Boston Scientific Corp (BSX) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q3 Boston Scientific earnings conference call.

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

Later there will be a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to the Vice President of Investor Relations, Mr.

Dan Brennan.

Please go ahead, sir.

Thank you, Ken, and good morning, everyone.

Thank you for joining us.

With me on the call today are Chief Executive Officer, Jim Tobin, Chief Operating Officer, Paul LaViolette, and Chief Financial Officer, Sam Leno.

We issued a press release a short time ago regarding our Q3 2007 results and key financials are attached to the release and we've also posted support schedules to our Web site, which you might find useful as well.

We also issued a press release after the close of the market on Wednesday regarding our initiatives to increase shareholder value and we will be discussing that in greater detail this morning as well.

The agenda for the call will include a review of the Q3 financial results from Sam, an update on the CRM business from Jim, a review of the cardiovascular and other businesses and an update on our quality initiatives from Paul, additional detail on those initiatives to increase shareholder from Sam, and a CEO perspective from Jim, followed by a question-and-answer session.

Before we begin, we'll be making some 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 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.

I will now turn it over to Sam for a review of the third quarter results.

Thanks, Dan.

I'll begin by first discussing our revenue results.

Total revenue for the third quarter was $2.048 billion, which was at the midpoint of our guidance range of $2 billion to $2.1 billion.

This represents a 1% increase over the third quarter of last year and is slightly less than last quarter's revenue.

The slight sequential decline is in large part due to seasonal impact of the third quarter as compared to the second.

In the third quarter the contribution of foreign currency to sales growth was a positive 2% or about $39 million.

Compared to prior year, domestic revenue declined 5% while international revenue increased 12%.

Paul will delve into more details on the DES market dynamics for the quarter, but I'll share the revenue results with you at a high level.

Worldwide DES came in at $448 million, just below the midpoint of our guidance range of $426 million to $475 million and down 22% from the third quarter of 2006.

Geographically, U.S.

DES revenue was $240 million, between the midpoint of our guidance range of $235 million to $255 million, and 38% below the third quarter of last year.

International DES sales of $208 million came in over the midpoint of our guidance range of $191 million to $220 million, and were 11% higher than the third quarter of 2006.

The continued success of our TAXUS Japan launch, which generated $67 million of sales in the quarter was a key factor in the strength of our O-US numbers.

Jim will provide more color on the CRM market, but I'll review some of the details for CRM sales here.

We delivered excellent worldwide CRM sales of $517 million in the quarter, representing a 16% increase over the third quarter of 2006.

The U.S.

CRM revenue were $343 million, also representing 16% growth over the prior year, and international CRM sales were $174 million, and again were 16% greater than the third quarter of last year.

With respect to defibrillators, worldwide ICD sales of $372 million were in the lower half of the guidance range of $364 million to $391 million and 18% higher than the third quarter of last year.

U.S.

ICD sales of $261 million were at the midpoint of the $250 million to $270 million guidance range and 18% higher than last year.

International ICD revenue of $111 million was just below our guidance range of $114 million to $121 million and 18% higher than prior year.

Paul will provide some insight on our other markets, and as we have done in the past, we've included a divisional sales summary with the press release.

As a result, I won't go into detail on all of our businesses here, but I would like to point out some of the highlights.

Reported worldwide revenue, excluding DES and defibrillators continued its strong performance with $1.228 billion in revenue for the quarter, representing an increase of 8% over the third quarter of last year.

Our worldwide endosurgery business continued its track record of strong revenue growth with a 9% increase over prior year, including endoscopy sales of $212 million, which were up 13% over prior year.

Neuromodulation revenue of $81 million represented an increase of 36% over prior year as we continued to drive excellent growth in our pain management business.

In summary, our revenue for the quarter continues to illustrate the benefits of our broad diversified portfolio of businesses.

And even though the DES revenue was down $124 million compared to the third quarter of last year, our CRM, endosurgery, neuromodulation and the rest of our businesses more than offset that decline to yield consolidated sales growth of positive 1% over prior year.

Turning to gross profit margin, reported gross profit margin for the quarter was 71.9%, which was 90 basis points lower than the second quarter of this year, and 300 basis points higher than the third quarter of last year.

The adjusted gross profit margin for the quarter,excluding acquisition-related charges was 72%, which was 90 basis points lower than last quarter and 310 basis points lower than the third quarter of 2006.

As we saw last quarter, revenue mix was a key contributor to the lower gross profit margin compared to prior year.

Total revenue was 1% higher in the third quarter of 2007, versus the third quarter of 2006, but drug-eluting stents which are more profitable than the average for the company represented 22% over consolidated sales in the third quarter this year, down from 28% of consolidated sales in the third quarter of last year.

Product mix plays an important role in determining our gross profit margin.

Reported research and development remained at 13% of sales, with spending of $271 million for the quarter, which was flat to both last year and last quarter.

Our reported SG&A expense in the third quarter was $719 million, which were 4% lower than last quarter and equal to the third quarter of 2006.

On an adjusted basis, SG&A expenses, excluding amortization and acquisition-related charges, were $711 million, which were 4% lower than the second quarter and basically equal to last year.

I'll talk more about R&D and SG&A when I discuss our restructuring plans.

We reported a GAAP operating loss of $147 million for the quarter.

On an adjusted basis, excluding amortization and acquisition-related charges, operating income was $445 million for the quarter, and 21.7% of sales.

The two most significant acquisition-related charges were the previously-disclosed and expected loss of $352 million, primarily associated with the impairment of goodwill in connection with the anticipated sale of our auditory and drug pump businesses, which are expected to close in January of 2008, as well as the $75 million write-off of end process research and development that was associated with the third quarter acquisition of Ramone Medical, which is a company focused on creating communication technology, which complements our CRM product line.

Interest expense was $147 million in the quarter, essentially equal to both previous quarter and last year.

And during the quarter, we repaid $750 million of debt.

Interest savings on the repayment were offset by an increase in our average borrowing rate to 6.5% as compared to 6.2% last quarter and 6.1% last year.

The higher rate was primarily due to an increase in our term loan credit spreads.

Interest income was $19 million, virtually identical to both the second quarter of this year as well as the third quarter of last year.

Looking at our tax rate, the reported GAAP tax rate for the quarter was a negative 5% and the adjusted rate, excluding acquisition-related charges was 10%.

The reported and the adjusted tax rates for the quarter reflect a reduction in our forecasted annual operational effective tax rate for 2007 from 21% to 18%, as well as a benefit in the quarter to catch up for the impact of this rate reduction on our first and second quarter results.

We were able to reduce our forecasted tax rate for 2007 as a result of tax planning that was implemented during the year.

It is not anticipated that this planning will provide any future tax benefits beyond 2007.

In addition, our third quarter tax rate reflects a $9 million benefit for the certain discrete tax items that are required to be accounted for within the quarter.

GAAP earnings per share for the third quarter was a loss of $0.18 as compared to earnings of $0.08 last quarter, and $0.05 in the third quarter of last year.

GAAP results include a $0.29 charge for the Advanced Bionics and Ramone charges that I mentioned earlier.

Our adjusted earnings per share, which exclude amortization and acquisition-related charges was $0.20 for the quarter as compared to $0.16 last quarter and $0.18 in the third quarter of 2006.

This compares favorably to our guidance range of $0.12 to $0.17 for the third quarter.

Included in this $0.20 are one-time tax benefits of about $0.02 related to the prior-period impact of the reduction in our forecasted annual tax rate to 18% and other discrete items for the quarter.

Also in the quarter, we recorded a net gain of about a $0.01 in connection with the monetization of our investment portfolio.

So excluding the one-time tax benefits and the net gain on investment, adjusted earnings per share for the quarter was $0.17, which is at the very top end of our guidance range.

Our amortization expense for the quarter was $155 million, stock compensation was $29 million, and the pretax acquisition-related charges were $437 million.

And all of our per-share calculations were computed used 1.5 billion shares outstanding.

Looking at the balance sheet and turning to working capital management, DSO was 65 days at the end of the quarter, and that's an increase of two days compared to last quarter and up one day from the third quarter of 2006.

In addition to seasonality, which is a key contributor to the increase in the second quarter, was a weakness of the dollar, particularly towards the end of the quarter as the September 30 balance sheet translation rates for the euro and the yen were among the lowest of the quarter.

Days inventory on hand were 132 days, which was two days higher than the second quarter and an increase of ten days over the third quarter of 2006.

The increase from last quarter was driven in part by a build in advanced bionics inventory and preparation for the move to a new facility, as well as a weakness of the dollar.

Looking at cash flow, adjusted EBITDA, excluding acquisition-related charges, was $534 million for the quarter, which is slightly higher than the $486 million in the second quarter of this year.

We monetized several of our public and private investments and received net proceeds of about $100 million.

The balance of our equity investment portfolio is approximately $435 million, and we are in the process of monetizing most of this over the next several quarters.

We recorded $34 million in gains associated with the proceeds from monetizing our investments in the quarter, and this was offset by a $14 million charge to write down other publicly-traded investments that had an unrealized loss as we continue to mark them to market as we have our intent to sell them.

In addition, we also recorded a total $6 million in write-downs associated with other investments in the quarter.

Operating cash flow was $474 million in the quarter, which compares to $211 million in the second quarter of 2007 and $481 million in the third quarter of 2006.

Lower cash interest payments and strong cash flow from TAXUS launch in Japan both contributed to the increase from last quarter.

Capital expenditures were $87 million in the quarter, which is in-line with the $90 million and $84 million that we spent in the second and third quarter of this year, respectively.

This resulted in free cash flow of $387 million in the quarter, capital expenditures for the full year are expected to be approximately $400 million.

We successfully amended our credit facility and prepaid $1 billion of our term loan in the quarter and we closed the quarter with $8.2 billion of gross debt and more than $1.2 billion in cash.

Turning to guidance for the quarter for 2006 -- for the fourth quarter of 2007, consolidated revenues are expected to be in a range of $2.050 billion to $2.150 billion.

For DES, we are targeting worldwide revenue to be in a range of $430 million to $480 million, U.S.

revenue of $220 million to $250 million, and O-U.S.

revenue of $210 million to $230 million.

For our defibrillator business, we expect revenue of $375 million to $405 million worldwide; 260 to $280 million in the U.S.; and $115 million to $125 million outside the U.S.

Adjusted earnings, excluding charges related to acquisitions, divestitures, and restructuring, as well as amortization expense, are expected to be in a range of $0.14 to $0.19.

The company expects a net loss on a GAAP basis in the fourth quarter of between $0.09 and $0.02 a share.

We expect to record restructuring-related charges of $275 million to $300 million or $0.12 to $0.14 per share in the fourth quarter.

GAAP guidance excludes any potential gains or losses related to dispositions of previously-announced business divestitures.

I'll provide more detail on our restructuring initiatives later in the call, but now let me turn the call over to Jim for a review of the CRM business.

Thank you, Sam.

Since Sam's already detailed the CRM numbers for the quarter, I would like to make a few follow-up comments on our ongoing progress.

As I've stated on prior calls, since day one of our Guidant purchase, we've had a long-term plan for success in the CRM market and we're committed to that plan.

We knew it would take years, not months, to fix the underlying problems at CRM, but after 18 months, we feel we are well ahead in executing the plan.

The changes we've implemented to strengthen our operations, improve quality and reliability, and enhance our communications have gone a long way to restoring trust and confidence with planning physicians and their patients.

The successful resolution of the CRM warning letter has allowed us move well into the next phase of our strategy, strengthening the pipeline and resuming our new product cadence.

The past quarter we have seen some ongoing evidence of this with the full launch of ACUITY and dextrous leads as well as European approval of the CONFIENT ICD.

We also saw continued success in driving market adoption of the Latitude Patient Monitoring system.

A restored product cadence, supported by improved sales and marketing execution should allow us to begin achieving consistent share gains, which is an essential step to our long-term goal of positioning Boston Scientific for future leadership in the CRM space.

This quarter, we saw strong signs of our ongoing progress.

Although off a depressed base, we achieved solid double digit year-over-year growth in defibrillators and pacemakers for both the U.S.

and international markets.

We also saw a positive sequential growth in the U.S., reversing a slight decline from the prior quarter, when U.S.

sales took a temporary dip due to a product advisory.

Exiting the quarter, our U.S.

run rate showed marked improvement in September, giving us confidence that we're moving in the right direction as some of our new product introductions begin to have an impact.

Part of our improved performance this quarter can be tied to our ability to resume our product cadence and deliver on our pipeline through a refocused R&D strategy.

With the CRM warning letter restrictions now removed, we issued several new product launches and are gearing up for more in 2008.

We're very pleased with our progress in the area of device leads and believe the improved pace of revenues in September can be partly attributed to our two recently-launched leads, the ACUITY steerable lead was fully launched in the U.S.

early in Q3 and has generated very positive feedback with adoption rates exceeding expectations.

In addition, the Dextrous pacing lead was launched mid-quarter in the U.S.

and Europe.

This innovative extendable retractable pacing lead has been well-received, allowing us to attract hundreds of non-BSE and planning physicians.

Looking forward, we anticipate European approval of the ACUITY spiral LV lead by the end of the year and U.S.

approval in the second quarter of '08.

ACUITY spiral will offer the smallest tip profile of any LV lead, allowing excellent fixation performance in a range of vessel anatomies.

On the device side, 2008 will provide us with a busy year, with plans to launch five new pulse generators.

In the first quarter we will launch CONFIENT ICD, which recently received CE mark.

Also in the fourth quarter, we will launch a product we have not mentioned before, the [Livian] CRTD.

Livian brings enhanced capabilities to enable clinicians to customize therapy based on a patient's individual needs.

The device features Boston Scientific proprietary technology based on more than a decade of clinical experience to improve a patient's response to cardiac resynchronization therapy.

Livian also offers clinicians additional technologies to help manage monitor heart barrier patients with frequent HLA rhythm use.

The launch of CONFIENT and Livian will give us a fully wireless high voltage portfolio designed to work with our latitude patient magnitude system.

Both of these products along with ACUITY spiral LV lead have already been submitted to the FDA.

Plans for the second quarter of 2008 will include the launch of another new product not mentioned before, [Altrua], our first Boston Scientific-branded pacemaker.

In the latter half of 2008, we anticipate launching our next generation high-voltage platform in the U.S.

and Europe.

The Telegen ICD and Cogna CRTD.

We are excited about the potential all of these new technologies will have with physicians and patients.

Not only will they advance the functionality and performance of the therapy, but they are built on the solid foundation of our enhanced quality systems.

All our next generation devices will be compatible with Latitude, which continues to offer a strong, differentiated platform for remote patient monitoring.

More than 65,000 patients are now enrolled on the system, a much steeper adoption curve than any competing system.

We are increasingly seeing examples of both referring and planning physicians choosing Boston Scientific devices based on the enhanced clinical benefits offered by Latitude.

It remains the only system on the market that provides early notification of clinical events for both wireless and wanded device patients.

Our collected event data on Latitude patients represents the industry's largest experience with wireless remote monitoring of implantable cardiac devices.

The data shows detection of sustained atrial arrhythmias, allowing physicians to intervene earlier with treatments, as well as events of shock therapy for potentially life-threatening arrhythmias.

I would like to briefly address one of the restructuring changes that we outlined in Wednesday's announcement on expense and head count reduction.

The restructuring moves are intended to allow us to leverage resources, strengthen competitive positions, and create a more simplified and efficient business model.

Part of the changes will involve integrating the electrophysiology business with the cardiac rhythm management business.

Our goal is to create a more efficient CRM organization that can better serve the needs of electrophysiologists.

This combination will help realize the full potential of our CRM business and will allow us to more effectively support the shared customer base with a broader product offering of implantable devices in patient therapy.

In closing I'll say that I'm encouraged by our progress this quarter and in advancing our pipeline and achieving meaningful year-over-year sales growth.

Although sequential sales were basically flat in Q3, we exited the quarter in good shape.

The fundamentals of this market remain strong and I'm optimistic that we'll see continued improvement and sequential gains next quarter and into 2008.

Our attention is now clearly on revenue growth, driven by new device and lead technologies that are based on a revamped quality system.

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

Thanks, Jim.

Well, as has been mentioned, I'm going to focus my comments on the global stent market and our performance within it, top-level comments on other businesses, and our progress on quality initiatives, and then we'll focus our attention on restructuring and answering your questions.

PCI procedure activity was stable in the third quarter.

We saw a number of signs that sentiment towards PCI among referring cardiologists was stable or shifting positively.

PCI procedures overall were down 11% year over year, consistent with the second quarter, while the rate of stenting and the number of stents per case were both completely steady with recent prior quarters.

We saw a number of factors that contribute to PCI, including multiple measures of referring cardiologist in PCI, their confidence in medical management, and their understanding of stenting data trend slightly favorably.

I'll expand on these issues at our analyst meeting next week at TCT.

We also saw diagnostic procedure rates, which were about 10% below prior year in July, narrow that rate of decline from 10% to 8% to 6% below prior in August to September to October month-to-date.

Considering that interventional cardiologists become the primary influence over patient therapies once a diagnostic catheterization is performed, we see this as a potentially positive leading indicator.

We would expect our bellwether products, those accessories used in PCI, to follow this trend and we do see some early evidence of that.

While we do not yet see PCI growth, we do see shifts in leading indicators, which if they persist, would bode well for future market health.

DES penetration in Q3 was 63% in the U.S., 48% in Europe, and 68% in Japan, clearly indicating that we have a very steady worldwide DES market.

The clinical trial data flow on DES has been quite favorable of late, with a reversal of mortality concerns in SCAR one year later and DES mortality benefits versus BMS in the Ontario study published in the New England Journal of Medicine.

We expect this data trend to persist at next week's TCT as new long-term new safety data arrives.

Survey results tell us that 75% of interventional cardiologists now believe late stent thrombosis and other safety measures of drug-eluted stenting equal bare metal stents.

That positive percentage has doubled since this time last year following the ESC meeting in Barcelona.

It does appear the cardiology community is beginning to clearly understand the superior efficacy and at least comparable safety of drug-eluting stents versus bare following a year of costly controversy.

Within that market, the BSE team has executed well.

Revenue reports confirm our U.S.

share grew to 56% while maintaining price discipline within the historic 4% year-over-year rate of erosion and we maintained a price premium for TAXUS over CYPHER.

Our bare metal stent franchise more than doubled as that segment expanded and Liberte grew our market share in the BMS segment.

International DES performance was also strong with market share over 40% in Europe and over 60% in Japan.

PROMUS continues to grow as a percent of our international mix, with a steady increase in converted accounts and over 25% sequential growth in the quarter.

All in all, we produced solid cardiology performance within markets that are below last year, but stable and showing potential signs of improvement.

Switching to our other businesses, the aggregate neuromodulation business grew over 30% while we prepare for a definitive separation of the auditory business and look to run the pain management business as an integral part of Boston Scientific.

The spinal cord stimulation business grew 38%, enjoying both a healthy 14% market growth and approximately a three-point market share increase.

The business benefited from execution by the expanded field force and several new product launches.

Within cardiovascular, we saw accelerating growth in EP, offset by increasing competition in neurovascular.

Our EP franchise grew on the strength of its leading ablation platform, while Neurovascular did lose momentum due to the return to market of a previously-recalled competitive coil.

We benefited from that recall at that time and believe we will retain about a third of the business gained during that product's absence.

Our urology business grew 7%, which is below our double-digit expectations due to a slower recovery from vendor quality issues in the BPH franchise.

BPH did, however, grow 32% in the quarter and we expect urology to continue to gain momentum.

Our endoscopy business, the largest noncardiac business for Boston Scientific grew a healthy 10% domestically and internationally with strength in a number of product lines.

In closing, we've made substantial progress and dramatic improvements in our quality systems.

Having completed all legacy BSE locations third party audits, we believe we today have an effective quality system.

We have received all third party audit reports and are completing a punch list of required improvements in the areas of execution consistency and evidence generation.

We plan, as we have conveyed previously, to meet with FDA this quarter.

During that meeting, we will convey to the agency our specific audit readiness date.

In deference to the agency, I will not speculate further about the time frame that will emerge from that meeting.

We will update you as appropriate on our progress in these final stages of warning letter remediation.

With that I'll turn it over to Sam to address our restructuring initiative.

Thanks, Paul.

We issued a press release on Wednesday afternoon regarding our initiatives to increase shareholder value.

I wanted to take a few minutes to describe them and provide some additional context.

The key components of these actions include a substantial reduction in expense and head count to bring our expenses in line with revenue.

The restructuring of several of our businesses, the expansion of our previously-announced divestitures of certain nonstrategic businesses to now include our Venus access product line, and the continued monetization of the majority of our remaining public and private investment portfolio.

Before I go into details on the expense and head count reduction, I want to provide some color on the businesses that are being restructured.

These actions are designed to leverage resources, strengthen competitive positioning, and create a more simplified and efficient business model internally.

The key elements of this portion of the plan include combining our peripheral interventions and interventional cardiology divisions under one management structure.

They also include integrating the electrophysiology division into CRM under one management structure and eliminating our oncology infrastructure and transferred the associated product franchises into other Boston Scientific business units, including peripheral interventions, neurovascular, and endoscopy.

The oncology Venus access franchise will be combined with the fluid management business, which as you know is being divested.

Lastly, eliminating the intercontinental headquarters infrastructure and moving to a two-region international structure.

One region will consist of Europe, Middle East, and Africa; the other will consist of Asia-Pacific, including Japan, as well as Canada and Latin America.

The process of monetizing the majority of our investment portfolio and divesting our nonstrategic businesses is progressing well.

As of the end of third quarter, we have monetized approximately $150 million of our public and private investments, and have implemented a plan to divest most of the balance of our public investments and the majority of our private investments.

We will retain a number of the private investments due to the strategic nature of the emerging technologies represented by those businesses.

We also have an active process underway to facilitate the sale of five businesses, which we've previously identified for divestiture.

The goals of these initiatives are to eliminate the distractions and ongoing investments in the nonstrategic businesses, restore profitable sales growth and strengthen the company for the future by increasing shareholder value.

I'll focus my remaining comments on our expense in head count reductions.

I thought it would be helpful to begin by providing a sense of the process that we deployed to determine the level of expense in head count reductions that we are targeting.

We performed a detailed trending analysis of each division, each region, and each corporate staff function by reviewing the past four to five years of historical performance and compared that to our five-year strategic plan for each of these segments of our business and our expense base.

The focus of this analysis was not to compare each business to each other, but rather to assess the appropriate level of investment and profitability for each.

We were deliberate in avoiding activities that could negatively impact our focus on quality or on our goal of improving profitable revenue growth.

We also looked at competitive benchmarks and assessed our overall company operating income and earnings per share goals relative to those benchmarks.

We then established targets for each division, geography, and corporate staff functions.

The businesses with the largest gaps to achieve the performance targets that we set received the larger head count and expense reduction goals and vice versa.

We did not target expense reductions for our quality organization and continue to invest in efforts to strengthen our quality systems and to remediate our corporate warning letter as quickly as possible.

We'll also continue to invest in research and development projects that are strategic, meaningful, and remain an important part of our growth strategy.

I would like to add some clarity to Wednesday's press release.

As a result of this process, we are planning to reduce our operating expenses against our 2007 base line by an estimated $475 million to $525 million in 2006, representing a reduction of 12 to 13%.

We also plan on reducing an additional 25 to $50 million in 2009.

The 475 to $525 million range is the annualized run rate amount of savings we expect to achieve as we exit 2008 since the implementation of these initiatives will take place throughout 2008.

However, based on the current expectations driven by our implementation schedule, we do plan to realize more than 90% of these savings in 2008.

These reductions will be driven by a restructuring plan to reduce head count and non-head count related expenses by eliminating the expenses associated with the businesses that we are divesting.

The plan assumes that those businesses will be divested as of January 1, 2008.

If these divestitures are not completed by January 1, then the expenses reductions associated with those divestitures will be delayed until they are divested.

However, because these divestitures are dilutive to adjusted earnings per share, those expense reduction delays will have no negative affect on adjusted earnings per share.

As you would expect with a reduction of this magnitude, head count reductions are a key component to achieving these goals.

As such, we are planning to eliminate approximately 2300 positions worldwide through our restructuring initiatives, which represent approximately 13% of our 18,000-person non-direct labor workforce base line as of June 30, 2007.

The reduction activities will be initiated next month and are expected to be substantially completed by the end of 2008.

We will not publicly discuss the impact of these reductions on individual businesses or specific operating expense categories, but I can tell you that all divisions, region, and corporate staff functions, except for quality, will participate in these reduction activities.

Some of the general themes that are common across the reduction include portfolio optimization, work elimination, process reengineering, and reducing the spans and layers within our organizational structure.

In order to provide more context for the reductions, I thought it would be helpful to also provide a bit more granularity.

The estimated 2007 combined revenue of the businesses that we are divesting is approximately $550 million.

Using the revenue guidance range that I just provided for the fourth quarter, the current forecasted 2007 full-year revenue for the company is between $8.25 billion and $8.35 billion.

Excluding the revenue associated with the businesses being divested, the 2007 baseline revenue should be between $7.7 billion and $7.8 billion.

From this adjusted 2007 base, our aspirations are to grow top line 3 to 5% per year for 2008 and 2009 and earnings per share in a range of 18 to 20% in each year.

This growth in earnings per share includes overcoming the approximate $0.05 to $0.06 dilution associated with the sale of the five previously mentioned businesses.

Obviously, we're dealing with a lot of assumptions when measuring these estimates, not the least of which are the volatile DES and CRM markets.

Consequently, we cannot provide specific guidance for this timeframe.

We will also not be discussing the specific underlying assumptions that we use when arriving at these ranges, but I did want to give you a sense of the growth expectations that accompany these reductions.

The associated operating leverage that should come with topline growth in that range along with the expense reductions we will be making should result in significant improvement in adjusted operating profit margins over the next two years.

The identified reductions will result in a pretax charge of approximately $450 million to $475 or $0.20 to $0.22 per diluted share.

Approximately $275 million to $300 million will be recorded in the fourth quarter of 2007 with the remainder expected to be recorded throughout 2008 and 2009.

These expenses will be recorded primarily as restructuring charges with a portion recorded through other lines of the income statement.

.

Approximately 400 to $425 million of this is expected to be cash charges with the balance being non-cash.

Now that we have finalized and publicly announced our restructuring plans, we will be focused on implementing the more than 750 individual projects and activities that are expected to yield these identified savings.

We will hold ourselves accountable for achieving these reductions and will provide periodic updates on our progress.

To give you a sense of the rigor and discipline that we are applying, there are 15 full-time employees devoted to -- together with 100 other employees dedicated with part of their time to tracking, executing, and continually reporting through a dedicated office.

We are confident these planned actions are the most appropriate way to ensure success with our goal of increasing shareholder value.

Now let me turn it back to Jim for his

Thanks, Sam.

I'm going to provide some brief perspective on the quarter and then I have some thoughts on the restructuring plan we announced on Wednesday.

You've heard the numbers now, so you know sales were at the midpoint of our guidance and that earnings exceeded guidance.

Looking beyond the numbers, though, this quarter had a better feel to it.

The best way I can express it is to say that the quarter represented a beginning of a turn for us.

There are several positive developments that stand out.

We became number one in DES sales worldwide with TAXUS in Japan putting us over the top.

Japan approval was the missing link in our selling TAXUS worldwide and now that we're on the market this, you can see the result.

Our DES market share in the U.S.

was another bright spot, ticking up 2% to 56.

And as I said, we had double digit year-over-year growth in CRM and I continue to feel optimistic about our ability to grow.

Based on a robust new product flow into next year.

We also announced our decision to retain our endosurgery group and to split up the advanced bionics business.

Endosurgery has been a steady and reliable performer with strong growth and I have every confidence it will continue to play that role for us.

The pain management business has posted impressive growth numbers and it has enormous potential.

Let me talk for a minute about the expense in head count reductions we announced on Wednesday.

These are sizable reductions and rightly so.

They will bring our expenses in line with revenue and they will help us achieve three things: restore profitable sales growth, increase shareholder value, and strengthen Boston Scientific for the future.

We will make these cuts, but we will do so in a way that preserves our ability to make the investments in quality, R&D, in capital, and our people that are essential to our success over the long haul.

In the end, these reductions will create greater value for our customers and their patients, as well as for our employees and shareholders.

We've faced challenges in the past and we've addressed them effectively.

We will do so this time as well and these reductions, along with the sale of nonstrategic assets and the restructuring of some of our businesses are the right solution.

With that, I'll turn it back to Dan for Q&A.

Thanks, Jim.

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

(OPERATOR INSTRUCTIONS) Our first question this morning comes from the line of Rick Wise with Bear Stearns.

Please go ahead.

Good morning, everybody.

A couple things.

I guess maybe I'll have my two questions focus on -- Paul, maybe help us think through some of the price issues in the quarter.

What kind of price impacts did you see?

And how do you think pricing evolves going forward as more competition enters the market?

Well, we did indicate that the pricing year-over-year was down in that 4% range, which is highly consistent with the same trends over, I would say, the last eight quarters.

So really no dramatic change.

And it's hard to predict what will happen when new competition enters.

A lot depends on how the market perceives the efficacy of those products.

We have that same range, 4 to 5%, going forward in our outlook, and of course we can't predict what competition will do.

So I think we've demonstrated great discipline.

We have price premium for TAXUS and I think that'll be our goal going forward.

Okay.

Jim, perhaps you could help us think through a little more detail the impact of the Medtronic lead withdrawal maybe on the market generally and on you specifically and maybe you could discuss the impact on market and referrals for procedures, but maybe you could address more specifically the opportunity with leads?

You clearly have some new leads in Japan, U.S., and Europe.

Thanks so much.

Yeah.

Thanks, Rick.

The lead situation is a tough one, really, for the market.

This is not going to help restore confidence in the marketplace as a whole and it's going to, I think, represent another opportunity for people to wait on some of the cases that come along.

So from that point of view, I don't view this episode as being helpful to market growth.

I think our role in this is to make sure that patients get the leads when they need them.

So we'll -- we're focused on making sure that anybody that needs a procedure, that we have leads to fill as much of the gap as possible.

We dialed up manufacturing as much as we can and so we'll be in position to help serve the market as we go forward.

But I don't -- I don't view this as a big positive.

I see it as probably a short-term effect for us and probably a short-term negative for the market.

So that probably balances out for us.

But this isn't something that has us dancing in the aisles.

This is not something we're happy about.

Thank you very much.

Thanks.

We have a question now from the line of Bob Hopkins with Lehman Brothers.

Please go ahead.

Thanks very much.

First a question for Sam on the numbers that were provided looking out -- or the growth rates that were provided looking out at '08 and '09.

Sam, I think you said off of a base to 7 to $7.8 billion, you would expect 3 to 5% revenue growth in '08 and '09 and maybe EPS growth of $0.18 to $0.20.

Is the '07 EPS base from which you're working from around the $0.70 base you're providing for 2007?

We did provide a range for the fourth quarter, so it's off a range of possible outcomes for 2007.

Okay.

So I was just using the midpoint of that range.

Then, Sam, in terms of the cuts, I know you said you're not going to give specifics on exactly where the cuts are coming from, but I would wonder if you would be able to comment on the degree to which those cuts are coming from direct salespeople in the stent and ICD organization?

Bob, this is Paul.

Clearly, we are focused on growth.

and growth is our challenge going forward.

We don't intend to save our way to success, although we are very focused on aligning our expense base to our scale.

So when you think about direct selling expense as a part of the overall cardiology P&L, for example, it's very low.

And that's a generally very efficient organization and as we saw in this past quarter, they are gaining share against their rival.

So the goal is not to focus on direct sales force size.

We clearly believe we can be more efficient in selling and will focus on that.

But we're not avoiding selling expense, because we see opportunity there.

But we don't believe we're going to be a stronger company with significantly smaller sales forces.

Thanks very much.

Bob.

Let me go back, also, the first part of your question.

As you know, we did -- we did change how we view adjusted earnings per share.

So in our -- we said we disclosed virtually everything absent merger-related costs and other major events, but in our quarter we had $0.20 and $0.03 of that is what I would call not associated with normal operations, tax contributed $0.02 and $0.01 of that coming from the gain of disposal on investments.

So as you and others work your models through, you want to continue to give consideration for those significant events that we view as really non-operational.

Sam, what is then, the '07 range that you're basing that 18 to 20% EPS growth off for '08 and '09?

You've got to take the reported earnings for the first nine months and add what you believe will do in the range and take that as your full-year base.

Thank you.

We have a question from the line of Mike Weinstein from JPMorgan.

Please go ahead.

Sir, your line is open.

If you do have a question, please go ahead.

My apologies.

Can you hear me now?

Sure can.

Sorry about that.

Let me ask a couple questions just to clarify some items here.

First, the third quarter performance, a couple items that caught me was one, the step down in your SG&A expense in the third quarter.

And this is ahead of the restructuring.

Could you just talk a little bit about where you got the gains this quarter ahead of the actions you're taking and then I want to follow-up with a couple revenue items.

Thanks.

As you know, most -- I can't give you the specifics, Mike, but as you know, there is some degree of seasonality with the third quarter being light on sales.

It's also typically a little lighter on expenses as well.

We do have, from time to time, other ups and downs or just part of normal operations that go through the P&L.

But the drop you saw is more than seasonality, Sam.

Your second quarter SG&A expense was up 7% versus a revenue base that was down almost 2%.

This quarter your SG&A actually showed leverage for the first time.

Is there anything else that went on this quarter that might have helped you?

Well, again, all I can say is there's typically true ups that take place throughout the course of every quarter, so in order to understand that, you have to dissect not only this quarter, but also the third quarter of 2006.

Okay.

Let me just talk a little bit about the restructuring and the long-term impact of the company.

We're talking a lot about cost cutting right now.

Help us gain a little bit of confidence that the level of cuts your making here, which are obviously very, very significant, doesn't impact the long-term competitiveness of the company, or even near-term competitiveness of the company from in your key markets.

And we're not talking at all, it seems about pipeline or long-term pipeline, so once you get the cost base for this company readjusted, can we have a discussion about what the drivers of growth are beyond just whatever the drug-eluted stent and CRM markets give you?

Let me give you my broad perspective and I would ask Paul and/or Jim to chime in as well.

Clearly, the reason I went into painstaking detail on how we decided to target each of our businesses and corporate staff functions is because we believe there's an appropriate level of operating profit margin that should come with each of our businesses, driven in large part by what each division's product portfolio should be able to deliver in gross profit and therefore operating profit.

So looking at the trends of our businesses and where we flattened out in sales, in the aggregate, the changes that we saw at the top line really caught us a bit flat footed and we didn't respond soon enough.

As a result, sales came down and expenses didn't.

So I believe if we were to have gone back and had full view prior to the flattening of the sales curve and saw those sales about to flatten and take action then they would have been a lot less noticeable because we would have done that in a normal course.

But wedidn't do that and as a result we continued to grow expenses assuming that we would have a quick rebound in two big markets and we didn't.

A lot of the expenses we are taking out are things that we added to our infrastructure that we thought we would need for a much higher sales base.

When we take those out, that doesn't affect our ability to grow the business in the future.

It's just as we got out ahead of ourselves on investing and expenses.

In terms of what the decline in expenses mean to us going forward and our ability to invest appropriately in both R&D projects and sales and marketing efforts, let me ask Paul and/or Jim to comment on that.

Mike, I think we have been extremely focused on our core businesses, our core strength, the core teams that have both built our strength in the marketplace today and will do so going forward.

We are very focused on preserving technology and preserving our commercial infrastructure, which I would convey or contend is pretty powerful.

When you look at the portfolio of investments that we have been preserving, subsidizing, many of them had payback potential in 2011, 2012, some well beyond that.

So we've clearly focused on streamlining our investment portfolio with more focus on the short to midterm and recognizing that the risk associated with these very long-term investments is high and accepting the fact that the ROI on them is accordingly much lower.

I think when you look at our company overall, what you have seen in the past couple of years is a company that has grown very rapidly from the $3 billion scale to the $8 billion scale while investing aggressively in warning letter remediation and integration of two very big deals with Guidant and Advanced Bionics and not really taking a breath anytime along the past 36 months to actually grow more appropriately into our scale and to put efficient business processes in place.

So a lot of what we're doing will get us there fast.

It is a more painful approach, it is a more necessary approach, but when you think about how we've grown, how we've taken on this scale and what we've not been able to do to manage efficiency into the business, I think you can really look at it as a catch-up to do that.

I think it would be helpful to try and address the two questions.

I think these questions are from Bill way, which are going to be the question of, are these cuts, which are great from short-term earnings and improving the profitability of the company, and I think everybody agrees are needed, how do we get comfortable that that's not impacting the competitiveness of CRM or cardiology.

Can you talk about your sales forces in those businesses and what you're doing?

And the last follow-up, what pipeline product should we be focused on outside of CRM and DES to drive growth beyond the 3 to 5% level as we look out?

Thanks.

Mike, you're not going to get comfortable with our ability to grow until you see us grow.

I'm not going to spend any time trying to convince you that that's what's going to happen.

If you step back from this thing and think about what we were trying to do, strategically, we were trying to take the profitability that we saw with TAXUS, redeploy that into growth areas.

Those growth areas are CRM and Advanced bionics.

What did everything else grow, minus 5.

When we did all, this we weren't expecting there to be a minus on the legacy business.

We thought it would be a modest plus, a mid- to high single digit plus.

That kind of growth will return when sort of the pain of the DES market readjusting itself is annualized in.

So we'll get back to reasonable growth in the legacy business and then have growth engines with CRM and Advanced Bionics.

The reason for that is that simply there is a new product pipeline in both of those businesses, as well as DES.

So if you look at it from a macro point of view, we didn't expect the CRM -- or the DES market to go backwards when we were doing all this.

We have to annualize that in but basically the strategy that we put in place is working and as I tried to point out in my remarks about CRM, when you've got five new pulse generators coming in the next 14 months, the likelihood is that you're going to see increased competitiveness for the product lines and that translates to growth.

So that's basically the story and obviously if we are planning on that sort of thing happening, we are not going to be diminishing our field force presence and the ability to compete, because we expect to have a product flow that will allow us to compete.

So that's what we're doing and you'll see a play out.

Okay.

Okay, next question.

Before we do that, Mike, I want to go back to your first question.

I don't think we publish per forma results from last year because, as you know, we acquired Guidant in the middle of April last year.

But let me just give one number for the audience, because it's probably important in modeling in response to your question.

When you indicated that the drop in expenses in the third quarter of this year from from the second quarter to 744 to 711.

Our SG&A base was $757 million dropping to $712 in the third quarter.

So we had a very similar reduction if you add back in the Guidant expenses from last year to the full-year base.

Great.

Okay.

Kent, next question?

Very good.

Next we'll hear from the line of Glenn Reicin with Morgan Stanley.

Will you be posting the geographic breakdowns for this quarter?

Yes.

Those should have been out there at the time the call began.

Okay.

Take a look at the web site.

Sam, if we take out the one-timers this quarter, and we take your range for the fourth quarter, we're coming up with a base of around $0.65, $0.70 excluding amortization and one-time charges and about $0.37 to $0.42 with amortization.

Just wondering the base at which we grow going forward, is that correct?

That range is an appropriate range.

And so you're saying $0.18 to $0.20 or 20% above that?

Correct.

In each of the next two years.

And the rate of growth is similar both pre-amortization, and post, I guess?

The amortization isn't changing.

It's a fairly flat number.

That should be a good assumption.

Okay.

Can you explain a little bit what's happening internationally?

The domestic business didn't surprise me this quarter, but internationally it looked like DES did fall off quite substantially.

And then CRM, the guidance you're giving with respect to fourth quarter does not imply much.

It also implies a big deceleration of ICD growth for the fourth quarter.

What is happening overseas right now?

The biggest thing in the ICD space that we're dealing with is that we're changing distribution models in Japan and that impacts us modestly, but noticeably, in our international numbers And we're going to have to work through that.

But that's offset by increased competitiveness, new products, and that sort of thing.

So we're -- I think -- it's obviously that the international markets are growing faster than the domestic markets, so we're optimistic about our ability to compete overseas.

And what are you doing in Japan and is the timing really appropriate given the fact that Medtronic is currently not selling?

Well, we didn't drive the timing.

This was driven by J.L.L.'s decision to switch from one horse to another, so we're in the process of building our own distribution, upgrading our own distribution in Japan.

So that's why we're doing it now.

We had no choice.

Okay.

Paul, what's happening with the DES market in Europe?

Penetration, as I mentioned, 48%.

That's essentially flat, so not growing, but also not going backward.

And Boston Scientific market shares, as I mentioned, over 40, basically 41%, which was unchanged over the past quarter.

So we consider our share position to be very strong and our global share, obviously, with the addition of TAXUS Japan to our worldwide mix was boosted up to 46% for the quarter.

So it's effectively the strongest global position we've ever had.

Okay.

But it looks like from your guidance you're not anticipating much of a net impact from PROMUS in terms of a helpful impact?

Well, we don't break out specific product line sales, but PROMUS continues to grow.

PROMUS is available, obviously, only in Europe and IC, and netting that against the global power of the U.S.

and Japan markets that are TAXUS-exclusive, obviously PROMUS has a hard time moving the worldwide needle.

But PROMUS continues to play an important and increasingly-important role for us.

Okay, thank you.

Glen, I'll go back to your first question again to add a bit more clarity.

When we provided an aspirational goal of growing $0.18 to $0.20, that incorporates overcoming the $0.05 to $0.06 dilution that comes from the divestiture of that $550 million base of business.

When we divest those businesses, some of those businesses have amortization associated with it, and that part of the amortization won't go away with the rest of the expenses.

But in the aggregate, the sale of those businesses does provide a $0.05 to $0.06 hurdle to overcome, and then on top of that, growing the business 18 to 20%.

At this point can you estimate what the amortization is with those five businesses?

I can, but I won't.

Okay.

That's fair.

Thanks.

Okay.

Thank you very much.

Next we'll hear from the line of Larry Keusch, I believe, with Goldman Sachs.

Please go ahead.

Hi.

Good morning.

Could you, Jim -- I don't know how much you want to get into the details here, but just given the sensitivities around Medtronic's issues with their leads and some all now assuming that all French leads have potential fracture issues out there, could you talk through your surveillance, how you're watching this situation, and why you may not have the issues that they have?

Well, we have a very good handle on what our performance is on our leads.

With the Fidelis leads, Medtronic was quoting number in the 97 and change range.

Our comparable numbers would be 99 and change.

So there's -- that's a difference that is noticeable in the marketplace.

Part of that's driven, I think, by just the fact that we've got latitude in place.

It is keeping track every day of 52,000 patients.

We know what's going on.

And what we see is not much.

Which is the right thing.

So we're very confident in where we are with leads and we've got some new items to offer that are upgrades from what we have had in the product line up until now and that will continue.

You'll see more new ones.

So we're feeling pretty comfortable that what we have works as advertised and that we'll be able to deliver what customers expect.

And I know that you're obviously always looking at this, but have you guys gone back post the sort of Medtronic announcement and just again confirmed that you're not seeing anything?

Yes.

I mean, we do that every day.

Okay.

There's nothing unusual happening with our leads.

The performance is good.

I did take a look at it and I was quite surprised at how good.

Okay, great.

Just two quick questions.

Paul -- I'll just rattle them off and you can answer.

Paul, you sort of alluded to the fact that the DES mark is feeling better and safety data is going to continue to be enforced at the upcoming TCT.

I was just wondering if that was a statement that was meant to be broad in terms of overall messages being delivered or does that also include some of what you guys are going to be presenting.

Obviously, you have the TAXUS IV V that's question number one.

And two, are you thinking about any share gain in those numbers as a result of the Medtronics issues?

And the other side of that, market deceleration.

Just trying to think about how you're at least thinking about incorporating the Medtronic's issues into your numbers, or are you leaving them alone for now?

I think that the events of this week will decelerate what looked like a reacceleration of growth in the market.

So that goes against us.

I think we will probably see a little more business, but that's not the way we're thinking about it.

We're thinking about it, we've got to make sure that customers are serviced.

That they're able to do the procedures they want to do because there are leads available, that supply is not an issue.

That's our focus.

We haven't really started thinking about how market shares are going to shift as a result of this, if they do at all.

Got you.

Larry, when I prepared my thoughts on the specific wording, it really is a -- it's a reflection on both front, on the general data trend and on the specific data trend, I feel pretty good.

Great.

Okay.

Thanks very much.

Thank you.

We have a question now from the line of Tao Levy with Deutsche Bank.

Please go ahead.

Good morning.

Sam, I was wondering if you could just, if possible, break out roughly the percentages where some of the cost initiatives are going to be next year, sort of in costs of goods sold, SG&A, just for modeling purposes?

Well, our focus for expense reduction and head count reduction is clearly on SG&A and R&D.

So all of operating expenses.

There's a small portion of benefit that we hope to get over the next couple of years in the administrative portion of manufacturing, because a direct labor force will ebb and flow based on -- throughput based on sales demand, but the vast majority of our savings -- clearly, the largest vast majority will be in total operating expenses.

Beyond that, we haven't -- we won't be breaking out the difference between savings and R&D and SG&A.

Okay, great.

And the 3 to 5% revenue growth that you were talking about next year, is that on a constant currency basis?

Yeah.

There really isn't much of an affect of FX.

There may be a point or two in FX growth that would come to us, but I think it's really minimal.

It isn't like the days of old, where sometimes you get five or six points --

A point or two on 3 to 5?

I said, maybe a point or two.

Based on where the rates are today, I don't even think it's a point.

Okay.

Lastly, Paul, you'd made some comments that the third party inspection folks had made some Rexes.

How long and how substantial are those recommendations and how long will it take you to implement those?

What I tried to convey very clearly is that we believe as of today we have our systems in place.

The systems are effective.

So most important takeaway from the third party audits is that the systems have integrity, there are no systems design issues.

And then you look across literally two dozen locations running all of those systems and our focus is on execution.

We have some variable execution.

Some of our smaller facilities may not run quite as well as the larger ones.

So we're really just primarily focused on running the play.

We're running the play over and over and making sure that every day we get a little bit tighter.

So we're very close.

I'm not going to comment specifically on how long things will take, but I chose that word punch list intentionally.

It's the final list of last things we need to run better.

And then generate evidence.

Some of the quality systems are new and they'll be audited on the objective evidence that they have produced.

They won't be audited on how they run that given day.

It's important that we put a little bit of time under our belts to make sure we can prove that the quality systems are running well and that's what we're doing.

Great.

Okay.

Thanks a lot.

Thank you.

Our next question then comes from the line of Tim Nelson with Piper Jaffray.

Hi.

A question for Jim.

A follow-up on the Japan distribution.

Could you be more specific regarding your Japan distribution system.

Are you going direct or switching distributors?

And how will that impact your -- and also can you update us on the product offerings you have in Japan in the CRM space, which generation are they, I guess, relative to the U.S.

offerings?

What happened was that J.L.L.

who had been a chunk of our business as a distributor for a long time chose to go with Ela Sorin and that then meant that we had a bit of business that was at risk.

So we are dialing up our direct capability to address that.

The likelihood is that at the end of the day, we'll probably make as much money there as we have been.

The top line will be maybe a little less and the gross margin line will be maybe a little more.

So from a profitability point of view, I think we'll end up where we want to be.

As far as what's available there, it's in typical fashion.

Remember, the TAXUS Express was just approved in April in Japan three years after the U.S.

And likewise in the CRM space, it's basically our Vitality generation.

The DR was just approved and that so far thing.

So it's lag, but the flip side is with all we've done to drain the number of trends down and to retest everything and to make sure that what we're doing every day is as robust as it possibly can be, those -- the last generation products are pretty good products and so we're competitive in Japan.

There's also a distribution switch, did your Q3 sales suffer and how long did it take to complete this transition?

Yes, Q3 sales did suffer, I would say modestly, but it was clearly a negative and it will take another six to nine months before I think you'll see that situation settle.

Okay.

Thanks.

Thank you.

Our next question then comes from the line of Glenn Navarro with Banc of America.

Please go ahead.

Hi.

Good morning.

Two questions for Paul.

First, Paul, your comments about the drug-eluting stent market in the U.S.

starting to feel better.

The fact that you're not seeing aggressive pricing and usually we get a bump up in 4Q volumes versus 3Q, yet your 4Q U.S.

revenues, if I look at your midpoint, looks like it's down from what you just delivered in 3Q.

So are you just being conservative with your forecast?

That's question one.

And then the second question is, for 2008, do you want to give us a sense of where you think the TAXUS market share will fall out and play out over 2008 with endeavor and with XIENCE coming to the market?

And maybe you can give us your impression when you expect both stents to come to the market.

Thanks.

Glenn, for the fourth quarter, obviously based on the last four quarters with DES, we are looking not pessimistically, but nor are we going to dial in optimism yet in our expectations.

If you want to call it conservative, that's fine.

I tried to be very clear that the indications that we're seeing are leading indicators.

They haven't translated yet into a tangible change and procedural volume and/or penetration.

So they're all headed in the right direction, but this has clearly demonstrated to be a clearly diffuse market change and it's going to take some time to get moving in the other direction.

But I will say we don't see any change in pricing trends in the fourth quarter.

We're not going to comment on specific market share expectations for 2008.

I would say we would reiterate our prior stance that competing drug-eluting stent programs are likely to be approved more toward the middle of the year and not by the end of this year or early into the year.

We continue to believe that there is a very complex path, even following panel approval for full PMA approval through plant inspections and through labeling negotiations.

Those tasks still lie ahead and so our plans will be based on '08 -- mid'08 launches.

Thanks.

Our next question comes from the line of Bruce Nudell with UBS.

Paul, could you give us -- I have a couple questions.

Paul, the revenue share that you have in Japan?

Yes, we had about 62% share.

62%.

And Jim, one of the questions is -- what do you think -- it looks, even given the potential disruption you had in Japan that the O-US ICD market this quarter is 15% or below growth rate.

What do you think the sustainable O-US rate is?

That's a difficult question.

Honestly, I think it's in the 15, 16% range, but that may turn out not to be, particularly given the events of this week.

There may be an interruption in that.

That's what I would have thought a week ago.

Now I'm not so sure.

So I guess that's the best I can give you.

So that's the sustainable range, you think, is mid-teens?

I think so, but I think it's likely to take a dip here and then it comes back to that.

Okay.

My final question is, you folks have had a very good look at XIENCE in your own hands as PROMUS and endeavor, just watching it and seeing the full disclosure at the panel.

When fully launched in the U.S., when all the players are in, what sort of share do you think TAXUS could hold given the fact that in the real world, the revascularization rate with your products probably really low and there are greater concerns with safety and just the unknowns of long-term safety?

So if you could just say, a ballpark range where you think TAXUS could hold share given those cross currents?

Bruce, it's a good question and we think about it a lot.

First of all, TAXUS has -- we know this for sure and that is proven through registries and long-term follow up.

TAXUS has a clearly low clinical reintervention rate in the real world.

So that's point number one.

Point number two, we only have to look to Europe, where all of the products that are contemplated for 2008 approval in the U.S.

are already for sale and already aggressively marketed and TAXUS is clear and away the number one platform.

If you look at endeavor, what I see is a product that is in-stent late loss of 0.67 and in comparison to TAXUS, roughly two times the binary restenosis rate in very similar patients with very low angiographic follow up and that leads to a two times TLR rate.

And that's with no safety signal, no durable, no claimable safety signal.

So you have a clear and predictable efficacy cost without a safety gain.

And that's what I see there.

And that's going to define its position in the marketplace.

In XIENCE, you have CYPHER-like clinical performance, you have a very low late loss, in stent late loss of well below 0.2, but without any -- if you take away the oculostenotic reflex driven by high integraphic rates in the trials and look at it's EMEA-driven TLR, there's no difference between the two.

But it is a deliverable Olimus and we think there's clear value to having a deliverable Olimus in the market.

So I look at Endeavor and I see a product with very high late loss and no safety edge.

I look at PROMUS and I see a product with low late loss and CYPHER-like safety and I'm pleased to have that product in my bag along with TAXUS, which is the global share leader.

But just -- is it somewhere between 20 and 40% and could you pick a number?

Nice try, Bruce.

Look forward to buying you a cup of coffee at TCP, Bruce.

I would like to give Bruce a round of applause.

Thank you.

Our next question comes from the line of Tim Lee with Caris & Company.

Hey, good morning, it's Tim.

Two real quick questions.

One on the restructuring side.

Could we see any impairment of intangibles on the assets you recently purchased given that the sales growth didn't materialize as expected?

And second one just for Paul, in terms of the U.S.

mark share dynamics on the drug-eluting stent side, it's been stable for some time and you bumped up two percentage points, was there anything specific here that caused that uptick?

Let me talk to your intangibles first.

We're obligated as all public companies are to assess our intangible assets every year.

In the second quarter of every year, we pick up the assessment of one block of the intangibles.

In the third quarter we pick up the assessment for the other.

So we have completed both in the second quarter and the third quarter all the required assessments for intangibles and we had no impairment.

Tim, yeah, we actually did have a defined selling strategy.

We did have in the past several months and actually predating Q3.

So I would contend we actually started to gain momentum in Q2 with rejuvenating clinical selling activity, key account, and key opinion leader targeting strategy and we believe that these share gains are tangible evidence and a result of a strategy and that strategy is ongoing.

So we're hopeful to maintain momentum.

Great.

Thank you.

Thanks.

Our next question then comes from line of Kristen Stewart with Credit Suisse.

Please go ahead.

Hi.

I have two questions.

The first relates to GPO contracts.

I was just wondering if you could comment on the recently announced Vermeer contract.

It's my understanding you were removed from that.

I'm just wondering if it's possible to quantify the affect.

I don't know if Medtronic's lead issues will be higher than the client's And my second question is on the Premier internal product, when do you expect to start clinical trials and will that enable you to launch before your supply agreement ends with Abbott?

Thanks.

I'll comment on premier generally and then on enrollments specifically.

I think we have the strongest group sales organization in the industry.

So we have contracts that we believe will benefit us and we don't participate in contracts that we don't think will benefit us.

I would say that our status with Premier is -- we're comfortable with it and we don't see it having a cost in the marketplace.

We have not put forward specific time lines on our internal Olimus program, which would be the PROMUS element project.

I would say it is meeting all of our internal time lines.

We're obviously well aware of the contractual milestones and we are comfortable with where that product stands relative to the contract.

And was Premier just principally a function of price, do you feel, or was it any concern over quality issues?

No, no, no.

No, no.

It was economics.

Thank you.

Thanks.

Our next question then comes from the line of Joann Wuensch with BMO Capital Markets.

Thanks for taking the question.

When you take a look at the cuts that you announced, can you give us an idea of how you prioritized what was being cut, what wasn't?

Sure.

As we looked at our business, as I mentioned, first of sensitive of area, we looked very carefully at our track record of R&D, our track record of delivering commercial products through the acquisitions that we've done, and armed with a lot of data then began to look at each of our individual R&D projects across every one of our businesses with a critical eye.

Where we thought we had a good opportunity to continue to grow our revenue profitably, those projects were untouched.

Where we had a lot of doubt as to the commercialization of those products, they got looked at under a bigger microscope.

But clearly from a sales growth point of view, we paid a lot of attention to R&D, to quality, as well as to our sales force.

Beyond that, we took a very critical eye to everything else and looked at where the growth of expenses have come from, what role each of the functions and businesses played towards the topline growth, profitably, and began to set targets based on that.

Some of the critics have said that you cut too much.

Do you have a response to that?

Yes, I do.

If you are -- if they were around the business, I think they will probably look at the business the same way we do.

It's easy to be a critic when you don't know much about the organization.

And have assurances been in place for the people that are staying to sustain morale, etc.?

We're working on a number of programs that will provide incentive for third parties to stay with us through the difficult times as well as a lot of internal campaigns, one of which will be today talking to all employees as to why, even with this, this is an amazing company to work for in a terrific industry and with a leading company.

So Paul LaViolette and I have been on the internal road shows for the past six weeks talking to employees around the company and we'll continue to do that for the next several, talking about the rationale for how we got here, what we're doing about it, why we're doing what we're doing, and why after all the reductions have taken place, why we'll be a stronger and better company for it.

Paul, you may want to make a comment.

I would add only on the first part of the question, Joann, that after we defined the boundaries of our financial performance, the business units themselves were far and away the influencers in a bottom up process identifying technology priorities or areas to retain versus areas to cut.

So these folks that own and operate the businesses made these choices.

These were not corporately-driven project lists.

And I would add only my personal passion to what Sam has said.

We believe very strongly in what we have here.

This is a challenging period, but we have a lot to look forward to and our job is to execute through this period and to get everyone very intensely focused on the value that is Boston Scientific and the growth that lies ahead.

And I personally feel we will do that and do that very effectively.

Okay.

Thank you very much.

You're welcome.

Thanks.

We have a question they then from the line of Larry Biegelsen from Wachovia.

Thanks for taking my call.

Just a clarification, the fourth quarter ICD guidance and your 2008 and 2009 sales growth aspirations, do they or don't they take into account the Medtronic recall, Jim?

I would say they do because I don't think that the Medtronic recall is going to have that much net affect.

They were done before that happened, but we wouldn't change it.

And then pricing in Europe, Paul, I don't think I heard you talk about that.

Can you comment what's going on in the drug-eluting stent market there and specifically PROMUS, any color on PROMUS, XIENCE prices in Europe.

And lastly, Paul, in the recent past, you've said that resolution of the warning letter would be an '08 event.

I didn't hear you reiterate that today.

Could you tell us if you still think that's an '08 event?

Yes.

For the warning letter, we didn't get specific because we're now moving into a period of working closely with the FDA over the weeks ahead.

So we're not getting any details, but absolutely we believe we'll be completed with this next year.

As it relates to European pricing, I would say we're not going to give the specific prices of either PROMUS or TAXUS.

It is -- it's an interesting challenge to have two products known to be the same and drive any price differentiation between the two.

So that's sort of a natural outcome of the branding strategy that we have and obviously that will be even more difficult over time as more and more data comes out and as it's clear to the marketplace that the two products are in fact the same under the hood.

And I would say the European price trends are, as is the case with the other 15,000 products we sell, they're always a little bit more aggressively downward in Europe than in the United States, but not -- there's been no change in the pricing trajectory in Europe.

Thank you.

Thanks.

We have a question now from the line of Jason Wittes with Leerink Swann.

Please go ahead.

Thanks a lot for taking my question.

Just another question about the guidance for next year, the 3 to 5%, first off, just to clarify, that doesn't include any currency benefit?

And secondly, in terms of swing factors, can we assume the biggest swing factor is the behavior of these ICD and stent markets?

As I mentioned earlier when that question was asked on FX, I think FX will be only a modest contributor to the 3 to 5% growth.

Also as I said in my scripted comments, the reasons we had aspirational goals and not guidance is because we are dealing with two very volatile markets and we had to mange a number of assumptions within those volatile markets and all the moving parts, but clearly what makes it difficult is to have clear view of the future, which is also only why we give guidance one quarter at a time --

Fair enough.

-- is what's going on in those markets.

For R&D, the reductions that you've made in R&D, does that necessarily keep the percentages kind of -- the percentage of revenue the same this year as next year, or is there going to be a percentage cut that we should anticipate for 2008?

R&D as a percent of sales, is that what you're --

Yes, exactly.

You'll see that trend downwards over the next 15 months.

One last question, at least I'll attempt this one.

For the noncardiovascular businesses, those are somewhat more more -- more predictable, should we be anticipating any kind of acceleration next year, or should we expect the rate we saw this year be the tone for the next year or so.

We should continue to expect double digit growth for endosurgery, neuromodulation has been well-established as a fast grower, and we expect that to be maintained, and then the other two important non-CRM non-interventional cardiology businesses being neurovascular and EP have pretty good growth profiles and we expect that to continue.

Thanks a lot.

All right, Kent, we probably have time for one more question.

That question comes from the line of Matthew Dodds with Citigroup.

Thanks for letting me on.

Quick question first for Jim and Sam, on the gross margin, are we getting close to the bottom with the impact of drug-eluting stents?

I know Jim in the past, when you got there, you got it up to almost 70% before drug-eluting stents hit so I'm just kind of wondering how much CRMs dragged that number down from where you were before drug-eluting stents was a big piece of the pie?

And for Paul, when you look at some of the recent data that's couple out in these head-to-trials in the U.S., like Spirit III, Costar II, and most recently Endeavor IV, you did a lot better in the area of acute and sub acute thrombosis, which, it's not the focus of safety as a lot of late safety.

It's a pretty big difference when you add the three trials up.

So I'm wondering if you think there's a difference on the balloon delivery system that's not getting enough attention on TAXUS versus competitors or maybe there's some experience there that your product's been out longer and people are more comfortable with and that's helped in the trial?

I think, Matt, it's a very good observation on your part, but I think these trials are generally simply too small to really draw conclusions on low frequence events.

So every -- I would say the one takeaway from all trials recognizing that it's a golden rule never to compare trials is that TAXUS always performs well.

Makes no difference who runs the trial, how the trial is designed, what we're compared to, TAXUS always does well.

Then I'll let Jim answer your other question.

As far as gross margin goes, we took a number of actions in the recent past within CRM that have had a negative impact on gross margin.

One is the rollout of Latitude wanded.

The other is that as a result of our efforts to dial up the focus on quality, we took substantial write-offs in the area of parts that didn't -- components that didn't meet our exacting standards.

Those things -- the Latitude piece have been going now basically all year and the components piece was a Q3 affect.

The Latitude piece will moderate as time goes forward.

The components thing is more or less a one-time deal, although there may be others that we decide to throw overboard.

But I don't know of any right now.

So this is kind of the bottom from that perspective.

Now, having said that, we have a mix issue as we go forward, which is where is the mix between TAXUS and PROMUS going to land in the next couple of year period?

The reason that's important is the margin on PROMUS is less than the margin on TAXUS.

Actually, everything is less than the margin on TAXUS.

So anything including high-margin CRM is still less than TAXUS.

So from a downdraft point of view, you're going to have, as we go forward, you're going to continue to see PROMUS as a negative, but everything else is going to trend in the other direction.

How that all plays out, TBD.

Two other thoughts.

I would add in the past 18 months, as we have with the entire rest of the organization, the engineering talent we have has been devoted completely to remediation of the quality warning letter.

And as a result, the efforts that we had historically put in to driving 5 to 8% of our costs down every year haven't been there.

So one of the issues that has suppressed our margins last year and again this year and to some extent next year will be having those engineers hostage to the quality program.

Once we get the quality warning letter lifted and we can turn their attention back to driving programs to reduce cost, that will be beneficial.

But as you all know, the benefits associated with V.I.P.

programs and driving non-product costs, as soon as they happen, they don't go to the P&L, we have to sell off the inventory we have first, so even if we were to wave the magic wand and start that today, it's still a number of months before we were to see the benefits showing up on our gross profit.

And another moving part is because we have so many new products coming out, we have to make sure we focus a lot of our energy on how we handle the growth of new inventory and the wind-down of the old inventory.

So our ability to both manage inventory carefully, to manage the -- to the extent we have any cannibalization that occurs from the new products product we sell, not just against our competitors, but also against ourselves, we have to manage the inventory there as well.

Between those issues and the issue that Jim mentioned, there are a lot of moving parts that go into the gross profit equation.

So we've tried as best we can to incorporate the best reasoning and thoughts we have on all those issues as we came up with that aspirational goal of 18 to 20% growth in EPS.

Thanks, Sam, thanks, Jim, and thanks, Paul.

Welcome.

Pleasure.

with that we'll conclude the call.

Thank you for joining us today.

We appreciate your interest in Boston Scientific and look forward to seeing many of you at our analyst meeting next Tuesday in Washington, D.C.

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