Boston Scientific Corp (BSX) 2007 Q4 法說會逐字稿

Welcome to Boston Scientific's fourth quarter earnings conference call.

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

Later, we will conduct a question and answer session.

Instructions will be given at that time.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded.

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

Dan Brennan.

Please go ahead, sir.

Thank you, Alex.

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.

In addition, Larry Newman is joining us as well.

I'll be transitioning to other responsibilities within the Company and Larry will be the new, Vice President of Investor Relations.

We issued a press release last night regarding our Q4 and full year 2007 results, key financials were attached to that release and we've also posted support schedules to our website, which you might find useful as well.

The agenda for this call will include a review of the Q4 financial results as well as Q1 and full year guidance from Sam, an update on the CRM business from Jim, a review of the Cardiovascular and other business and an update on our quality initiatives from Paul, and a CEO perspective from Jim followed by a question and answer session.

Before we begin, we will be making some forward-looking statements in this 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 our financial performance, our restructuring plan, our programs to increase share holder value, new product development, regulatory approvals, litigation, our growth strategy, market recovery and our market position, the Company's overall business strategy and other factors described in the Company's filings with the Securities and Exchange Commission.

With that, I'll now turn it over to Sam for a review of the fourth quarter results.

Thanks, Dan.

Before I begin my summary of the financial results, I'd like to take this opportunity to thank Dan Brennan on the outstanding job he has done heading up our Investor Relations function for the past year.

And as a result of his performance, we've asked Dan to lead our financial planning and analysis function as our new Vice President of FP&A.

Larry Newman has held a number of Senior Finance positions during his 11 years with Boston Scientific and is very excited to move into his new role, replacing Dan as Vice President of Investor Relations.

Now I'll address the results of our business.

2007 was a challenging year for Boston Scientific and for our competitors, as we all experienced the challenges of servicing two large volatile markets, the DES and the CRM markets.

For us, it was also a year of transition, a year where we made important progress on a range of fronts in restoring Boston Scientific to a sustainable, more profitable growth plan.

We demonstrated our ability to maintain market share throughout the year.

We cleared the CRM Warning Letter and made significant progress toward remediating the legacy, BSC, Corporate Warning Letter.

We positioned our CRM business to launch more new products in 2008 than it has ever launched in a single year, all with the Boston Scientific name for the first time.

We strengthened our interventional cardiology business' ability to compete in the drug-eluting stent market with the only two drug platform in the industry including the expected U.S.

launch of TAXUS Liberte, our next generation stent system.

We created and implemented a thoughtful plan for our capital structure going forward, including improved operating and free cash flow.

We positioned the sale of five nonstrategic businesses and we monetized much of our public investment portfolio, and launched a plan to monetize the majority of our private investment portfolio.

And finally we launched a major expense in headcount reduction initiative.

We're very pleased with how we finished the year operationally, and our fourth quarter financial results were very complex, as we continued to make significant progress on our broad set of programs designed to improve shareholder value.

Because a number of these initiatives resulted, as expected, in large P&L charges in the quarter, I will disaggregate them so that you can clearly understand our results of operations.

In addition to our adjusted fourth quarter operating results coming in at the high end of the guidance range that we provided at the end of the third quarter, our reported results also included net charges related to divesting business, monetizing our investment portfolio, launching our restructuring initiatives, litigation and discrete positive tax items.

It will be important to understand each of these components, not only in the context of our fourth quarter results, but also their effect on the guidance that I will provide for 2008 a bit later in my remarks.

Let me begin our fourth quarter results by first discussing revenue.

Consolidated revenue for the fourth quarter was $2.152 billion and that exceeded our guidance range of $2.050 billion to $2.150 billion.

This represents a 4% increase over the fourth quarter of last year and 5% growth over last quarter's revenue.

Compared to the foreign currency contribution assumed in our fourth quarter guidance range, foreign exchange contributed a positive $43 million, so without this benefit, revenue would have been $2.109 billion or slightly higher than the midpoint of the guidance range.

Overall, the contribution of foreign currency to sales growth was a positive 3% or about $75 million compared to the fourth quarter of 2006.

Compared to the fourth quarter of last year, domestic revenue declined 3%, while international revenue increased 15% reported or up 6% on a constant currency basis.

Paul will provide more color on the DES market dynamics for the quarter, but I'll share the revenue results with you at a higher level.

Worldwide DES came in at $435 million, at the low end of our guidance range of $430 million to $480 million and down 14% from the fourth quarter of 2006.

Geographically, U.S.

DES revenue was $224 million, at the low end of the guidance range of $220 million to $250 million, and $0.32-- 32% below the fourth quarter of last year.

International DES sales were $211 million compared to our guidance range of $210 million to $230 million, representing an increase of 19% over the fourth quarter of 2006.

Before Jim provides more detail on the CRM market, I'll review some of the specifics for CRM sales here.

The $544 million of worldwide CRM revenue reported in the fourth quarter marked the highest quarter of worldwide CRM revenue we have achieved since the acquisition.

This represents an 11% increase over the fourth quarter of 2006.

U.S.

CRM revenues were $347 million, representing an 8% increase over prior year, while international CRM sales were $197 million, and 17% greater than prior year.

With respect to defibrillators, worldwide ICD sales of $396 million were well above the midpoint of the guidance range of $375 million to $405 million, and 11% over the fourth quarter of 2006.

ICD sales in the U.S.

were $266 million, that's 6% higher than last year and near the midpoint of the $260 million to $280 million guidance range.

International ICD revenue of $130 million exceeded our guidance range of $115 million to $125 million, and represents a 23% increase over last year.

I'd like to add just a bit more color on the U.S.

ICD revenue for the quarter.

As many of you are aware, when you sell a product that has a future service expectation, GAAP accounting requires that you assign a fair value to that service, and defer that portion of the sales price, together with the associated product cost into future periods.

Our latitude-enabled devices fall into this category and as such we currently defer a portion of each sale of these devices.

The amount of this deferral is reviewed periodically, as we complete -- and we completed a thorough analysis of this in the fourth quarter of this year.

This analysis caused us to increase the amount we are deferring from $300 per unit historically to a range of $650 to $1000 per unit going forward, depending on the battery life, in the fourth quarter and beyond.

This deferral will be released to revenue over approximately four to six years, which is the average expected battery life of the implants sold with a latitude device.

The net impact of this was an $8 million increase in our sales deferral for the quarter, so excluding this impact, the U.S.

ICD number would have been $274 million, representing a 10% growth over the fourth quarter of 2006 and towards the top end of the guidance range.

On a global basis, six of our divisions achieved double-digit growth for the quarter.

In addition to the CRM business growing at 11% for the quarter, our electrophysiology, neurovascular, endoscopy, urology and neuromodulation franchises all grew at least 10% in the quarter.

This speaks to the diversification of our product portfolio, the quality of our sales force, and the growth opportunity that these businesses bring to Boston Scientific product's portfolio.

I would also like to provide some highlights of our full year 2007 revenue results.

Reported revenue for the year ended December 31st, 2007 was a record $8.357 billion, which represents 7% growth over prior year.

The contribution of foreign currency to full year sales growth was a positive 2%, or about $180 million compared to 2006.

On a pro forma basis, including the acquired CRM and cardiac surgery businesses, for the entire year in 2006, full year 2007 revenue declined by 2%.

Our global cardiology business was down 14%, principally due to the DES market contraction that we've experienced throughout 2007.

Our U.S.

DES market has been at least 53% for the past three years, and our O-U.S.

share has also proven to be resilient, even in the face of many new entrants into the O-U.S.

competitive landscape.

The peripheral intervention and vascular surgery businesses showed a decline of 6%, but the vast majority of decline was due to the loss of our Terumo distribution contract for guide wires in June of 2006.

The rest of the businesses posted very solid growth numbers in 2006, and here are some of the highlights of these businesses.

Endosurgery continued its track record of double-digit growth with a 10% increase over prior year on the strength of 12% growth in Endoscopy.

Our electrophysiology business also grew 10% for the year, and we are excited about the future for this business as we capitalize on the benefits of integrating it into the CRM group.

We continued our history of leadership in the neurovascular market with 8% growth over prior year.

And finally our neuromodulation business grew 40%, as we continue to believe that this will be one of the more significant growth engines for us in future years.

The common theme among these businesses is our strong market share and oftentimes leadership positions in many franchises, including coronary balloons, IVUS, biopsy, biliary stone management, and neurovascular coils and stents, to name only a few.

I believe that our revenue results, even in our most difficult markets, illustrate our ability to deliver impressive execution by our teams in each of our businesses.

The contraction of the DES and CRM markets during the year dominated much of the headlines.

But when you look across our entire portfolio of products and franchises, it is clear that there is much to be proud of.

The rest of the portfolio excluding DES and CRM grew at 10% and 9% for the fourth quarter and full year respectively compared to 2006.

We posted record-breaking sales in total for both the fourth quarter and the full year by delivering record sales in seven of our 10 business, while at the same time successfully launching TAXUS Express in Japan and restoring trust, confidence and cadence in our CRM franchise.

Reported gross profit margin for the quarter was 70.5%, which is 140 basis points lower than the third quarter of 2007 and 400 basis points lower than the fourth quarter of 2006.

The adjusted gross profit margin for the quarter, excluding acquisition and restructuring related charges, was 70.6%, which was also 140 basis points lower than last quarter and 340 basis points lower than the fourth quarter of 2006.

As has been the case during all of 2007, revenue mix was a key contributor to the lower gross profit margin compared to prior year.

More specifically the lower mix of DES revenue exerted downward pressure on our gross profit margin.

The total revenue was 4% higher in Q4 of 2007 than Q4 2006, but drug-eluting stents, which are significantly more profitable than our average of our other products represented 20% of consolidated sales in the fourth quarter of this year, and that's down from 25% of consolidated sales in the fourth quarter of 2006.

Product mix clearly plays an important role in determining our gross profit margin, but in addition, the fourth quarter gross profit margin rate was 70 basis points lower due to increased inventory exposures triggered primarily by higher than normal scrap charges within our CRM business.

Research and development remained 12% of sales, with spending of $256 million for the quarter, which was down $11 million versus the fourth quarter of 2006 and down $15 million compared to the third quarter of 2007.

Similar to SG&A, the swift execution of our approved restructuring plan in the fourth quarter resulted in reduced spending.

We believe that our reduced R&D spending, driven in large part by selectively eliminating products-- projects that had lower likelihood of success, will not negatively effect our ability to restore short and long-term profitable sales growth.

Our reported SG&A expenses in the fourth quarter were $704 million, which was 7% lower than the fourth quarter of 2006, and 2% lower than last quarter.

Adjusted SG&A expenses excluding acquisition-related items, were also $704 million, which is 1% lower than the third quarter and 4% lower than the fourth quarter of last year.

We began to execute on our approved restructuring plans in early November, which resulted in a dramatic reduction in SG&A expenses earlier than anticipated at the time that we provided guidance during our third quarter earnings call.

I am pleased to say that we've been able to make significant progress in executing a number of shareholder value improvement programs that we've been talking about for the past few quarters.

Several of these resulted in large charges as expected, and had a significant negative impact on reported operating profit.

It's important to understand these large expense items, so I'll spend a few minutes here addressing these in some detail.

We reported a GAAP operating loss of $430 million for the quarter.

On an adjusted basis, excluding acquisition, divestiture, restructuring and litigation-related charges, as well as amortization expense, operating income was $509 million for the quarter and 23.6% of sales.

That's up 190 basis points from Q3 2007.

The difference between GAAP and adjusted operating profit consists of five major items, including normal amortization expense, write-downs of intangible assets related to certain suspended R&D programs, merger and integration expenses, restructuring expenses and an increase in our legal reserves related to patent litigation involving our Interventional Cardiology business.

I'll address each of these in a little more detail.

Our total amortization expense was $174 million, which included the write-off of $25 million of intangible assets as a result of our decision to suspend funding of certain internal research programs.

And as a result of the divestitures, we are anticipating a decrease in our annual amortization expense of approximately $50 million for full year 2008.

We also recorded $216 million pretax of merger and integration-related charges during the quarter, and those include $193 million of the $240 million previously disclosed as an after-tax charge, primarily associated with the write-down of goodwill in connection with the sale of our cardiac surgery and vascular surgery businesses, which were announced on January 7th of this year.

Note that the remaining amount of the approximate, of approximately $50 million of the goodwill write-down for cardiac surgery and vascular surgery is to be recorded as expense, primarily tax expense in the first quarter of 2008, concurrent with the completion of this transaction.

In addition, we recorded a $15 million true-up, primarily associated with the write-down of goodwill in connection with the sale of our auditory businesses.

We recorded $184 million pretax of restructuring-related charges in the quarter which are primarily related to severance accruals in conjunction with our previously announced expense and headcount reduction initiatives.

We also recorded a pretax increase of $365 million in our litigation-related reserve related to patent litigation involving our Interventional Cardiology business.

The sum of these five items was $939 million, which is the difference between the $430 million GAAP operating loss and the $509 million of adjusted operating income.

Interest expense was $137 million in the quarter, which was down $10 million from the third quarter and $7 million lower than last quarter, primarily as a result of the $750 million debt prepayment that we made in conjunction with our facility amended in the third quarter.

Our average interest rate for the quarter was 6.3% compared to 6.4% last quarter.

In other net expense was $29 million, and that includes a net charge of $48 million primarily related to the write-down of our private investment portfolio, and interest income of $18 million was in line with last quarter and $5 million lower than the fourth quarter of 2006 due to lower average cash balances.

The reported GAAP tax rate for the quarter was 23% and the adjusted was negative 3%.

The reported and adjusted tax rates for the quarter reflect a reduction to 11% in our annual operational effective tax rate for 2007 from our forecasted rate of 18%, as well as the benefit in the fourth quarter to catch up for the impact of this annual rate reduction on our results for the first three quarters.

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

While this planning provides substantial one-time cash savings, it is not anticipated that these planning initiatives will impact our effective tax rate beyond 2007.

In addition, our fourth quarter tax rate reflects a $4 million benefit for certain discrete nonrecurring tax items that are required to be accounted for within the quarter.

GAAP earnings per share for the fourth quarter was a loss of $0.31, as compared to a loss of $0.18 per share in the first third quarter and positive earnings of $0.19 per share last year.

GAAP results include $0.43 for the acquisition, divestiture, restructuring and litigation-related charges that I mentioned earlier.

So our adjusted earnings per share excluding amortization expense and restructuring, acquisition, divestiture and litigation-related charges was $0.24 for the quarter, as compared to $0.20 last quarter and $0.30 in the fourth quarter of 2006.

As a reminder, the fourth quarter of 2006 also included a $0.10 one-time tax benefit and without this benefit, EPS for the quarter of last year would have been $0.20.

The $0.24 achieved in this quarter is obviously well above our guidance range of $0.14 to $0.19, and included in this $0.24 is $0.05 of nonrecurring tax benefit.

Excluding these nonrecurring tax benefits, adjusted earnings per share for the quarter would have been $0.19.

And approximately $0.02 of this $0.19 performance was driven by a rapid execution of our restructuring plans early in the fourth quarter, which was not anticipated in our fourth quarter guidance.

Stock compensation was $27 million and all per share calculations were computed using 1.5 billion shares outstanding.

Turning to working capital management, DSO was 66 days at the end of the quarter, which is a decrease of two days compared to last year and an increase of three days compared to the fourth quarter of 2006, and the two day reduction was the result of, direct result of improved cash collections in both our domestic and our European operations.

Days inventory on hand were 115 days, and that was down 19 days compared to the third quarter 2007 and down 16 days from the fourth quarter of 2006.

The additional inventory provision that I mentioned during my gross profit margin comments, as well as overall decreases in CRM and DES inventory, relate to improved management of transition, of the transition process associated with numerous new product launches in 2008, and those contributed to this improvement.

Operating cash flow was $308 million in the quarter, which compares to $365 million in the fourth quarter of 2006, reflecting higher accounts receivable to support our increased sales, restructuring payments and increased cash tax payments, partially offset by improvements in inventory days.

Four quarter 2007 operating cash flow declined by $167 million compared to the third quarter and $74 million of this charge -- of this change is primarily due to the timing of semi-annual interest payments on our senior notes, $36 million of restructuring payments and an increase in accounts receivable due to increased sales.

For the full year 2007, operating cash flow was approximately $900 million compared to $1.8 billion in 2006.

The 2007 operating cash flow decline is primarily due to $400 million of tax payments related to the gain on sale of the cardiovascular -- of the Guidant vascular business to Abbott made in the first quarter of 2007, $160 million of additional interest payments reflecting a full year's increased debt balance due to the acquisition of Guidant in April of 2006, approximately $100 million of restructuring payments including the CRM payments in the first half of 2007 and lower adjusted after-tax operating income of approximately $220 million.

We did monetize most of our public investment portfolio and are in the process of monetizing the majority of our private portfolio.

We received proceeds of $94 million in the fourth quarter and $243 million for the year.

The total book value of our investment portfolio at the end of 2007 is $380 million.

We recorded gains of $19 million in the quarter and 60-- $65 million in gains for the year associated with investment sales.

These gains were offset by write-downs of $67 million in the fourth quarter and $118 million for the year.

Capital expenditures were $90 million in the quarter, which were in line with Q3 2007 and down slightly from the $111 million in the fourth quarter of 2006.

For the full year 2007, capital expenditures were $363 million compared to $340 million in 2006.

This contributed to free cash flow of $218 million in the quarter and $571 million for the year.

We closed the quarter with $8.2 billion of gross debt and $1.5 billion in cash, resulting in a net debt balance of $6.7 billion.

Gross debt is $713 million lower, and net debt is $496 million lower than our 2006 ending balances, reflecting our $750 million debt prepayment in the third quarter and our net cash flow.

We reduced net debt by $182 million from the end of the third quarter.

We announced our initiatives to improve shareholder value at the time of our third quarter earnings call and we told you that we would provide updates each quarter.

I am pleased to say that we are on track with the process-- processes and activities that will drive the savings targeted that we had previously disclosed.

We said that we would exit 2008 with a run rate annualized savings and operating expenses of $475 million to $525 million and planned to achieve 90% plus of those savings in 2008.

We also announced that we would be eliminating 4300 positions, with 2000 associated with the businesses identified for divestiture, and 2300 positions from our ongoing businesses.

Our divestitures' timing is basically in line with our original time line and as we exited 2007, we had completed more than 50% of the reductions in the ongoing businesses.

As you see in our fourth quarter results, we initiated our restructuring plans faster than originally anticipated, so these activities have already begun to make a meaningful contribution to reduced operating expenses and we expect to accelerate that momentum as we progress through 2008.

As you know, we have been giving sales and earnings per share guidance one quarter at a time for the past year, due to the volatility in our two largest markets, DES and CRM.

On our third quarter earnings call in October, we provided our aspirational goals of 3% to 5% revenue growth and 18% to 20% adjusted earnings per share growth for 2008 and 2009, because we wanted to put our restructuring initiatives and expense reduction targets into a meaningful context.

Our full year 2007 revenue guidance range was $8.255 billion to $8.355 billion, and we came in slightly over the top end of that range, primarily due to the strength of foreign currency contribution to sales growth in the fourth quarter.

The businesses identified for divestiture accounted for roughly $550 million of revenue in 2007, so a range of $7.705 billion to $7.805 billion was the base for our 3% growth, excluding these divestitures.

Given our sales performance in the fourth quarter, we are providing full year sales guidance consistent with our previous aspirational goals of 3% to 5% growth on the 2007 revenue base of $7.8 billion, excluding the revenue from divested businesses.

This results in expected revenue for 2008 in a range of $8 billion to $8.2 billion, and if foreign currency rates held constant throughout 2008, the contribution from foreign currency would be approximately $250 million and represent 3% of growth.

For those of you who are attempting to adjust your 2007 models for divestitures, the 2007 revenue for each of the divested businesses, by quarter, will be available on our website immediately following this call.

Providing adjusted earnings per share guidance for the full year 2008 is a bit more complex, so let me take you through the details of our thought process.

On the third quarter earnings call, I provided an aspirational goal of 18% to 20% adjusted earnings per share growth for 2008 and 2009.

The derivation of this goal included actual adjusted earnings per share of $0.53 for the first nine months, less $0.03 of non-operational items from the third quarter that I mentioned on that call, principally tax items and gains on our investment portfolio, plus the midpoint of the Q4 range of $0.17, for a total 2007 adjusted earnings per share of $0.67.

Given the complexities and details of the fourth quarter results that I have already discussed, the $0.67 remains a reasonable base to build on for providing 2008 adjusted earnings per share guidance.

And using the 18% to 20% growth rate on a 67% operational earnings base for 2007, we are targeting a 2008 adjusted earnings per share range of $0.79 to $0.80.

As a reminder, the divestitures are about $0.05 dilutive from the $0.67 adjusted 2007 earnings per share base, and as a result, we expect to overcome this dilution and still achieve $0.79 to $0.80 of adjusted earnings per share in 2008.

Before I move on to first quarter guidance, I'd like to say a few words about gross profit margin for 2008.

As you know, we do not give line item guidance, only sales and earnings per share.

But as you build your models and attempt to estimate gross profit percent for 2008, please keep in mind that the effect of added inventory charges in the fourth quarter was to lower adjusted gross profit margin by 70 basis points.

Without these added costs, the adjusted gross profit margin would have been 71.3% in the fourth quarter, and as the quarters unfold throughout 2008, the mix of TAXUS and PROMUS may begin to exert some downward pressure on gross profit margins, but offsetting this pressure should be reductions in the transitional quality remediation costs, as we move closer to the Corporate Warning Letter being cleared.

We should also see the benefits of manufacturing, value-added improvement programs coming online, as manufacturing engineers are refocused back into what they do well, which is to drive significant manufacturing cost improvement programs in all of our plants.

Turning to sales guidance for the first quarter of 2008, consolidated revenues are expected to be in a range of $1.96 billion to $2.08 billion, up a range of 1% to 7% from the $1.95 billion recorded in the first quarter of 2007, excluding divestitures.

If current foreign exchange rates held constant throughout the first quarter, the contribution from foreign currency should be approximately $80 million and represents 4% of growth.

For drug-eluting stents, we are targeting worldwide revenue to be in a range of $395 million to $435 million, with U.S.

revenue in a range of $215 million to $235 million, while O-U.S.

revenue in a range of $180 million to $220 million.

For our defibrillator business, we expect revenue of $395 million to $430 million worldwide, with $270 million to $290 million in the U.S.

and $125 million to $140 million outside the U.S.

For the first quarter, adjusted earnings per share excluding charges related to acquisitions, divestitures and restructuring, as well as amortization expense are expected to be in a range of $0.15 to $0.20.

The Company expects earnings per share on a GAAP basis in the first quarter of 2008 of $0.13 to $0.18.

We expect to record restructuring-related charges of $40 million to $50 million, or $0.02 a share in the quarter, as well as an additional loss of $15 million on both a pretax and after-tax basis on the sale of our cardiac surgery and vascular surgery businesses and a $230 million pre-tax gain or $120 million after-tax gain on the sale of our fluid management and venous access businesses.

The cardiac and vascular surgery, as well as the auditory transactions, closed in early January and the fluid management venous access divestiture is expected to close in mid-February, so any operational impact from these businesses beyond what is included in our guidance should be minimal.

I will also provide some other key elements, which might be helpful to you as you model 2008.

We are planning approximately $450 million of capital expenditures during 2008, and with respect to the tax rate, we are currently forecasting a 21% rate for the year based on our assumption that, similar to many of the past years, the expired R&D tax credit will be re-enacted for 2008, but not until the fourth quarter of 2008.

Consequently, we anticipate a tax rate for the first nine months of approximately 23% on adjusted earnings offset by a tax rate below 15% in the fourth quarter to record the full year impact of the R&D tax credit in the fourth quarter of 2008, and that should result in a 21% effective tax rate for the full year.

That's it for guidance.

Now let me turn it over to Jim for a review of the CRM business.

Thank you, Sam.

Since Sam's detailed the financial numbers for you, I'd like to make some qualitative comments on the ongoing improvements in our CRM business.

For the past 21 months, I've spent much of my time in Arden Hills, working with some very talented and committed people.

During that time, the CRM organization has transformed itself to better serve our customers and their patients.

With much hard work, we have re-engineered how we design, build, test and report on our products.

These efforts have greatly succeeded in improving our product quality and have gone a long way toward rebuilding trust and confidence among our customers.

Our attention is now clearly on restoring our new product cadence and growing revenues and market share.

We have an impressive slate of new products that we plan to launch this year.

I'll share more details on our pipeline in a moment, but first, let's review our recent progress.

The fourth quarter results show evidence of a revitalized business, competing more effectively in a slowly recovering market.

We saw strong overall growth in Q4 CRM sales at 11%.

International defibrillator sales remain particularly strong with 23% year-over-year growth and 17% sequential quarter growth.

The quarter also showed slow but steady recovery in our U.S.

defibrillator sales, which posted increases of 6% year-over-year, with an upward trend in actual implants, which rose 8% year-over-year and 5% sequentially, a trend that started well before Medtronic's Fidelis Lead recall.

While it is too early to determine the full impact of the Fidelis recall, sales of our defibrillator leads did show a modest increase in Q4 with the largest proportional impact in Japan.

We will all have more complete picture of market shares after Medtronic's earnings announcement, but overall we seem to have done okay, especially in the face of numerous competitive product launches.

We expect modest but steady growth in CRM revenues in 2008 and we look forward to share gains as we introduce new ICD and CRTD products beginning this quarter.

Before I discuss some of our anticipated product launches, I'd like to comment on the tremendous progress we've made in our quality systems since acquiring Guidant.

In less than two years we have fundamentally re-engineered the culture of quality in our CRM organization.

In all areas of the business, we have scrutinized and redesigned our processes, with a keen focus on customer and patient needs.

From the product development processes to manufacturing, operations and our extensor supplier network, we have dramatically improved the way we bring new products to market.

And most importantly, we stand by the results of our improved quality systems, with the most comprehensive online product performance reporting available.

I believe we are now producing the highest quality products in the industry, which will soon begin to set new standards for excellence and reliability.

During our quality improvement efforts, we diverted significant engineering resources to assist our quality teams with the integration of new processes and systems.

With those efforts essentially complete and the resulting quality enhancements in place, we have now entered the phase of continuous quality improvement.

This has allowed valuable engineering resources to be refocused back onto product development.

The results are evident in the numerous product launches we've planned for 2008.

Our restored product cadence has already begun to take shape with major product approvals in just the last few weeks.

In Q4, we received CE Mark approval for our CONFIENT ICD and LIVIAN CRT-D, the first Boston Scientific-branded pulse generators.

The first European implants occurred in late January and we are anticipating U.S.

approval and launch at the end of Q1.

Two weeks ago, we also announced CE Mark approval for our COGNIS CRT-D and TELIGEN ICD.

These next generation devices are the result of a multi-year research and development effort to provide physicians enhanced clinical options for their patients.

COGNIS and TELIGEN are among the world's smallest and thinnest high energy devices and offer significant advances, including extended battery life, self correcting software and improved programming technology.

We expect the first European implants to occur this month and we are preparing for a full European launch by the end of the second quarter.

Both COGNIS and TELIGEN are currently pending FDA approval, which we expect to secure in time for a U.S.

launch in the second half of this year.

Other important product launches scheduled for mid-2008 include the [Altrua] pacemaker, the first Boston Scientific-branded brady device, and the ACUITY Spiral LV lead, which features the smallest LV Lead tip profile on the market.

Our enhanced pipeline demonstrates additional evidence of a revitalized CRM business and the our-- the first products design and built on our foundation of improved quality.

An integral part of our new product cadence is our LATITUDE patient management system.

With the recent attention of the issue of Lead failure, we have clearly seen the importance of remote monitoring of device performance, not only to manage patients, but to build physician confidence in the reliability of the devices.

We believe LATITUDE offers a strong differentiated platform and we are increasingly seeing examples of referring and planning physicians choosing Boston Scientific devices based on the enhanced clinical benefits provided by LATITUDE.

We now have more than 82,000 patients enrolled on the system, exceeding our own aggressive targets with a faster adoption rate than any competing system.

In 2008, we plan two significant LATITUDE updates to support additional clinic alerts, more comprehensive electronic medical records integration and other system enhancements based on our user feedback and continuous improvement.

Overall, I think we've provided ample evidence that we've indeed transformed our CRM business over the past 21 months.

We are beginning to hit on all cylinders as our quality improvements have taken hold, our expanded pipeline is ready to be unleashed and our sales force is stronger than any time in the recent past.

We are a revitalized team, prepared to deliver pioneering innovation driven by solid clinical science and built on industry-leading quality standards.

All these strengths will be applied to a market with strong fundamentals that is showing incremental signs of improvement.

Our success in 2008 will depend largely on our ability to execute our product launches, lead with our LATITUDE strategy and leverage our quality improvements.

I have every confidence we will achieve our goals and I look forward to a productive and successful year in CRM.

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

Thanks, Jim.

I'll first update on stent market dynamics and then on our global business performance, followed by comments on our progress in quality.

Overall, stent market indicators are heading in the right direction and our business with TAXUS and with PROMUS is very healthy.

U.S.

PCI procedure volume in 2007 was down about 8%, yielding 990,000 procedures.

The rates of stenting at 92% and stents per case at 1.45 remained fairly consistent with historic levels throughout the year.

U.S.

procedure trends continue to improve in the fourth quarter.

Cardiologist opinions about volume are improving.

Diagnostic catheter volume by December had nearly reached 100% of Q1 levels pre the COURAGE impact.

Also by December, our bellwether PCI product lines had reached about 97% of prior year, and we believe PCI procedures in December were at 98% of prior year levels.

After substantial drops in volume early in the year, second half stability has been accentuated with signs of year end recovery.

It remains to be seen if these trends persist, but they are certainly encouraging.

U.S.

DES penetration did not accelerate in Q4, but did remain highly stable in the 62% to 63% range, now for five months running.

Our data and MRG data both confirm this stability.

Europe and Japan penetration rates were steady at 48% and 66% respectively.

Stents plus, the BSC-initiated dual antiplatelet program, has been endorsed by SCAI, the society for coronary angiography and intervention, the BSC-initiated, I'm sorry -- and is now rolling out.

We expect full rollout by end of Q2 and we believe this program will be a gradual contributor to increasing interventional cardiologist confidence in the use of DES as the preferred clinical option compared to bare-metal stents for on label patients.

Boston Scientific stent selling performance was strong.

Our U.S.

market share reached the tenth quarter in a row of between 53% and 56%.

Q4 once again averaged over 54%.

The TAXUS average selling price premium also expanded to $80 compared to CYPHER.

We also anticipated and are prepared for the Endeavor stent launch by Medtronic.

Our sales team has been thoroughly trained and provided with selling materials on the limitations of that device, notably its weaker efficacy and the absence of any safety advantage, and they are actively conveying those messages to U.S.

customers.

Internationally, our market share also remains strong, again at 38% overall and stronger in the major markets of France, Germany and the UK.

Our PROMUS everolimus-eluting stent is playing an increasing role in our dual drug strategy.

Q4 PROMUS revenues in Europe grew by 80% sequentially and even faster in intercontinental.

The PROMUS brand, created well after its everolimus counterparts, now has 88% recognition in Europe.

We have also received reimbursement for PROMUS in France and will be launching there shortly.

We believe the everolimus platform in its two brands surpassed Endeavor in Q4 revenues and will surpass CYPHER shortly.

However, TAXUS Liberte still remains solidly entrenched as the number one stent in the international marketplace.

This position will be strengthened by our newly received CE Mark for diabetic patients, the only DES brand to receive such a claim in Europe.

In Japan, TAXUS Express averaged 52% share for Q4, lower than its peak share achieved post launch, and we believe that share will fluctuate before eventually settling in over 50%, consistent with most other TAXUS/CYPHER head-to-head markets.

Our DES pipeline activity remains diversified and progressive.

We anticipate launching the PROMUS and TAXUS Liberte platforms in the U.S.

mid-year.

Our TAXUS Element IDE trial, the PERSEUS trial, continues on its enrollment plan and the PROMUS Element program is progressing towards its clinical trial around year end.

We continue to believe our cadence of platforms, expansion of the stent size matrix and data-enabled label claims expansion will reinforce our objective of sustained leadership in the DES market.

Beyond stents, the strength of our other cardiology product lines was clear in Q4.

We maintained 63% balloon share and have commenced international launch of our next generation [APEX] platform to very positive physician reviews, to be followed by the U.S.

launch expected in Q3.

Our worldwide IVUS market share lead was bolstered by 24% global growth, enabled by our iLab next generation system.

Of the eight major non-stent cardiology franchises, we hold the number one position in five, and a strong number two position in the remaining three.

With launches of the [APEX] balloon, iLab imaging system and the kinetics guide wire, expected in Q4, we remain very enthusiastic about the financial contributions of this business, as PCI volumes recover and the strategic contribution of our cath lab position as we fortify DES leadership through our dual drug strategy.

Our Peripheral business is regaining strength.

Our PolarCath Cryo balloon system grew 13%, and we expect this rate to continue, aided in part by clinical data on below the knee outcomes.

This novel technology continues to gain evidence and momentum, while other technologies, notably the FoxHollow Device, are in decline.

We expect to gain strength in peripheral stenting as we gear up to launch the [Epic] stent, now in its final stages of approval, by the end of Q1.

We expect to gain strength in guide wires, having just completed a 25,000-unit evaluation of the ZIPwire, which is now ready for full launch.

We expect to gain strength in PTA balloons with Sterling below the knee line extensions that complement the 24% growth generated by the current Sterling offering.

Lastly, the mid-'07 launch of our first carotid device, the NexStent, and our FilterWire system has taken the number three market spot and we expect to add further strength with the carotid WALLSTENT leader this year and our next generation ADAPT system, which will be launched internationally in the fourth quarter.

With a strong new product flow, procedural growth, and leading market share positions, the Peripheral Interventions business should be a strong contributor to total cardiovascular performance in 2008.

Our Neurovascular business, against coil launches from three key competitors, grew 9% globally and 8% domestically, while maintaining clear leadership in every product category in interventional neuroradiology.

We expect to maintain this position in the lab, to fortify this position by our unprecedented clinical trials for coils and atherosclerotic stents and to extend this position with restored new product flow, as our engineering teams return their focus once again to innovation.

I'd like to also comment on the strength of our non-cardiovascular core businesses, which are demonstrating impressive vitality and depth.

Our EP franchise had double-digit U.S.

and worldwide growth in 2007, despite its primary commitment to quality remediation.

Our U.S.

therapeutic franchise grew 8% and maintained leadership and our diagnostic franchise grew 18%.

We believe this growth will be enhanced by new product flow and by the organizational leverage we expect from selling and marketing synergies with the CRM team.

We are successfully piloting these programs in Europe and will implement them in the U.S.

throughout 2008.

Our Endosurgery businesses continued to grow to solidify leadership and expand their technology and procedural reach.

Urology grew 9% globally, highlighted by 13% growth in pelvic floor surgery and 26% in gynecology.

We grew faster than the market in total stone management, where we hold clear overall market leadership, and we are very optimistic about growth prospects for BPH and gynecology going forward.

Endoscopy has emerged as a global, balanced and prominent business for BSC.

Our 2007 worldwide growth was 9% for balloons, 13% for GI stents, 19% for hemostasis, with great contributions from our resolution clip system, and 16% for our biliary franchise.

Each of these business, plus biopsy and others, holds number one market positions.

We are launching our SpyGlass system this month, the world's first cholangioscopy system that enables direct visualization in biliary interventions.

This system adds revenue per procedure, creates pull-through for our other biliary devices and is empowering cost effective and improved clinical decision making.

I expect this platform to emerge as a steady driver of the biliary franchise for a long time to come.

And lastly, as we divest our venous access business, we are positioning -- we are repositioning remaining oncology product lines to other divisions.

Endoscopy has gained the RF ablation franchise for tumor management and we expect this technology to blossom in the larger endoscopy commercial organization.

Neuromodulation -- Boston Scientific now operates neuromodulation independently from the divested Advanced Bionics Company.

This separation has been seamless to our customers and is moving rapidly toward final integration status within BSC.

We learned a lot about this business in 2007.

We learned we have a technology advantage that has enabled consistent share gains and fast revenue growth.

38% for pain management in 2007, 43% for the fourth quarter.

We believe the advantage will be further revealed by the ongoing launch of our OMG device, which enables a side-by-side comparison during patient trials of our precision device with competitive devices.

Early clinical feedback from physicians, but importantly from patients being provided a head-to-head therapy choice, reinforces the improved therapy delivered by Boston Scientific.

We are also introducing the new ST Lead for placement in the cervical region to treat upper extremity pain.

Finally, we have increasing confidence that our platform offers advantages for expansion into new neuromodulation segments and we are working to finalize our portfolio of investments in pursuit of this strategic expansion.

Overall, reinforcing Sam's comments, many of our businesses posted very solid, often double-digit growth numbers, and as we restore new product investment focus, we expect innovation to contribute incrementally to future business growth.

Switching to quality, I'd like to just take a minute to recount our overall progress and status.

We received the Corporate Warning Letter two years ago, and its message was unmistakable.

We had to overhaul our systems and our culture and do so as a top priority to remediate compliance issues and create an organization where quality systems, values and output are sustained and continuously improving.

We have invested every necessary resource to accomplish this change.

We have added over 600 people in the global quality function.

We have implemented a number of entirely new quality systems.

We have revalidated our manufacturing processes.

We have re-engineered our management controls.

We have eliminated hundreds of weaker product codes and incurred their lost revenues.

We have diverted R&D investments and product cost improvement programs to focus technical and plant resources on remediation.

We have run all new systems to assure effectiveness, trained every person in the organization on every applicable change, and subjected those systems and people to repeated internal and external audits.

This has taken a passionate commitment by our team and we have done this work very well.

There are many signs of progress across the Company.

Importantly, the project horizon structure we use to drive change has been disaggregated into the sustaining organization.

The vast majority of our technical resources have completed their remediation efforts and have returned to driving our new product pipeline forward.

And we have numerous indicators that our investments are producing better quality management, improved reliability, and a more responsive and preventive management environment across the Company.

We indicated previously that our plan -- that we planned to confirm our inspection readiness date with the FDA for sometime in the first quarter, and we have done so.

We also hoped to have a timely inspection start by FDA.

I am pleased to tell you that FDA investigators have commenced site inspections at Boston Scientific.

As indicated on prior investor calls, we will not provide status updates during this inspection process.

We appreciate your patience as we work with FDA through the next phase of our quality and compliance evolution.

And with that, I'll turn it back over to Jim to provide his CEO perspective.

Thank you, Paul.

I'm going take just a couple of minutes to give you a brief perspective on both the quarter and the year, and then open it up for questions.

We had a decent quarter and it's a strong finish to a difficult year.

Net sales and adjusted EPS both exceeded guidance and we reported record sales for Q4 and '07.

With the DES and CRM markets, while they were not what we wanted them to be, both saw positive developments that provided more reasons to be optimistic about these markets and their prospects for recovery.

In DES, there are more data showing that prior reports of safety concerns were basically unfounded.

A number of studies showed that in addition to there-- to being far more effective, drug eluting stents may actually be safer than their bare-metal counterparts.

In CRM, we saw evidence that the market is recovering, albeit slowly and we saw double-digit growth in our own sales.

For the year, we made substantial progress on our main goals.

We implemented a series of initiatives designed to focus and simplify the business.

These included extensive expense and headcount reductions intended to bring our expenses back in line with our revenue.

We have implemented many of these cuts and we are already seeing their benefits, with the balance of our reduction program scheduled to take place throughout 2008.

We also announced the sale of five nonstrategic businesses and we expect to have closed all five by the end of this quarter.

We are also in the process of divesting the majority of our investment portfolio.

In addition to these measures, we have streamlined our product portfolio.

We made progress throughout the organization during the year, with notable accomplishments in a number of areas.

Let me mention the highlights in case you missed them.

TAXUS was approved in Japan and it received CE Mark for use in diabetics.

We became the number one stent manufacturer worldwide and we successfully held DES market share in virtually all our major markets, even in the face of new competition.

And we marked our third year of leadership in the U.S.

DES market.

In CRM, we received several new product approvals from the FDA and the Warning Letter was lifted and we positioned ourselves for 10 launches next year-- this year.

Through the process of selling nonstrategic businesses, we have positioned our Endosurgery and Neuromodulation businesses to become even greater growth engines.

We amended our credit facility and reduced our gross debt by more than $700 million.

Perhaps our most meaningful progress came in quality, where we revolutionized our approach and changed our culture.

With these accomplishments-- while these accomplishments represent progress in their own rite, their real value is in positioning the Company for profitable growth going forward.

This year, 2008, we expect to introduce a number of important new CRM products that offer entirely new platforms, see the Corporate Warning Letter lifted, receive FDA approval for the TAXUS Liberte and PROMUS stent systems, restore new product flow across all our businesses in the U.S.

and continue to strengthen our international business.

We also expect to be able to shift substantial resources from remediation back to innovation.

We have spent heavily on fixing our quality problems, and while quality will continue to be our most important responsibility, it will not demand the same level of remedial spending.

Those dollars will now shift back to R&D and manufacturing VIPs.

With R&D spending boosted and the Corporate Warning Letter lifted, we believe a robust product flow of profitable new product will be restored across our businesses.

We don't underestimate the challenges ahead in this year, but we believe we are prepared well for them and that we have strengthened our organization to meet the challenges of 2008 and beyond.

In closing, I'd like to make a few special recognitions.

I'd like to recognize those people who left the organization during the past year as a result of the reductions.

Their departures were related to our need to reduce expenses, and the fact that they left is no reflection on them.

Many of them put years of dedicated and effective service to Boston Scientific, and I want to thank them and wish them well.

I also would like to recognize Jeff Goodman and Paul Sandman, who are retiring.

Jeff has most recently run our international business, which has grown substantially in size and importance.

Over the years, he's covered the world for Boston Scientific and he's been one of the driving forces in making BSC a global company.

Paul Sandman has served as our General Counsel since 1993 and has been a crucial partner in our growth and success.

Above all, he has been the moral comfort-- compass of Boston Scientific.

He has said and demanded an uncompromising standard of integrity and we are all better off because of it.

We will miss Jeff and Paul and we wish them all the best.

Now let me turn it back to Dan, who will moderate the Q&A.

Okay.

Thanks, Jim.

Alex, let's open it up for questions.

And as usual, in an effort to enable us to field as many questions as possible in the time remaining, I would respectfully request that you ask no more than two questions at a time.

Thank you.

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

Please go ahead, sir.

Okay, thanks very much.

A lot to sift through here, I'll try to keep it to two.

Congratulations on the progress, first of all.

My first question is for Sam.

I just want to be clear on the guidance, Sam.

The revenue guidance you gave of $8 billion to $8.2 billion does not include currency and if you included currency, it would add $250 million.

Is that right?

No, that is not right.

It includes our best estimate for the currency effect.

Okay.

So the $8 billion to the $8.2 billion includes currency.

Okay.

And then on the EPS side, the reason you're using $0.67 as an '07 base is that the restructuring that's happening faster than expected, but not necessarily going to be larger than expected at this point?

Is that why you're using that base to grow $0.18 to $0.20 instead of the extra $0.02 by which you beat this quarter?

Yes, that's correct.

We wanted to be sure, while we're really pleased with the fourth quarter and very happy to have turned in the level of earnings per share that we did, part of that, the $0.02 part, actually got us out ahead of the still expected full year reduction rate of $475 million to $525 million.

So we are not increasing that range.

We just got to it a bit sooner.

Okay, thanks.

And then for Jim.

Jim, I was wondering if you could talk in a little bit in a little more detail about the ICD benefit that you had this quarter from Medtronic's problems in Japan?

Since you obviously broke that out at about $20 million, I was wondering if you could quantify that for us and give us any other thoughts, including what kind of market growth expectation you think we'll see on a worldwide basis for 2008?

Thank you.

Yeah, Bob, I -- the sense you get is that the impact of the Medtronic Fidelis recall was not that great on us, kind of lost in a rounding frankly.

We made that accounting adjustment.

Those two probably offset each other, give or take.

So it wasn't a major factor in Japan or anywhere else for us.

As far as market growth goes, that's hard to call because when Medtronic had the recall, that impaired their ability to put product on the shelf at the end of that quarter.

That will reverse itself this quarter, I think, and so what's likely to happen is you're seeing a slightly depressed market growth in the past quarter and maybe a little extra this quarter and you got to kind of average those out and it's hard to tell.

All right.

So I think the defibrillator business overall is back in the high-single-digits, maybe even 10% growth rate.

Pacers are surprisingly strong versus everybody's expectations, but until we see what happens with Medtronic this quarter and really next, I don't think we're going to have a good feel for what the market growth really is.

And those are the numbers you used to put forth this guidance, those kind of market growth rates?

Yes.

Thanks very much.

If I could make one more quick correction on guidance, during my comments prior to the Q&A period, as I was discussing worldwide DES guidance range for Q1, I said was a range of $395 million to $435 million, should have said $395 million to $455 million.

Next question?

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

Please go ahead, sir.

Good morning, everybody.

Let me ask maybe one product question and one P&L question.

On the P&L side, can you help us think through gross margins going forward a little bit?

I know you're reluctant to give any precision, but can you help us sift through at least a little bit how gross margins, maybe your aspirational goals, if you will, how gross margins might look sort of post-Endeavor, post-PROMUS, you have new products coming in, you're still getting more efficient.

Just help us frame it a little bit?

Yeah, I attempted to do that in my comments without giving specific numbers, Rick, because as you know we don't give line item detail.

But clearly mix, mix plays the most significant role of anything in determining what our gross profit margin is going to be.

And while we have a clear set of underlying assumptions that drive our overall EPS guidance, we don't disclose that internally because we can get to margin in a variety of ways, but clearly the wild card is mix and I think we've done our best job to estimate what that is.

And I tried to put that in balance, too.

While mix and the presence of PROMUS, and if we do lose any of the volume or share from TAXUS has a downward pressure on gross profit margins, that's the bad news.

The good news though is that we have in fact redeployed our manufacturing resources to drive VIP programs, and those have already begun.

We should start seeing those as the year progresses, and the amount of dollars that we have historically spent in remediation transitional costs for quality were quite substantial, and those are already coming out of the system.

And as we look towards lifting the Warning Letter, we'll be able to turn our attention even more towards improving the rather inefficient process that we put in place to remediate the quality efforts.

And that would give us some, some boost and lift going forward.

So might be reasonable to assume that both the reported and the adjusted gross margin might represent lows and things stabilized at a minimum to improve from here?

I've given you all I can,Rick, on this one.

Okay.

Thought I would try.

CRM, maybe, Jim, you could help us think through international sales have grown clearly faster than domestically, not just for you guys, but for the industry.

How sustainable is that?

And maybe just if you could talk about the new implant replacement mix, how that factored into driving growth in the quarter?

Thanks so much.

Yeah, those are good questions.

The international piece seems sustainable to me.

There's no fundamental thing going on, other than people recognizing the value of the therapy and using it.

You see, you see just sort of slow and steady growth on the pacer side and defib side is pretty strong.

So that looks good.

As far as the replacement piece goes, I think the market suffered greatly from a lot of free replacements in '05 and '06 and we started to see people paying for replacements in '07.

How much of that is, what that-- how much of that looks like growth, but then goes away when you start doing '08 over '07?

It's hard to call, but it's certainly helped in '07 and that, that should be a more or less steady piece of the thing.

I don't really -- it's hard to call, so I just don't -- I don't think about it as really being separate.

It's all one big market and it's growing.

Thank you.

Next question comes from the line of Glenn Reicin with Morgan Stanley.

Please go ahead.

Folks.

Just want to confirm a couple of issues as pertains to guidance.

The guidance, Sam, that you gave, $0.79 to $0.80, that obviously excludes amortization.

It sounds like the amortization number's going to be, you said $50 million lighter than what you projected last time around, so if we--

Well our run rate for amortization has been about $150 million a quarter, roughly $600 million for the year.

And we think it'll be about $50 million less than that in 2008.

Okay.

So if I want to adjust for amortization, I take $0.79 minus $0.27 and that would give us $0.52 roughly, or $0.53, correct?

If you want to add amortization expense back to the guidance?

Yeah, because I think that's what consensus estimates are.

I think the consensus estimates are mixed.

It's really hard to decipher.

And we spent a lot of time on this, because some of the analysts have now conformed to the exclusions that we have.

Some have not.

Some have backed out the effects of the divested businesses.

Some have not.

So right now first call is quite a mess.

The reason we went into such meticulous disclosure here is to try to give everybody enough information to more appropriately construct their models, using whatever normal growth rates for sales and operating results that they can.

Okay.

Fair enough, but that $0.27 is the right number in terms of a yearly amortization number?

I haven't converted the cents, but if you're using roughly $550 million, that would get you there.

Okay, and then I'm a little bit -- the yearly guidance looks fine.

Quarterly guidance in Q1 on the top line looks fine, but the bottom line looked a little bit light.

Now, $0.01 of that is tax rate.

I'm wondering, in terms of the cost cutting initiatives, is there something going on there in terms of the ramp that we need to be aware for the year?

And if you're going to achieve 80% of your goals, maybe give us a sense of how much you've achieved in the first half versus the second half?

Yeah, we haven't broken that out separately publicly.

We obviously have that in our internal models, but we provide a range really because of mix issues, and so with, especially with Medtronic coming out with Endeavor having recently been approved, all those play some role in the breadth of the range that we provide for earnings per share growth.

But does cost cutting actually ramp pretty steep as the year progresses?

Well, it takes place throughout the course of the year.

Throughout the entire year, one of the issues we deal with is that we're absorbing $0.05 of dilution on the divested businesses for starters.

Right.

So that's a little more than $0.01 a quarter, so that's an issue to deal with and build into the models as well.

But we have more than 50% of the 2300 targeted headcount reduction out of this system by the end of 2007.

Those positions and people have moved on, and the rest we'll get through business process improvement programs and a variety of other mechanism we've put in place.

So those will take place throughout the course of the year.

There's no big single event that's going to happen to get the balance of those jobs reduced and removed.

It's meticulous out of programs and business process improvement initiatives that we have in place.

Okay, fair enough.

And then one last question for Paul.

When we look at international stent market share, or drug-eluting market share, can you give a sense of what that share is ex Japan and then maybe also tell us what the rough mix is between PROMUS and TAXUS?

Well, we don't provide the PROMUS/TAXUS breakout, but as I indicated in the revenue comments PROMUS of course from a smaller base is growing pretty impressively sequentially.

So I think, and I expect that to continue.

We established that brand well after XIENCE and of course it has taken some time to build some recognition for that.

That recognition is now established and we expect that to just continue to grow.

The numbers that I gave regarding Europe are pretty, pretty well confirmed by MRG at 38% for Boston Scientific.

That's been stable, and our estimates for intercontinental, which has a little bit less organized competition, shall we say, would put Boston Scientific at probably 3 to 4 points higher than that.

So the 38% was a European share or total international share that you gave us on the introductory comments?

That's a European position.

Okay, good.

Thank you very much.

You're welcome.

Our next question comes from Mike Weinstein with JPMorgan.

Please go ahead.

Good morning.

Can you hear me, guys?

Yes, Mike.

Okay, perfect.

Thanks.

Couple different items, maybe the first one just to clarify, because I thought it was fairly meaningful.

You reported there 70 basis points of gross margin hit from scrap in the CRM business.

That amounts to $15 million, and that's a lot of scrap, so maybe you can just explain to us what happened and why was there such a big write-off?

Second, I just wanted to make sure I understand your first quarter U.S.

drug-eluting stent guidance, you reported for the fourth quarter $224 million and drug-eluting stent sales in the U.S., and that was down from the third quarter by about $17 million, but for the first quarter, even with Endeavor launching February 1, you're guiding to basically flat U.S.

drug-eluting stent sales sequentially.

So maybe you can just explain that?

Thanks.

Mike, let me talk about the CRM situation.

When I say that we have revolutionized our quality program in CRM, that is not free.

What we essentially do is buy components and assemble them and that's called an ICD, or a pacemaker.

That part of our process needed major rework.

One was one of the major root causes for how Guidant got in the mess it got into in the first place.

In the course of doing that, we went through a ton of inventory of components and threw away, I think the number last year was $55 million worth of components that would have found their way into devices in the past.

And that's what you saw reflected in Sam's comments.

And, Mike, maybe I can answer the comments just on Q1 guidance for DES.

First of all, there has been a penetration change from Q3 to Q4.

It went down probably a point.

We do expect that trend in Q1 to tick up a bit, so there's a little bit of shift from, on the sequential Q4 numbers, penetration downward.

We expect that might be a tailwind in the first quarter.

And then obviously Medtronic has -- we have seen that coming.

We couldn't tell when it would be launched, but obviously we now know that.

It was factored into the lower end of our range estimates, so we did have a place holder, if you will, for Medtronic.

Bear in mind, it will be in really an evaluation mode for a number of weeks.

So it will take a bit of time before there's any traction.

I think, I think Medtronic will have a difficult time penetrating.

I think the absence of Monorail is going to weigh heavily against them.

I think there's been a lot of selling that has taken place to inform the market on the weaknesses of the endeavor platform, and we, we see it coming.

It's in our range.

It remains to be seen how we all do relative to that.

But that's been factored in.

So you think that sales will be flat sequentially, we have that right?

That was your guidance?

That's right.

Okay.

Sam, I just want to make sure, one other cleanup item.

As you went through all the different pieces, write-offs, and some stuff that you guys had called out in the press release in nod, in the amortization expense, I think you said there was $25 million of write-offs.

What was that tied to?

We, we suspended some funding for internal research programs and as a result, we ended up writing down some of the intangibles associated with that.

We haven't disclosed probably what they are, but that's what it's related to.

Okay.

Last question then for Jim.

You answered a question where you gave your own commentary about the outlook for the international ICD market and your comments about the state of the U.S.

market.

Can you give us how you were thinking about the growth profile of the ICD market, both in the U.S.

and internationally?

Obviously the U.S.

market didn't grow in 2007 or in 2006.

Do you expect the U.S.

market to grow, and then how do you view the profile internationally?

Thanks.

I think internationally, the impact of all that went on in '05 and '06 has largely been absorbed in, there's -- the market is fundamentally less penetrated than the U.S., and so you're seeing a, I think a sooner snapback of demand in international.

On the U.S.

side, a little closer to home, longer memories, I think it will take new generations of devices from all competitors before the market is fully confident again in what it is that they're implanting, particularly the referring physicians.

So, that begins this year.

We will be introducing five new pulse generators during the course of this year built on quality systems that are totally re-engineered and I think that's going to be a catalyst.

That -- it's not going to resume 15%, 20% growth like it was for a long time, but you will see stronger growth than have you this last couple of years based on new products.

And so what do you think a reasonable range (inaudible)?

I think 8% to 10% is probably where it's going to settle out on the ICD side.

I think pacers is probably more like 4% to 5%, but these are big markets.

So those are lots of dollars.

Okay, great.

Mike, we have to move on to the next caller.

Thanks.

Let me go back and just add a little bit more definition to Jim's answer to your first question.

Your estimate of about $15 million effecting gross profit is certainly accurate when you look at the sales base and 70 basis points.

What you're seeing is the scrap charge and the cost of transition to higher quality standards.

What you're not seeing yet is the benefits that come with that.

The benefits that come with that, if we're right in our assessment, are fewer field actions, fewer recalls and the benefits associated with that are almost immeasurable.

So the good news is you have to follow.

The bad news was we took a $15 million charge in the fourth quarter to rid ourselves of some problem inventory.

Okay.

All right.

Alex, next question.

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

Please go ahead.

Hi, good morning.

Just a couple questions maybe to start with Paul.

Paul, when you talk about PROMUS Element, what is your understanding now with where the FDA's headed with what sort of trial would be expected for that product?

Larry, we have -- that's a great question.

We haven't really discussed that yet and we won't probably for at least another quarter or so, that we're still finalizing that program.

So it's an internal program right now.

We know about obviously the FDA Guidant general.

We have to bear in mind that PROMUS Element at that point will be an already known drug/polymer combination and an already known stent and delivery system.

So we're dealing with hopefully a limited need to generate longer-term data.

And all that, of course, will be factored into the protocol that we develop.

So we haven't discussed that yet and we will announce that as soon as we've made a decision.

Okay, and I assume that you'll try to do something off of, sort of the ATLAS registry.

Maybe there's a little bit longer follow-up, but something in that respect?

We'll do the right thing.

So we'll generate as much data as is necessary, leveraging the fact that we have more drug-eluting stent data than any other company on earth.

Okay, and then just a couple of other quick questions.

Maybe for Sam, if I heard you correctly, you said that you are assuming that the R&D tax credit will get renewed by the end of the year and then that will become retroactive and that reduces your tax rate in the fourth quarter.

I guess what, what sort of gives you that confidence that that will happen?

And if it doesn't, do we just assume the 23% rate for the 4Q, is question one.

And maybe, Sam, you could just review the $1.5 billion of cash, sort of where is that sitting and sort of how you're thinking about using that cash over the next couple of years?

Yes, let me address your first question, which was--

The R&D tax credit.

The tax credit.

The reason we're confident that the R&D tax credit will get approved again is because it always does.

It's used as a bargaining chip by every politician on the planet to get what they need in other Bills that go before Congress.

So I think corporate America would be outraged if the R&D tax credit didn't go through and that would not be good for the politicians.

It's typically so volatile and used so many times, that's why it ends up being approved in December of every year.

This year was the -- the year just ended was the first year in a long time that we actually had that in hand to start the year.

But I'd be shocked.

But if it doesn't come through, then our tax rate ends up being 23% for the year instead of 21%.

In terms of the $1.5 billion of cash, we invest it in very safe investments, A-rated investments and money market funds and a wide variety of things.

We have a specific list, but the use of cash will be to pay down debt obviously.

It won't be used to buy back shares it will be used to pay down debt.

But as part of our strategy to get our balance sheet back into investment grade land by 2010, we're targeting a 1 to 1.5 times debt to EBITDA.

To do that we also anticipate that we'll have a lot of cash on hand at all times, a lot of cash to us means about $1 billion or more.

So we'll always be targeting to have about $1 billion of cash on hand to go and offset the gross debt that we have.

It's not in subprime, if that's what you're asking.

Yeah, well, that was part of it, thanks.

And then just quickly, Sam, the cash just physically, how much is sitting overseas?

That's what else I was getting at.

We haven't disclosed that publicly.

Okay, thank you, guys.

Next question comes from the line of Tao Levy with Deutsche Bank.

Please go ahead.

Good morning, this is Tao from Deutsche Bank.

Just a couple of questions here.

Sam, can you help us think of how we should be viewing operating margins this year?

I don't know if you want to provide that level of detail.

But just with the improvement on the gross margins, on the manufacturing side offset with the mix and then also all your restructuring efforts.

Is this the year where operating margins stay relatively flat versus last year?

Maybe a little bit of improvement?

And then we should be thinking of 2009 where you see a little more benefit?

Well, you -- with a tax rate that's increasing effectively year-on-year, and our shares outstanding staying the same, you really can't have a 3% to 5% growth in sales and a 20%-- 18% to 20% growth in earnings without a substantial improvement in operating profit margins.

Just no way to do that.

So if you just run your models, what we said is that we're planning on taking out $475 million to $525 million of total expenses from the $4.1 billion estimate to finish for 2007, by the time we get to 2009, and we expect 90% of that will be on the P&L by the time 2008 is done.

That alone --

Should get us a nice benefit.

Together with profits margins should have your models with some dramatic improvement in operating profit margins.

And on, Paul, on TAXUS Liberte I think you mentioned mid, mid-part of this year, is that what's assumed in the forecast in the U.S.?

Yes that assumes that by sometime in the next month or two the, the only remaining regulatory hurdle will be lifting of the Warning Letter and elimination of compliance hold.

So given the commencement of our inspections, we of course aren't forecasting any specific time lines for FDA activity in the investigative process, but we feel prepared and we're still planning for TAXUS Liberte approval sometime mid-year.

Okay and then just lastly, the deferred revenue associated with the latitude, are you familiar -- are the other companies doing the same thing with their remote patient monitoring systems?

I'm just trying to get an apples-to-apples for my picture.

They don't disclose it, we do but they don't.

I would suspect we may set a new standard for disclosure here.

And this is the first time in this quarter that that's happened?

We're really obligated to do that, from what we can tell.

Whether they do or not you'd have to ask them directly.

I think we had been doing $300, and now it's $650 to $1,000, depending on which device you're talking about.

So it didn't start from 0, it started from $300.

Okay great, thanks a lot.

And our next question from the line of Joanne Wuensch with BMO Capital Markets.

Please go ahead.

Thanks, it's Joanne Wuensch.

If you take a look at your products, your ICDs came in a little better than what you were expecting, your pacemakers came in a lot better than what you were expecting.

And Jim, in your commentary you were talking about market that sort of is, I think you used the word defy, is what everyone had been expecting of it.

Could you comment on what you're seeing in that market and how sustainable it is?

Well, Joanne, it's ironic, because people have been predicting the demise of the pacer business for five, six, seven years, and in fact, when you looked at the former Guidant pipeline, there was not a single funded project for a new pacer on the list, because obviously the market was going away.

So why invest?

Well, the market didn't go away.

It's actually growing, and so we're going to have two new pacers in the next two years.

I think that as a result of some of the product performance issues that occurred in '05 and '06, people have been -- some people, at least, have kind of been using pacers as a starter device.

It's a simpler way to get started and there are simpler devices, they're very, very, very reliable, unbelievably reliable, actually.

And so I think that's been a factor.

And I think that will continue for awhile because it's not a bad way to go.

Okay.

Second question is, can you talk about the pricing environment for drug coated stents, particularly in Europe?

And even here in the United States and also you're seeing in the United States on the CRM side?

Thanks.

Well, the pricing environment, first of all, internationally, it is so varied from market-to-market, we generally don't comment much on it.

I would say TAXUS has been surprisingly stable in pricing, and of course we're just really getting started with PROMUS around the world, so it's a little bit too early to tell.

I was encouraged by the nice conclusion earlier this month because it reaffirmed incremental value for drug-eluting stents despite all of the hoopla leading up to that.

So I don't think there's any question that drug-eluting stents are valued.

There's a lot of competition obviously in Europe, 20 companies, and given 20 companies competing with quite varied product lines and clinical performance, to have TAXUS with pretty stable ASPs I think is impressive.

We had-- in 2007, we had projected around 4% year-over-year pricing decline.

We have projected previously that we would expect that to increase a little bit with more competition, and that's really where we stand.

We don't expect any dramatic shift in pricing.

We believe the investments made by the newcomers in years of clinical trial, years of program development, acquisition costs are pretty sizable, and that everyone has a vested interest in maintaining the value of the marketplace.

So we don't see any variability from that trend, and we'll let you know if we see that.

As far as CRM goes, the way the market is operated for a long time is pricing has been relatively stable because as new products come in, they come in at a premium, and we have not had a flow of new product as we sort of paid the penalty in our pipeline for, while we fixed the quality end of this thing.

That has put more pressure on pricing but with 10 new products coming out in the next year, I think you'll see a return to essentially over time stable pricing in the marketplace and us included.

Thanks.

Let me go back to one of the questions asked prior to Joanne here is where do we invest our cash.

We invest our cash in highly liquid investments that have high credit ratings, and they consist of U.S.

treasuries, short-term bank time deposits, money market funds.

We do not have any funds invested in either auction rate securities or the subprime mortgages.

Next question.

Next question comes from the line of Jason Wittes with Leerink Swann.

Please go ahead.

Hi, thanks a lot.

I guess you just implied that pricing on ICDs is slightly down but you also indicated, if I heard correctly, that you're getting additional pricing on LATITUDE?

How do I reconcile those two?

I don't think I talked about LATITUDE, as far as pricing goes.

I thought you mentioned that you were, I guess you said your basis was $300, and it's now $650 to $1,000.

I guess --

That's a deferral thing.

I only think about this in cash.

Cash hasn't changed.

So there isn't an additional cost right now that we should be thinking about for LATITUDE?

No.

Just that -- you just changed the deferral recognition, basically?

That's correct.

Okay.

And in terms of, just one final question on the cascade of new products.

I assume -- you mentioned you have 10 new products, and I assume most of those are basically gone, a lot of those have already gone through the review with the FDA, and once you get the lifting of all the regulatory issues with the FDA, those should start coming out immediately.

Is that the way to think about it?

Or how should we think about the cascade of new products this year?

Okay.

Guidant, former Guidant, is still and has been on a separate quality system from the legacy side of the business.

So when the Warning Letter was lifted last April, that eliminated any hold-backs of products.

Actually, we had received product approvals during the Warning Letter, and then we got some additional ones when the Warning Letter was lifted.

So there's no connection between the flow of new products on the CRM side and the Warning Letter on the legacy side.

As far as the cascade goes, most of these have been approved in Europe.

There the approvals are still to be had on the U.S.

side.

Filings have basically been done, so it's a matter of time, and there are no regulatory impediments, that I'm aware of.

These are high quality files.

We got approval for COGNIS and TELIGEN in Europe in a matter of weeks, because the file was so strong and the evidence was so complete.

So I think -- I don't think this is an issue looking forward.

Okay, great, thanks.

Next question comes from the line of Larry Biegelsen with Wachovia.

Please go ahead.

Hi and thanks for taking my questions.

Just two drug-eluting stent questions.

First, Abbott indicated that XIENCE's share in Europe ended 2007 in the low-20s and the combined XIENCE PROMUS share was in the mid-20s suggesting that PROMUS' share was about 20% of the combined sales.

I know you launched a little later, but it's about a year out, so why is it only about 20% in Europe?

How might that change in the future?

And how do you expect this ratio to differ in the U.S., or is this a good benchmark for the U.S.

split of PROMUS and XIENCE?

And my second drug-eluting stent question is a simple one.

At what quarter does your guidance assume that PROMUS is launched in the U.S.?

Thanks.

So no change on the guidance for timing.

We've said mid-year for PROMUS.

And, of course, that's going to be simultaneous with Abbott's approval.

So it remains to be determined,.

We haven't provided a specific split of our revenues internationally.

I wouldn't underestimate, however, the lag time that we had or the absence of any knowledge about the fact that that product would exist.

We started that product, the PROMUS product from a standstill, had to create the product, manufacture a separate set of inventory, create a brand, and then launch it well after XIENCE, number one.

Number two, we started, of course, as the market leader and had a slightly different objective with our second product than a new competitor would with a brand-new product, so we've perhaps been a little more disciplined in our launch.

And, of course, that launch happens in a marketplace internationally where there are at least half a dozen major stent platforms available and another dozen plus secondary.

So there's a, there's the shelf space dynamics are different, the customer interest in incremental choices is different, and I would say as a result of that, the -- what I-- my take-away from Europe as a precedent for the U.S.

would be TAXUS has demonstrated remarkable fortitude and durability, and we expect that in the U.S., and that PROMUS and its ability to launch concurrent with XIENCE with a well established brand will probably do considerably better out of the gate than it did in Europe.

Okay, next question, Alex.

Our next question comes from the line of Matthew Dodds with Citigroup.

Please go ahead.

Thanks.

Question for Paul and then well one for Sam.

For Paul, you talked a little bit about neurostim.

Which indication do you think is first in terms of it moving forward, or can you at least say where you are in Phase I or II and next indication it's not spinal cord stimulation?

And then for Sam, in terms of your debt, how much of that roughly is floating rates, meaning if you were at 6.3% blended rate in Q4, how much could that come down as we move into 2008 now?

So Matt, good question.

We haven't really disclosed our comprehensive thinking on what's next.

We have discussed three basic directions, and just to give you a color on those, overactive bladder, of course, is an established market where existing Boston Scientific Technologies would have applicability, so that's a direction we can take with what I would describe as very low clinical and low regulatory risk.

So that's one thing we're considering.

The second thing, of course, is the deep brain stimulation market where we have already done some research on intercranial leads and other technology requirements necessary to facilitate that direction.

And then, of course, migraine, which was initiated by advanced bionics using the original bion product, and which does still have applicability even though that particular device was, perhaps, not powerful enough.

So the way I look at those three is that we're going to try to optimize our prioritization within them.

We have started work in each of those, and we have yet to sort of run the mill to finalize exactly how we prioritize and which one we would expect to accelerate into next stage clinical work.

We expect to do that strategy formulation in the next quarter, and then we'll update you probably sometime in Q2 on what that strategy looks like.

In broad numbers we have about, I believe we have about $2 billion of our outstanding gross debt is floating, the balance is fixed in varying degrees, but typically the blended average I think we said this quarter blended average was about 6.3%.

Was down a bit from the 6.5% last year because of the backing off of some of the interest rates that we've seen from the Fed.

Hopefully they'll go down, but we have-- I think we have a pretty good blend of exposure minimizing the effect of rapidly moving interest rates.

Thanks, Sam.

Thanks, Paul.

Okay Alex, we've passed the top of the hour so we probably have time for one more question.

Thank you.

And our last question comes from the line of Kristen Stewart from Credit Suisse.

Please go ahead.

Hello, thanks for taking my call.

Yes.

I just had two real quick questions, hopefully quick.

Sam, on the gross profit margin just in terms of PROMUS, how should we be thinking about how that's really reflected?

Is it appropriate to think about it as within the cost of goods sold for that product we should be including the operating profit you will be paying to Abbott?

That's correct.

Okay.

Then on other litigation -- other long-term liabilities, they increased sequentially.

Specifically, what was the legal settlement related to or the estimation?

Is that the Cordis litigation that was announced recently?

Yes, we don't disclose any of the details of our litigations, Kristen.

I'm just referring to the accrual.

We don't disclose that either.

And what exactly is within the composition of other long-term liabilities?

Take a quick look here.

It's legal-- it's litigation, tax reserves.

It's a variety of things.

And then the Guidant product liability is also in there?

No, that would be up in other current liabilities.

For all the entire amount related is all in current?

For?

Is that because you expect to pay the Guidant product liability that's it's mixed here?

It's mixed.

We have-- a part of it is in other long-term liabilities, part of it's in other current liabilities.

Okay.

Perfect, thank you.

Yes.

Okay, with that, we'll close the call.

Appreciate your interest in Boston Scientific.

And Alex will provide you all the pertinent details for the replay of this call.

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