts to rebuild trust and confidence.

With regulatory restrictions now removed, we look forward to restoring our new product, Cadence, which will include product launches in virtually every category.

Last week, we announced, FDA approval of the ACUITY Steerable left ventricular lead.in addition to approval for ACUITY, we received 5 other approvals from the FDA for software upgrades and other enhancements designed to improve the performance of existing CRM products.

Other recent product approvals outside the U.S.

include the launch of the Vitality DR dual chamber ICD in Japan.

The Japan market is responding well to our technology offerings as evidenced by the strong adoption of the renewal for CRTD.

Back in the U.S., we anticipate FDA approval of the Vitality NXT ICD in the late 2007 or early 2008, which will bring wireless technology to our entire defibrillator portfolio.

We continue to make progress on the rollout of latitude remote monitoring.

Approximately, 20,000 patients are now enrolled in the system and we are receiving positive feedback from both patients and physicians.

In March, we completed the full launch of our WAND at latitude system that conserve as many as 150,000 patients all ready implanted with non wireless BSC defibrillators.

In closing, I'll say that we're very encouraged by the first quarter results.

Our sequential sales growth over the past two quarters confirms our belief that the CRM market is beginning to recover.

The comparables to last year will likely remain soft for another quarter.

But the trends are positive and all evidence indicates they should stay that way.

As we mark the one-year anniversary of the Guidant acquisition, we are well-positioned to take advantage of the substantial opportunities in the CRM space.

We look forward to starting our second year in CRM with no regulatory restrictions and improve quality system, reallocated R&D spending, and a stronger pipeline.

Finally, I'd like to thank the members of the CRM Group and those who support them for their tireless dedication over the past year.

Although there's still plenty of work to be done, we have come a long way in a short time, and Boston Scientific is a better company for their efforts.

I'll share some additional perspective with you later in the call, but now I'm going to turn it over to Paul LaViolette.

Paul.

Thanks, Jim.

I'm going to concentrate my comments on cardiology and drug eluting stent performance, both the product and the market, but I'll also provide some additional insight into other businesses and our progress on quality.

Based on reported sales that you've now heard across the industry, Boston Scientific gained U.S.

market share in the first quarter and now holds 55%, our strongest position in over a year.

We witnessed very stable pricing with less than 1% sequential decline and an unchanged annual price of about 3% decline or less.

So taxes controllable are in very good shape.

The drug eluting stent market in Q1 did decline, as has been well documented.

And I'd like to review the building blocks of that market for you to give you a better perspective.

Q1 procedures were soft to prior by 3%.

But down sequentially by just about 1%.

And as indicated in prior calls, the growth in procedures has halted, we believe temporarily, but the current rate of decline is very modest.

Q1 DES penetration with all data now in, was about 69.5%.

Other contributing variables of the percent of stented cases and stents per case were down just fractionally.

This results in a market that has reduced in size from prior highs.

We need to drill into current market perceptions to assess stability and up sides or down sides from here.

First, on penetration.

Post ACC physician data indicates no erosion in the perceptions on DES safety.

The majority of physicians tell us their procedures are now stable and any variation in their volumes is due primarily to fewer reintervention as a result of the beneficial affect of drug eluting stent.

This is obviously a positive sign.

Secondly, media coverage on the [Courage] trial has increased patient inquiries, but will not according to cardiologist perceptions lead to changes in practice.

And this is primarily because the trial's limitations are well-known and factored into practice guidelines already.

Cardiologists do believe procedural volumes will dip due to referring physician responses to media reports, but they believe it will last only a few weeks to a few months.

The majority believe this change will fall into the plus or minus 2% range.

Perhaps to the benefit of existing platforms physicians are also for the first time expressing stronger preference for using platforms that are proven rather than switching to what's new.

There they be growing alignment between increased conservatism and increased switching barriers.

Overall we appear to have a stable safety and share outlook.

Procedure volumes may exhibit transient softness based on perceptions, but should be bolstered over time by data.

Shifting to international markets, drug eluting stent penetration in Q1, excluding Japan was equal to Q4 at about 48% and was 70%, again in Japan.

It's clear the negative affect of media perceptions is muted outside the U.S.

and, in fact, penetration on average in certain markets, including Southern Europe, has increased since Q3 of last year.

Our stent business in international is strengthening.

TAXUS Express is approved and now licensed in Japan.

Will be reimbursed shortly and launching mid Q2.

We have a comprehensive release plan, a great team, a market presence, and very solid expectations for share gains.

Within several quarters, we expect market leadership in Japan.

Our Q1 TAXUS run rate in Europe was higher than in Q4 and our PROMUS launch is accelerating.

It appears that our overall dual platform goal of incremental aggregate share with minimal cannibalization is working.

TAXUS Liberte remains strongly entrenched as the number one stent.

Is being bolster by an international only campaign on diabetic results, where a majority of physicians believe TAXUS is superior and the growing market interest in deliverable devices with proven clinical performance.

PROMUS is now growing rapidly for Boston Scientific and to date has been basically fully incremental.

PROMUS technology is perceived as the optimum olimus platform and the benefits of offering customers two DES choices are increasingly demonstrable.

We are seeing some increasing pricing pressure based primarily on XIENCE, which is the only DES in Europe below $1500 on an average selling price basis.

But overall, based on the strength of our platform and stent and drugs, our diabetic data and our careful launch execution, we remain at over 40% market share, in fact at 42% in March and optimistic both about the strength of our plan and our prospects in Japan.

Looking very quickly at other businesses worldwide, the endosurgery group grew about 8% globally, challenged a bit by tough comparables by '06 in which urology grew by 32%.

We saw a strong endoscopy growth at around 9% and all signs point to sustained double-digit growth performance for 2007.

We also acquired the Prolead asset recently, which is a driver to our BPH franchise and that will allow us to boost gross margins, quality and new product flow.

We also had strong worldwide growth in neurovascular, at 17%, the fifth consecutive quarter at double-digit growth and in neuromodulation, up 28%.

And our corroded stent system launch is off to a very solid start with several hundred accounts opened in the first quarter and early double-digit market share position and commencement of our [Sonoma] post market study in the coming weeks..

So, a number signs of strength across the business portfolio.

Lastly, updating status on corporate warning letter, , we have made substantial progress.

We have accelerating momentum and are approaching our next goal of external audit readiness.

Our challenge is to prepare over 20 locations, for both targeted warning letter audits, as well as, full quality systems audits.

We believe we are essentially ready for both.

We have set a date certain to commence third party audits in May and our plan is to complete them through June and July with a goal to provide the final audit reports to FDA by the end of July.

I'll conclude my remarks there and turn it back to Jim Tobin to provide his CEO

Thank you, Paul.

I'll briefly give my perspective for the quarter and open it up for questions.

While we continue to face challenges, our progress in a number of areas shows we're moving in the right direction.

Operating results came in at the upper end of the range for sales and EPS.

CRM Group achieved double-digit sequential growth in worldwide sales for the second consecutive quarter coming in stronger than we had anticipated.

These results provide further evidence that we're having success in our efforts to restore trust and confidence in our CRM offering.

The resolution of the CRM warning letter also sends a strong signal.

It bodes well for a rejuvenating pipeline led by a successful rollout Latitude.

Saturday was the one year anniversary of our closing of the Guidant acquisition and I'm very pleased with how far we've come in that time.

Where we are today, at one year, is where I originally thought we'd be at 2 years.

We've been able to come so far so fast because of the many good people in the CRM organization who have dedicated themselves to turning this business around.

In our drug eluting stent franchise, sales we're softer than we had hoped but our market share held steady again, in fact we increased a point in the U.S.

We're going through a rough patch with DES, but we believe the market will be stabilizing and we're optimistic about the future.

We continue to make progress addressing our quality challenges, most notably with the of the resolution of the CRM warning letter.

And we're about to start third party audits related to our corporate warning letter, which represents progress on a broader front.

As I look at the quarter, there are accomplishments in key areas, financial performance, CRM, DES, and quality that lead me very encouraged and support our belief that we're moving in the right direction.

And with that, I'll turn it back to Dan Brennan who will moderate the Q&A.

Thanks, Jim.

So, let's open it up to questions and in an effort to enable us to fuel as many questions as possible in the time remaining, I would request that you ask no more than two questions at a time.

(OPERATOR INSTRUCTIONS) And our first question comes from the line of Bob Hopkins with Lehman Brothers.

Please go ahead.

Thanks very much and good afternoon.

Question first on the stent side and then on the ICD side.

On the stent side, first of all, I was wondering if you could offer us any comments on the potential for cost cutting at some point within that division?

It seems like your Q2 guidance is pretty weak despite coming into Japan.

I'm wondering at what point you potentially take action on the cost side?

And as a corollary to that, when do we expect to see the diabetic data from XIENCE, as you understand it?

Bob, this is Paul, I'll give you a sense of that.

First of all, we expect to receive diabetic data shortly, and I believe we'll see some public disclosure of that data at PCR.

So it should be in the coming weeks.

That's my understanding.

Regarding costs, I think, first of all, we are not restructuring our cardiology business while at the same time we are monitoring our cost structure very, very closely.

We believe we are investing for sustained leadership in that market.

We think that leadership is going to be bolstered by the benefit of a dual drug program, but there are some costs associated with having two drugs, two platforms to develop.

Obviously, we're investing in that because we think there are long-term benefits.

And our I think our early results internationally are starting to show the benefits of both programs.

But that, I will say as a stand alone business runs rather efficiently.

Although we see some pressure in the future on gross margin based on the blended mix of manufactured verses supplied stents, we still expect that business to be highly financially productive and we're continuing to invest in pipeline.

We obviously are all aware that some of the regulatory requirements are actually intensifying.

And so we have reduced our portfolio of investments to the top, literally 4 or so DES programs that we think are most vital to long-term success.

And so while the business is not growing, we're investing in it as a major earnings producer for the long-term and we intend to maintain leadership for the long-term.

So we shouldn't expect any kind of restructuring in the near-term, then as far as the stent business is concerned?

That's correct.

Okay.

And then, Jim, on the ICD front, can you just give us a sense as to where we are in terms of profitability for the cardiac rythmn management business?

Where we've been and where you think we can get to as we look towards the--- further out into this year?

We've been at not very much.

We're about half as profitable as we should be at this point.

So in 6 months, literally we've come half way back.

I think the second half will take longer than an additional 6 months.

But we've come quite a ways in a short period of time.

The restructuring we did in February-March really wasn't aimed at saving dollars so much as reallocating the dollars that we were already spending.

And that, I believe will pay dividends in terms of productivity of the R&D pipeline over the rest of this year.

So we're -- we're making -- we're making progress faster than actually I would have thought possible.

But we're not there yet, we're about half way back.

And then, Larry, just very quickly, can you give us any update on the endosurgery, spend, timing or details?

Sure, the endosurgery project is underway.

We have a small team of people that's a growing team of people focussed on all the complexities of attempting to carve a business that was home grown for many years out of the Boston Scientific into a separate legal entity that can sustain itself with manufacturing, distribution, finance, treasury, all those sorts of things.

So most of the work right now, Bob, is focussed on the blueprint of how we separate the business.

And we're making progress, but it's going to take a while.

Then the second significant project is understanding the IP separation, intellectual property.

How do you -- because of all this intellectual property is used by both endosurgery as well as the rest of the company.

How do you get the IP figured out, and then thirdly, looking at the governance issues that are relevant to a carved transaction.

So timetable is not changed.

I think before we're really conversant on all of these issues, it's going to be another month or so.

We are also preparing separate financial statements and preparing those to be audited.

That's also an enormous project.

A lot of heavy lifting by a lot of people in order to fully explore the carve.

Thanks very much.

Timetable's not changed.

6 months to 12 months.

Our next question comes from the line of Rick Wise with Bear Stearns.

Please go ahead.

Hi, good afternoon, everybody.

First, a question for Paul.

Paul, maybe you could just -- you could also clarify your comments on XIENCE pricing, the impact of XIENCE on pricing?

I didn't quite understand what you were saying.

But specifically, can you update us on your promise TAXUS marketing strategy?

Are you switching accounts actively?

Are you opening new accounts because you have an OLIMUS stent?

Maybe just help us understand where things are?

Well, first on pricing, just I'm really commenting specifically on what is generally available for all to see through MRG pricing which has the clear, published prices from TAXUS, CYPHER, Endeavor and XIENCE, where within the first three stents I referenced the lowest recorded price, again based on MRG is over $1650 and XIENCE is simply below 1500.

And it's somewhat surprising to me with a new platform, very positive data that pricing would be so low.

So I think it just remains to be seen how that pricing strategy plays out.

In terms of our launch with PROMUS.

And again, I would reemphasize our very, what I think is a very simple business strategy incremental aggregate share with minimal cannibalization.

And so there are, that is translated to a field organization that has a variety of accounts scenarios.

Some accounts with taxes as the leading platform, there is still 60% of share points available and there are some accounts internationally where we had, as an example zero TAXUS business and now hold anywhere from 10% to 60% market share with PROMUS.

There are other accounts that are key TAXUS stronghold that may have wanted a-- an OLIMUS on the shelf, prefer Boston Scientific and are more than content to make PROMUS that choice.

So I think it's -- every account is different.

And we've been measured in our launch primarily with the goal of assuring that PROMUS business is gained in a quality way with, again preservation of TAXUS, run rates and a goal to gain incremental business in those segments where we didn't necessarily have share.

That's very difficult to generalize, because every single account is different and we're customizing our launch on an account by account basis.

I hope that answers your question.

Thanks, on the CRM side, Jim, can you just review as specifically as you can what needs to be done to get new products approved now?

And maybe if there's any update on the pipeline but in terms of validation or FDA review?

I think a number of new products coming at the end of this year.

And just I'd be curious to hear your thoughts.

We've seen so many surveys, I've had so many conversations with doctors who are seeing their procedures are flat, I'm sure you've heard it yourself.

And yet with the St.

Jude numbers and now your numbers, it seems like we're seeing a little bit of a turn around.

I'd be curious to hear your perspective on that, as well.

Thank you.

Well, as far as the pipeline goes, the field is clear ahead of us at this point.

We have what I've referred to as remedial testing to do on the products in the pipeline as well as further back in the pipeline.

And that is progressing.

It will realistically take the rest of this year to work our way through all of that, maybe even a little bit of overhang into next year.

But we're doing well on that.

And it's -- when you test, you find things, you take the time to fix them, and you move on.

But that in general is moving in the right direction.

And I'm confident that we're going to be able to swallow all of that yet this year.

As far as the market itself goes, we're at the same handicap that you are.

Until the big guy with half the market reports, we're talking what's visible at this point is half or less of the market.

The numbers are what you see they are.

I'm very hopeful that when Medtronic's reports that they'll have had a decent quarter too and that will bode well for return to growth in the marketplace.

The alternative is that they don't have a good quarter and we gain some share, but that not the way to bet.

Thank you.

Our next question comes from the line of Mike Weinstein with JP Morgan, please go ahead.

Thank you for taking the question.

I have a couple.

Larry first, your cash balance was down about 330 million from the year-end.

I think you had an Advance Bionics payment that was part of that.

Could you maybe just break that down for us?

And then I have a follow-up.

Sure.

We had an Advanced Bionics earn out payment of about 190 million.

And then on top of that, we had the tax payment on the Abbott sale transaction of 400 million.

So those were two big payments in the first quarter.

Okay.

Perfect.

So net that will give us a picture of what your cash flow will look like?

Yes, the cash flow, for example, operating cash flow in the Q2, I would expect would be in the 275 -- 275 to 280 million.

We will probably be focusing on paying some debts down here in 2007, out of our cash balance and some other sources.

So it's hard to forecast the-- or predict what the net debt will be at the end of the year.

But probably at the end of the second quarter, it'll still be around 7.4 - 7.5.

Jim, if I can turn to you, I want to go to Bob's earlier question, if I look at the progress over the last 6 months, which you talked about, your CRM business is 20% larger but your DES business is 18% smaller.

And the net -- they net out to pretty close to the same thing.

But because of the differential and profitability right now, your operating margins over that time, third quarter to first quarter are down 250 basis points.

And that's despite what you described some progress on improving the profitability of CRM.

If we look out what everybody think's is going to playout in drug eluting stents with more competitors coming and therefore a smaller TAXUS business, 12 months from now than what you have today, it's still not clear to me and, I think probably to others in this call, why the company isn't taking a more aggressive look at cutting costs, be it in the stent franchise or really across the company given that it's going to be tough to see margins going higher over the next 12 to 24 months.

Thanks.

Stay tuned.

So stay tuned meaning that you're still thinking about it work as in progress?

Mike, this is Paul.

The question that was posed earlier was specific to whether or not we think the cardiology business, which is perhaps the most profitable business in the entire medical device industry needs to be fundamentally restructured.

And the answer to that right now based on our investment strategy and based on the fact that the future of the drug eluting stent market has not been predetermined is not yet in a tail spin, that the competitors that are planning to come in have not yet received their approvals and may, in fact, take considerably longer to get there.

Based on all of those variables, it is clearly premature for us to reduce our investment in a pipeline.

We have the most productive sales and marketing organization on a dollars per head basis in the industry.

It's premature to start attacking the SG&A of that particular division.

We are clearly aggressively assessing our overall cost structure in Boston Scientific and have a variety of plans in place to become more efficient.

But as it relates specifically to our cardiology business, we don't intend to restructure that business based on what we hope will be transient pressure on procedures, and what we hope will be overtime, stabilization and a restoration of DES penetration.

Understood, so, Jim your comment was a broader comment.

And what Paul's saying is don't look to the cardiology franchise as being the one that needs to be restructured?

There's more cards to be played in the marketplace.

And you can wreck a business in the process of trying to make it healthier.

Neither of us are interested in doing that.

And so we're going to -- we're going to be patient.

We're going to wait and see how things develop and see what happens.

And then we'll decide from there.

Last item, then I'll drop.

Jim, the guidance for the second quarter on the U.S.

ICD business, obviously you had a very good first quarter, your guidance to the second quarter is also encouraging.

Suggesting that your not seeing an impact from the latest round of letters you had to send out to clinicians about some of your devices?

Is that a fair assumption?

That's the way it turned out.

Great.

Thank you.

Your next question comes from the line of Larry Keusch with Goldman Sachs.

Please go ahead.

Yes.

Hi, good afternoon.

Just a couple things here.

I guess, Jim, as it relates to the CRM business, you now with the FDA warning letter behind you, my suspicion is and in speaking to some folks, there certainly seems like there were some accounts that would not order because of that FDA warning letter situation and maybe is more administrator driven, but there was some of that going on out there.

Anything anecdotal that you can offer?

Or help us think about what that opportunity may be now that that's behind you?

Yes, that Larry is a good question.

It's very interesting, I've been spending a lot of my personal time out in the market place talking to people.

And I've been doing it now for 9 months.

So it's no longer a sample of one.

I think the way I would summarize this is that there were people who put us in a 30-day penalty box and 90-day penalty box, 180-day penalty box, year-end penalty box.

And there were others who said I think it'll be safe to go back in the water when the warning later is listed.

And so, it's been more than 180 days and so that first set of customers have already begun to come back.

But clearly, there are people who have been waiting for this action as sort of the all clear signal from the FDA.

And so -- I sort of feel like the restraints have been taken off.

And it's not just the new product flow, it's that the signal is out there that we have put an awful lot of our difficulties behind us and are ready to rock 'n' roll.

Thank you.

And then just a couple other ones for Paul and then Larry.

For Paul and I'll just rattle these off.

For Paul , where do you actually think DES penetration is headed?

In other words do you think it was exiting at a lower rate at the end of 1Q and where might it go?

And as it relates to your TAXUS business, how much are you relying on your bundle of interventional cardiology products that you have in the catha lab to sustain share?

And for Larry, you indicated in response to a question as it related to paying off debt that you'd probably do some this year and there'd be some sources other than just your cash.

Obviously one of those may be endosurgery, but that's not clear that it's this year.

So what other sources of cash might you

Larry, on the bundle, I'll use your word.

But we don't -- the majority of accounts don't necessarily receive a bundled yield from Boston Scientific.

But without doubt, the premise of your statement is correct.

The fact that we are the leader of overall products besides stents, the fact that we're the leader in drug eluting stents.

And the fact that we are the only company with 2 drug eluting stent platforms Is an enormous factor.

It's the definition of market leadership and we intend to exercise that leadership, routinely and aggressively.

The fact that we're the only company that balances a large basket of routine products from balloons to wires, et cetera and then procedural enabling differentiated products.

Like embolic protection or intervascular ultrasound.

That is the broadest and most attractive portfolio.

So while there may be some customers globally that prefer not to have too much in one company's line, the majority of accounts prefer to consolidate.

And I think the early experience we're seeing in Europe is that -- and this is in markets more complex because of a number of different vendors that are smaller scaled.

There are a lot of hospitals that don't end up wanting to have more than 3 stent suppliers on the shelf.

And I think that's going to bode very well for us when the market begins to stabilize after a number of products are launched.

So I think our position in a market of ever increasing crowdedness becomes increasingly attractive.

Penetration, it's too early to peg where Q2 will come in.

The sense we have is physicians have increasing comfort and stability.

Coming out of ACC, it's clear to us that the vast majority of physicians now are very comfortable with the conclusion that actual patient safety is not affected by the late stent thrombosis signal that they now are aware of, but they now can justify against the performance in bare metal stents.

I think we're going to see considerable increases in restenosis cases in the coming weeks and months based on the trend toward bare metal stent utilization in the fourth quarter.

So we think we are approaching a period of stability and we think we're going to see increases between now and the end of 2007.

Okay.

On the other issue, Larry, on the paying down debt.

I think that early in the year I talked about our interest in paying down debt.

Our first debt payment isn't for another year '08.

And that one 650 million that we could easily accommodate.

But we like to pay a little more aggressively.

So we have a number of strategies underway and, of course, we've announced the possibility of a carve into surgery.

We have other -- quite a of a carve into surgery.

We have other -- quite a number of other contributors.

I can't really go into our strategies at this time, but they'll become apparent throughout the year.

Even as small as -- we've got some facilities and real estate that is no longer strategic, things like that.

We've got return on investments that we've made that are no longer -- they're going to be liquid.

And there's just a lot of different contributors.

And like I say, throughout the year you'll hear more about it.

We do plan on paying debt down to some extent this year in advance of the required repayment in 2008.

So it sounds like there's some easy ways for you guys to get incremental cash.

Right.

I'm not talking about anything radical.

Right.

The biggest contributor at this point, obviously is the idea of the carve.

Right.

Okay.

Thanks very much.

And Greg, with that, why don't we take two more questions?

Our next question comes from the line of Dhulsini De Zoysa with Cowen & Company.

Please go ahead.

Thanks so much.

Paul, I understand it's hard to peg where DES penetration will end up for the quarter, for the current quarter.

But maybe if you could tell us that 69.5% penetration you cited in Q1, was that the exit rate?

And I'm wondering because your Q2 guidance 405 to 460 million worldwide compares to 468 and that's a rather noticeable drop off.

I'm wondering is it total PCIs that's the biggest potential swing in the U.S.?

Yes, that's a good question, Dhulsini.

And I haven't given the penetration rates for Q2 or 3 because we really haven't pegged them yet.

We're really waiting to see.

Coming out of ACC, we planned on an impact for [Courage].

And it's still a little bit too early to gauge exactly what the PCI implications are.

PCI is such a diffuse procedure base with obviously something on the order of 260 - 270,000 procedures a quarter.

When you talk to physicians as a result of [Courage], the general sense is I haven't seen any on a per capita basis, if you will.

Most physicians just don't think there's been any impact.

But if you look at a macro perspective, we think there will be a couple of percentage point impact and that's very hard to gauge right now.

Since it is not data base but it is -- it's a function of the referral pattern with patients second guessing, with referring physicians saying maybe you can just tolerate your systems a little bit longer or try to max out on a pharmaceutical regimen a little bit more.

It's difficult to gauge, it's a period of (Inaudible) in PCI that we have not experienced before.

It is not based on data, it's based on media more than anything.

And that's why we're a little bit more conservative in Q2.

But it's not because we believe there's any shift in perceptions about DES safety that would lead to predictable erosion in DES utilizations.

Okay, so if I try to tease out the moving parts, I think you said stent-- the percentage of stented cases and stents per case were just marginal changes there.

I think you said suggests that DES penetration in the U.S.

seems to be finally stabilizing.

So then it is just that question mark of what could happen to total PCIs.

I think that's right.

When I say that other factors are fractionally down, device utilization per procedure literally was down from in our calculus 1.47 to 1.46.

It really doesn't get any slighter than that.

And I would say stented procedures change by less than a half a percent.

In other words, balloon only procedures went from 8% to 8.5.

So you're dealing with very minor changes and the real swing factor is whether or not total PCI volume will be below 265,000 or back up closer to 270 to 272,000 as was the case in the first and second quarters of 2006.

That's the biggest swing factor for us and it's a hard number to put our finger on right now.

Okay and are you still on track to start the IDE for TAXUS Element this quarter?

We are.

I think two critical milestones that are under our control and moving forward.

One is the TAXUS Element trial and the second is the IDE for the [bilocation] program, the pedal stent.

And those both represent, I think significant portfolio milestones for us in the quarter and our teams are doing a great job executing on those.

I think it reinforces the robustness of our pipeline in comparison to the rest of the industry combined.

If I could sneak one in, Jim for you the size of the CRM field organization verses a year ago we're hearing a lot from your competition about sales (Inaudible) Could you just weigh in on that?

Last time I looked, we actually had a few more sales reps now than we had a year ago.

5%, 10%, or less?

No, a handful, small numbers more, but it hasn't gone backwards, it's gone forwards.

Great.

Thanks so much.

Let's take one last question.

And our final question comes from the line of Glenn Reicin with Morgan Stanley.

Please go ahead.

Great.

Glad to make it.

Couple of questions.

PROMUS sales, what were they in the quarter?

Almost non -- not worth talking about.

Basically I think it was under a couple -- go ahead, Paul.

We're not disclosing specific mix of drug eluting stents, but I think our basic message is PROMUS started out in the early first quarter really as a commercial launch.

We then went into February and I think our sales in March were more than double February.

So we're starting to see nice acceleration.

And I can't emphasize enough that every one of those is incremental to our existing TAXUS.

So when you gave 175 million, I think that was the number for TAXUS sale, did it include PROMUS, or no?

That would have included PROMUS.

It included all of our stents.

Okay.

And Larry, question for you.

These acquisition costs, what are they?

Are they cash costs?

And then when of you given guidance in the past with respect to cash earnings, we've always excluded stock based compensation and amortization.

Never heard us excluding these acquisition costs.

How long are they going to last?

And are they part to have the synergy number you recently articulated?

The good news I think they're mostly behind us, Glen.

But they are -- it's driven be the accounting rules.

And I don't like the accounting rules.

I like the old accounting rules where you estimate, accrue and take it through the P&L when you acquire it.

But you do make adjustments, you have a one-year period to make adjustments.

And also incur integration costs and we're at the end of that.

So most of that noise is behind us.

And are they cash costs?

Yes.

They are cash costs.

Okay.

And then in terms of-- what have you said in the past for synergies, 400 million?

Yes.

400 million, was that inclusive of these acquisition costs?

Part of that 400 million that declined in these acquisition costs?

I'm not sure I understand the question.

Okay if your goal was eventually 400 million at synergies, the decline in acquisition costs was that included in the synergies number?

No.

Okay, so these truly are excluded from any analysis?

That's correct.

Okay.

Thank you very much.

Okay.

With that, we'll conclude the call.

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