Boston Scientific Corp (BSX) 2008 Q2 法說會逐字稿

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

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

Later we will conduct a question-and-answer session with instructions being given at that time.

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

And I'd now like to turn the conference over to your host, Mr.

Larry Neumann.

Please go ahead.

Thank you, Rochelle.

And good morning, everyone.

Thank you for joining us.

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

We issued a press release yesterday afternoon announcing our second quarter earnings results.

Key financials are attached to the release and we've also posted schedules to our website which you will find useful.

The agenda for the call will include a review of the Q2 financial results as well as Q3 guidance from Sam and an update on the CRM cardiovascular and other businesses from Jim.

Jim will provide some overall perspective on the quarter, and then we will take your questions.

Before we begin we will be making some forward-looking statements on the call today.

So I would like to remind everyone of the Safe Harbor statement.

This call contains forward-looking statements.

The company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and may be affected by among other things risks associated with our financial performance, our restructuring plan, our programs to increase shareholder value, new product development, regulatory approvals, litigation, our growth strategy, the company's overall business strategy, and other factors described in the company's filings with the Securities and Exchange Commission.

I would like to turn the call over to Sam for a review of the second quarter results.

Thanks, Larry.

I will begin my comments this morning about our second quarter results by first discussing revenue.

Consolidated revenue for the second quarter was $2.024 billion, exceeding the midpoint of our guidance range of $1.950 billion to $2.075 billion.

This represents a 2% decrease compared to the second quarter of last year and a 1% decline compared to last quarter's revenue.

As we discussed last quarter, we completed the divestiture of our five noncore businesses that we previously announced.

And excluding the impact of these businesses in both years consolidated pro forma revenue for the second quarter was $2.005 billion representing a 4% increase over the $1.932 billion in the second quarter of last year and a slight decrease versus last quarter's revenue of $2.014 billion.

Compared to the foreign currency contribution assumed in our second quarter guidance range, foreign currency contributed a positive $10 million to our second quarter sales results.

Overall, the contribution of foreign currency to the sales growth of the second quarter of 2008 was approximately $100 million or positive 5%.

Compared to the second quarter of last year excluding divestitures, domestic revenue declined 3% while international revenue increased 13% and was essentially even to prior year in constant currency.

Now Jim will provide a broader overview of our businesses by major product category, I will share the revenue highlights at a higher level as well as DES and [CRM] market dynamics for the quarter.

Worldwide drug eluting stents came in at $382 million at midpoint of our guidance range of $360 million to $405 million and down 13% from the second quarter of 2007.

Geographically US DES revenue was $175 million exceeding the mid point of our guidance range of $160 million to $185 million and 30% below the second quarter of last year.

International drug eluting stent sales were $207 million.

That's slightly below the midpoint of our guidance range of $200 million to $220 million and represents an increase of 10% over the second quarter in 2007.

Including in our US DES and total sales in the quarter is a reduction of approximately $22 million of revenue for the expected returns of customer owned DES product in anticipation of our new drug eluting stent platforms being launched in the third quarter.

In the third quarter 2008 we expect to ship new replacement products to replenish customer stock for return of TAXUS Express as we launch TAXUS Liberte.

These replacement shipments should result in incremental revenue over and above our normal run rates.

And excluding the reserve U.S drug eluting stent revenue was $197 million in the second quarter.

I will now spend a few minutes on the market dynamics in the DES market during the second quarter.

We estimate the worldwide DES market in the second quarter at about $1.050 billion with the US market at about $420 million.

These estimates include the impact of the sales return reserve that discussed about.

USPCI volume in the quarter was about 251,000 procedures and that's consistent with last quarter but up 3% over the second quarter of 2007.

We estimate US DES penetration was 66%, which represents a three percentage point increase from last quarter's 63%.

This is the second quarter of increasing US DES penetration rates as well as stable PCIs, both of which continue to demonstrate that the health of the DES market is improving.

Combining stent procedure volume as well as stents per procedure we estimate that the US DES unit market was approximately 333,500 units for the quarter.

We estimate our US market share for the second quarter excluding the sales adjustments made for expected returns at about 45%.

This is down five points as expected from the first quarter share of 50% as result of Medtronics entrance into the market late in the first quarter.

The reduction in sales were expected return from the second quarter should be offset by the incremental sales of TAXUS Liberte resulting from replenishing customer stock for the return of TAXUS Express.

This is expected to occur third and fourth quarter as we launch TAXUS Liberte and therefore should add to our sales growth in both of those periods.

Based upon an assumed adjusted US market of $440 million in the second quarter which includes adding back our sales return reserve we estimate that endeavor gained market share to approximately 18% with Johnson & Johnson declining to 37%.

TAXUS pricing in the US was down 1% sequentially and 6% versus prior year while stents per procedure remain consistent.

While we expect to see some continued price pressure with more competitors in the market, we have been able to maintain our premium price on TAXUS versus the competition.

The international DES market remained strong for the quarter with 301,000 PCI procedures in Europe, Middle East and Africa, EMEA, over 6% over last year.

Penetration in EMEA grew 3% to 49% and was approximately 60% in our intercontinental region.

Boston Scientific's market share in EMEA is in the mid-30s and remain stable in Japan in the mid-40s.

Combining with our US market share we estimate our second quarter worldwide market share excluding the sales return adjustment to be about 37%.

Now I will share a few comments on our CRM business.

Our CRM team delivered a solid quarter posting the highest quarterly revenue since the acquisition with double digit sales growth worldwide.

Reported revenue of $578 million represents a 10% increase over the $524 million in the second quarter of last year.

US CRM revenues were $364 million representing a 10% increase over prior year while international CRM sales were $214 million an increase of 11% over prior year.

Worldwide ICD sales of $420 million were near the midpoint of the guidance range of $410 million to $440 million and 11% over the second quarter of last year.

ICD sales in the US were $276 million.

That's a 9% increase over last year and at the low end of our guidance range of $270 million to $290 million.

International ICD revenues of $144 million were at the midpoint of our guidance range of $140 million to $150 million and represents a 16% increase over last year.

Our other divisions and product categories delivered very good sales results in the quarter.

Excluding revenue from our five recently divested noncore businesses our nonDES and nonCRM worldwide revenues increased 8% over prior year to $1.045 billion.

This includes continued strong performances by our endosurgery businesses with a 12% increase over prior year including endoscopy sales and $243 million presenting a 13% increase and neurology sales of $109 million representing a 9% increase.

In addition, our neuromodulation business continued exceptional performance with 20% growth over prior year.

And in summary because of the strength of our diversified portfolio businesses we increased our worldwide revenue by 4% and OUS revenue by 13% over the second quarter of last year.

Reported gross profit margin for the quarter was 70.2%, which is 150 basis points lower than the first quarter of this year and 260 basis points lower than the second quarter of last year.

Adjusted gross profit margin for the quarter excluding acquisition and restructuring related charges was 70.3% which is 150 basis points lower than last quarter and 260 basis points lower than the second quarter of 2007.

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

A lower mix of DES to total revenue resulting from both decline in the DES market versus prior year as well as our estimated market share in the quarter contributed to the reduction in gross profit margin compared to last year.

The weakening of the US dollar and the resulting settlement of our foreign currency hedge contracts in cost of sales also eroded our gross profit margin by 100 basis points compared to last year.

Our reported SG&A expense in the second quarter were at $655 million which was 13% lower than second quarter of last year and 1% lower than last quarter.

Adjusted SG&A expenses excluding restructuring related items were $649 million which was about the same as the last quarter and $95 million or 13% lower than the second quarter of last year.

We continue to track very favorably against our restructuring expectations at the end of the second quarter of this year and these expense reduction programs will continue to drive cost improvements for the company going forward.

Reported research and development increased slightly from the last quarter to 12.5% of sales with spending at $253 million for the quarter, which was down $22 million versus the second quarter of last year and up $9 million compared to last quarter.

The vast majority of the reduced R&D expenses compared to prior year were a result of the divested businesses.

R&D expenses for the rest of the company were essentially flat with prior year.

We are committed to continuing to invest in meaningful R&D projects in all of our businesses in order to maintain a healthy pipeline of new products that will restore or short and long term profitable sales growth.

We remain committed to advancing medical technologies and will invest accordingly in both internal R&D as well as strategic external opportunities.

I am pleased to say that we continue to make significant progress in executing the shareholder value improvement programs that we have been discussing publicly for the past few quarters and our overall financial results are reflecting that progress.

Our expense reduction initiatives are running considerably ahead of schedule.

We reported GAAP operating profit of $303 million for the quarter, and on an adjusted basis excluding acquisition and restructuring charges as well as amortization expense, operating income for quarter was $475 million and 23.5% of sales, down 240 basis points in the first quarter of this year and up 220 basis points in the second quarter of last year.

As I mentioned earlier in the quarter, we reduced revenue for expected returns related to the upcoming launch of our new drug eluting stent platforms and estimate that these revenue adjustments reduced our operating income in the quarter by approximately 130 basis points.

In addition our operating income for the second quarter includes planned increases in OUS spending.

I like to highlight the GAAP to adjusted operating profit reconciling items in a bit more detail.

Our total amortization expense was $135 million pre-tax, which was $23 million lower than the second quarter of 2007.

And this is in line with our expectations for the quarter as we discussed during the first quarter call.

This reduction primarily due to divestitures of the five noncore businesses were previously mentioned.

We recorded acquisition related charges of $16 million pre-tax or $19 million after tax related to the purchase R&D associated with the company's acquisition of CryoCor, Incorporated, that's a company that addresses atrial fibrillation.

We also recorded $21 million pre-tax and $15 million after tax of restructuring related charges in the quarter which are primarily related to employee retention costs as well as third party payments in connection with our previously announced expense and head count reduction initiatives.

These charges which were communicated during last quarter's earnings call are lower than previously estimated primarily due to lower than expected severance costs.

The cumulative effect of these items was $172 million pre-tax and $142 million after tax.

Interest income was $118 million in the quarter which was $28 million lower than the second quarter of last year primarily as a result of our $1.7 billion of debt repayments during the last 12 months.

Interest expense was down $13 million from the first quarter as we prepaid an additional $300 million of bank debt in the quarter and benefited from a full quarter of reduced interest expense related to prepaying $625 million in bank debt first quarter.

Our average interest expense rate was 5.9% for the quarter, and that compares to 6.3% in the first quarter, and the reduction is primarily due to lower market interest rates.

Other net expense was $85 million and that includes the loss of $96 million related to the sale of the company's nonstrategic investments which I will discuss in more detail in just a moment.

Interest income was $11 million in the quarter which was $9 million lower than the second quarter of last year and $6 million lower than last quarter primarily due to significantly lower investment rates.

Reported GAAP tax rate for the quarter was 1.5% and the adjusted tax rate was 17.4%.

Our tax rates for the quarter do not reflect any benefit for the US R&D tax credit which expired at the end of 2007.

And in addition, our tax rates for the quarter did reflect discreet tax benefits of approximately $10 million.

On a year-to-date basis our adjusted effective tax rate of 22% excluding discreet items was slightly below our expected rate of 23%.

We do anticipate that our annual operational effective tax rate for Q3 will be approximately 23% and full year 2008 will be 21% including our estimated Q4 operational rate of 15%, and that assumes the R&D tax credit extended in the fourth quarter with a retroactive effective rate back to January 1st of 2008.

GAAP earnings per share of the second quarter was $0.07 compared to $0.21 per share for the first quarter and earnings per share $0.08 in the second quarter of last year.

GAAP results for the quarter including $0.06 related to the acquisition divestiture and restructuring related charges that I mentioned earlier, and our adjusted EPS from the second quarter excluding amortization expense, restructuring and acquisition related charges as well as loss on the sale of noncore investments was $0.20 compared to $0.24 last quarter and compared to $0.16 in the second quarter of last year.

As a reminder, the second quarter of 2007 adjusted EPS excluded $0.08 per share related amortization.

The $0.20 achieved this quarter exceeded the high end of our guidance range of $0.14 to $0.19, included in this $0.20 is a $0.01 benefit for the discreet tax items that I mentioned earlier.

As many know discreet tax items appear from quarter to quarter.

Sometimes they are favorable and sometimes they're unfavorable.

With six months remaining in the year therefore we are not expecting that these discreet items will affect our full year adjusted earnings per share expectations.

Stock compensation was $34 million and all per share calculations were computed using 1.5 billion shares outstanding.

Turning to working capital management.

DSO was 64 days at the end of the quarter which is an improvement of three days compared to last quarter and three days below prior year.

Significant cash collection improvements in our US neuromodulation businesses, Japan and Italy businesses were main contributors to this improvement.

Days inventory on hand were 122 days and that's down one day compared to the first quarter of this year, but down 13 days from the second quarter of last year.

And while days inventory on hand for the quarter was essentially flat compared to last quarter, inventory dollars increased over the last quarter due to inventory bills that were necessary to support new product launches in the third quarter as well as planned upcoming new product launches for the balance of the third quarter and fourth quarter.

Second quarter 2008 reported operating cash flow was $259 million and that is an increase of $48 million over the second quarter of last year.

Reported operating cash flow in the quarter includes a tax payment of $188 million related to the sale of our divested businesses.

Adjusted operating cash flow excluding the one time tax item was $447 million, an improvement of $236 million compared to the second quarter 2007.

The increase is primarily due to working capital improvements resulting from our focus on improved balance sheet management as well as higher operating income and lower interest payments.

Adjusted operating cash flow was also $181 million higher than last quarter.

This increase was primarily due to annual employee cash incentive payments made in the first quarter and lower restructuring payments in Q2 partially offset by lower operating income.

Capital expenditures were $79 million in the quarter which is $11 million lower than the second quarter of last year and $22 million higher than the first quarter of 2008.

Reported free cash flow was $180 million in a quarter, representing a $59 million increase over the second quarter of last year.

Net increase is due to improved operating cash flow as well as lower capital expand.

Reported free cash flow was $29 million lower than the first quarter, primarily due to higher capital expenditures in the quarter.

In Q2 we completed the acquisition of CryoCor for an approximate enterprise value of $21 million.

In addition, we were nearing completion of the sale of our public investment portfolio and realize proceeds to date in excess of $200 million.

In June, we announced definitive agreements to sell our investments in a portfolio of companies to [same] capital as well as to sell our investments in a portfolio venture funds and companies to [Paul] Capitals partners subject to certain closing and other conditions.

The transactions will raise pre-tax proceeds in excess of $140 million majority of which will be in cash with a portion in a note payable over several years.

In connection with these transactions, in monetization of other strategic investments, the company recorded a net pre-tax loss of $96 million which is $64 million after tax or approximately $0.04 per share.

We expect this loss in the second quarter to be partially offset by anticipated gains to be recorded concurrent with the closing of these transactions during the remainder of this year of approximately $30 million pre-tax or $20 million after tax or $0.01 per share.

We closed the quarter with $7.284 billion of gross debt as well as $1.616 billion in cash on hand resulting in net debt of $5.668 billion.

Net debt is $1.7 billion lower than it was a year ago, as a result of repaying approximately $1.6 billion of gross debt during the past 12 months, while at the same time increasing our cash on hand by approximately $100 million.

In the second quarter we reduced net debt another $161 million by prepaying an additional $300 million of bank debt partially funded by cash on hand at the start of the quarter.

In the first half of 2008, we prepaid remaining $300 million of bank debt due in 2009 and $625 million of bank debt due in 2010.

And as a result, our next debt maturity is not due until 2010.

We announced our initiatives to improve shareholder value at the time of our third quarter earnings call last year.

And we told you that we would provide updates each quarter.

I'm pleased to say we are well ahead of schedule in reducing targeted expenses.

We previously disclosed that we would exit 2008 with a run rate annualized savings and operating expenses of between $475 million to $525 million, and that we plan to achieve 90% plus percent of those savings in 2008.

We also announced that we would be eliminating 4,300 positions with 2,000 associated with the businesses identified with the divestiture and 2,300 from our ongoing businesses.

Our savings initiatives are running ahead of schedule as evidenced by our second quarter operating expenses while overcoming the adverse impact of operating expenses of weakening US dollar of approximately $30 million.

With respect to head count our divestitures were completed during the first quarter of this year.

And the associated 2,000 positions have transitions out of the company as planned.

With respect to our restructuring reductions, we are tracking well ahead of schedule and our original time line through 2008 second quarter with 85% of the positions already eliminated.

Turning to the sales guidance for the third quarter of 2008, consolidated revenues are expected to be in a range of $1.950 billion to $2.060 billion.

That will be up 2% to 8% from the $1.914 billion recorded in the third quarter of 2007 excluding divestitures.

Current foreign exchange rates hold constant through the third quarter the contribution from foreign currency should be approximately $70 million in 4% of the growth.

For DES we are targeting worldwide revenues to be in the range of $375 million to $420 million with US revenue of $205 million to $225 million while OUS revenue is expected to be in a range of $170 million to $195 million.

Included in our US DES and total sales estimate for the third quarter is the incremental sales we expect to have to replenish customer stock for the return of TAXUS Express.

Of the $22 million in revenue reserve in the second quarter, 2008 for expected returns of customer owned DES product, in Q3 of 2008 we expect to shift new replacement product and recognize revenue of approximately $16 million which will be incremental to our run rate.

We expect a balance of replenishment to recur in the fourth quarter of the year.

For our defibrillator business we expect revenue of $410 million to $440 million worldwide with $280 million to $300 million in the US and $130 million to $140 million outside of the United States.

We are also reaffirming our full year sales guidance of $8 billion to $8.2 billion as discussed in our fourth quarter 2007 earnings call in February of this year.

For the third quarter adjusted earnings per share excluding charges related to acquisitions, divestitures and restructuring as well as amortization expense, are expected to be in the range between $0.14 and $0.19 per share.

This range includes the impact of the replenishment sales for the TAXUS Express returns I addressed earlier.

The company expects earnings per share on a GAAP basis the third quarter of 2008 to be in the range of $0.18 to $0.23.

Included this our GAAP EPS estimate for the third quarter is approximately $0.12 per share of gains associated with the third quarter receipt of a $250 million payment from Abbott as result of the US FDA approval of XIENCE as well as $0.01 per share of gains related to the sale of the company's non strategic investments and $0.02 per share of restructure related cost $0.07 per share of amortization expense.

We are also reaffirming our full year adjusted EPS guidance of $0.83 to $0.84 per share.

Prior to the earnings call the research analysts consensus adjusted EPS estimates as noted on first call were $0.19 for the third quarter and $0.22 for the fourth quarter.

As a result of seasonality with the fourth quarter being traditionally greater in sales and earnings in the third quarter and taking into consideration the expected US launch of many new major products throughout the third quarter including Promus, TAXUS Liberte, TAXUS Adam, Cognis and TELIGEN, all of which will continue to ramp up throughout the balance of the year, we will expect consensus adjusted EPS to show a little lighter mix of EPS expectations in the third quarter and a little more in the fourth quarter.

That's it for guidance.

Our third quarter earnings call will be at 8:00 AM eastern standard time on October 30, 2008.

Now let me turn the call over to Jim for a more in-depth review of our businesses.

Thank you, Sam.

I'm going to take you through the nonfinancial aspects of the business and then I'm going to share some overall perspective for the quarter.

Let me start with CRM.

This quarter marked a major milestone in the evolution of legacy Guidant into Boston Scientific CRM.

The FDA approval of Cognis CRT-D and TELIGEN ICD we have entirely new platforms that are built on the foundation of our improved quality processes and standards.

We were very pleased with these earlier than expected approvals which reflect the hard work and effective coordination of our teams.

The full EU launch began last month.

Full US launch is August 4th.

Our European customers reacted enthusiastically to the new features and these two devices are already accounting for more than 20% of our defib sales in that market.

During Q2 alone, we received approvals for six major new CRM products bringing the total to 12 new approvals for the year so far.

We never been better positioned to leverage our competitive advantages and grow this business.

In May, we received US and European approval for our first Boston Scientific branded pacemaker Altrua.

The Altrua family represents our most advanced pacer delivering capabilities allow physicians to tailor therapy to individual patient needs while maintaining small size and battery longevity.

Launch of the product begun both in US and Europe and initial reports are positive.

Also in May we announced profile of our Acuity spiral left ventricular lead for us with CRT-Ds and CRT-Ps.

Acuity spiral features a spiral fixation design in the smallest LV lead tip profile in the industry.

It's designed to offer greater flexibility to place a lead in veins of all sizes even difficult to access ones and has shown excellent fixation performance.

In addition to our new product introductions we continue to make steady progress in the area of clinical trials.

This quarter we completed enrollment in the landmark made at CRT study which is designed to examine whether CRT therapy can slow the progression of heart failure in minimally symptomatic patients.

While we were encouraged by the results of the reverse trial we anticipate more definitive results which made at CRT which has more larger patient base.

We believe this study has potential to drive expansion of CRT-D indications.

In addition to made at CRT we are initiating eight other clinical studies this year.

These studies are designed to support a range of objectives including: new product development, enhancement of existing therapies and expansion into new market segments.

One of the restructuring initiatives we announced last year included a plan to integrate our electrophysiology business into our CRM business.

This integration is proceeding smoothly.

The overall EP market continues to grow at 15% to 20%, while the afib segment is growing even faster, with three new EP catheters planned for launch next year we expect to take a larger share of this market over time.

An important part of our long-term strategy in the afib market will be implementing technologies from CryoCor which we recently acquired.

The integration of CryoCor is progressing well and we plan to use their power console to deliver cryoenergy to Boston Scientific's proprietary cryoballoon catheter which begins clinical trials next year.

I'm very encouraged by the performance of our CRM group this quarter.

The business grew double digits while the market grew high single digits so we probably took a little share.

Six product approvals in one quarter is impressive and early approvals for Cognis and TELIGEN were added bonuses.

With next month's launch of these devices we are setting the stage for a second strong second half in CRM.

So let me turn to cardiovascular and other businesses.

One question I know is on your minds is the status of the corporate warning letter.

We continue to make progress in our efforts to improve quality and resolve the warning letter.

As has been our practice we will not comment further on the details of that have progress but is it consistent with our expectations.

We believe approval for TAXUS Liberte is probable in the third quarter but that's up to the agency.

In the DES market we saw two encouraging signs during the quarter.

PCI levels grew worldwide and penetration rates increased in the US and European markets.

So we believe the recovery is continuing and the market is strengthening.

We are encouraged by these two important metrics and we are confident that the DES market will continue to move in the right direction.

As you know, we received FDA approval for our PROMUS Everolimus-Eluting coronary stent system on July 2nd.

While we've just launched this product we are off to a good start and are optimistic about its potential.

Our sales force is the most seasoned DES team in the industry.

They are well trained and enthusiastically executing on our two drug offering.

Initial physician feedback is confirmed expectations that Promus is a highly desirable platform.

Promus and when approved TAXUS, Liberte and TAXUS [Adam] represent improving technology over what's been available in the market and we're pricing these products commensurate with the value they bring.

Finally we were experiencing positive interaction with Abbott in terms of our supply agreement.

We are the only company to offer two distinct drug platforms and there is no question in my mind that this gives us considerable advantage in the DES market.

Going forward, our focus will be to maintain leadership in this market.

I am confident that our stent platform which continues to deliver new products positions us very well to do just that.

As I said, we anticipate the probable launch of TAXUS Liberte in the US this quarter.

In addition, TAXUS Adam, the first 225mm DES in the US and our in stent restenosis indication expansion are also pending approval and are probable this quarter.

An acute MI indication for TAXUS may also follow pending the outcome of the horizon's trial which we plan to announce at TCT.

Left main, multiple vessel and diabetic indications may be sought pending the outcome of the syntax trial which we plan to announce at ESC.

The TAXUS element clinical trial remains on track to complete enrollment this year and Promus element will begin its IDE trial next year.

These two next generation platforms will set a new standard of DES portfolio performance and are a key part of our leadership strategy.

We will provide a comprehensive update on our DES performance and market share during the third quarter earnings call in October.

Looking briefly at other CV lines we grew 6% year-over-year across nonstent franchises in the US.

Our US leadership balloon dilation continued with 65% share and this performance women be strengthened by the apex balloon launch which we expect this quarter.

Our IVUS platform, iLab, continues to be readily adopted by cath labs as evidenced by 7% year-over-year growth globally and our US Embolic Protection franchise grew an attractive 17% over the prior year.

In summary, we believe we are very well positioned as the only company with the two drug offerings, a long a list of franchise strengths in improving market fundamentals.

We believe our relative strength as the overall cath lab leader will increase over the next two years.

Turning to neurovascular, we remain the market leader there though our growth has flattened recently due to Cordis re-entering and our coil first ever competition in adjunctive aneurism stents.

Despite this short-term pressure, we retained 46% share in this space.

This position combined with our 11% growth in the market and upcoming coil and stent product launches makes us optimistic about our prospects.

In peripheral intervention business we are number two in the growing market and number one in multiple product categories.

We have approvals pending in carotid, renal and biliary stents and we expect gains in balloons and wires from new product improvements.

Endosurgery had a very strong quarter with 12% growth including 13% endoscopy and 9% in urology.

Endoscopy delivered another quarter of strong balanced growth.

US growth was driven by our biliary, hemostasis and dilatation franchises.

The strong biliary growth was due to the continued utilization of our SpyGlass direct visualization system, the world's first single operator system in the labels direct visualization of the bile ducts.

Hemostasis growth was driven by the continued adoption and utilization of our resolution clip.

Our balloon dilatation franchise grew 6% led by the continued utilization of our CRE controlled radio expansion balloon dilatators which are used to dilate [strictures] throughout the GI tract.

Endourology or stone management grew 3%, while women's health grew more impressive 17%.

The recent launch of Pinnacle, BSE's first pelvic floor repair kit, drove the pelvic floor business to a 15% growth rate.

Meanwhile, the hydrothermal ablation business continues to gain share and grew at 22% compared to the prior quarter.

Our endosurgery business has strong platforms, large growth markets and leading physicians.

But as a result of project horizon during the past two years we also have some short-term growth challenges as we refocus our engineering teams back to our pipelines.

I want to close my comments by highlighting neuromodulation which continued its double digit growth of 18% in the US and 20% worldwide.

This growth is the result of the clinical advantages of our precision system estimated market share gains and increasing success in side by side patient therapy evaluations using our OMG device.

Launch of Medtronics restore Altrua device in the first quarter created a buzz.

However, we believe our technology advantage with our multiple independent current control will allow us to dampen the overall impact of this launch.

This strong showing in the spinal court stimulation market is a positive indicator of our future in neuromodulation.

So let me close with some overall perspective on the quarter.

We were pleased with the quarter, especially with our expense management and working capital initiatives, which resulted in strong earnings leverage and improved cash flow.

Our restructuring plan is working.

We are doing what we said we were going to do, and we are getting the operational results we expected.

We reduced SG&A and R&D expenses by more than $100 million over last year's levels and we paid down $300 million more of debt.

We also sold the nonstrategic assets in our private investment portfolio.

So we made progress in Q2 on a number of fronts that benefited the bottom line and increased our financial flexibility.

There is also good news in virtually all of our businesses.

In CRM the news was particularly good.

We increased sales 10% and we saw some modest share gain.

We were encouraged by the high single digit growth in the size of the worldwide market.

There's no question the market was aided by currency and no question the market grew.

The product approvals I mentioned earlier were good news.

In DES we were encouraged by the market dynamics there as well.

Procedures grew year-over-year and penetration continued to increase.

The approval of Promus was a major event re-enforcing our status as the only two drug company.

Endosurgery returned to double digit growth boasting a healthy 12% year-over-year increase and neuromod recorded double digit growth as well, delivering a 20% increase over last year.

When we pull all this together it makes up upbeat about the second half of the year and especially the fourth quarter as new product introductions pick up steam.

In cardiovascular, we've already launched Promus and hope to launch TAXUS Liberte, TAXUS Adam, and our apex balloon.

In CRM it would be tough to overstate the importance of next month's Cognis and TELIGEN launches.

The DES and CRM markets have stabilized and both are strengthening.

The improvement in these markets along with new products and built in advantages like two outstanding sales forces should help us do what we know we have to do which is to grow.

In DES we are targeting to hold share in a growing market with more competitors and in CRM I'm confident we can continue to take share in a growing market with our cadence of new product launches.

As I conclude my remarks I'd like to leave you with one observation.

With this month's US launch of Promus and next month's US launch of Cognis and TELIGEN, we are now seeing the power of the Guidant acquisition for the first time.

The last nine quarters have been a race to the starting line.

Now for the first time you will see what all the fuss was about.

And with that let me turn it back to Larry who will moderate the Q&A.

Thank you, Jim.

Rochelle, can we now open it up to questions?

And in an effort to enable us to field as many questions as possible, the remaining time, I would ask that the participants ask no more than two questions at a time and then return to the queue if you have additional questions.

Thank you.

Okay.

Certainly.

(OPERATOR INSTRUCTIONS) Our first question comes from the line of Larry Keusch of Goldman Sachs.

Please go ahead.

Yes.

Hi.

Good morning.

Jim, I guess two questions for you.

On Promus and TAXUS for the next quarter it looks like based on your guidance you are looking for somewhere between 45% and 50% share of the market.

So that would perhaps be up from why you are with TAXUS if we did our math right and you take the reserves into account.

Can you help us understand how you are thinking about the mix of TAXUS versus Promus?

And then you made a comment earlier in your prepared statements that your pricing Promus relative to the value you perceive it to have.

There have been some scattered reports of potential very low prices on Promus.

I'm just wondering if you could speak to how you are thinking about pricing that out in the marketplace.

The pricing comments are wrong.

The mix piece I think will -- it's just too early to tell.

It depends on a host of factors.

And I really don't know how that will come out so I can't give you guidance there.

As far as where we are pricing overall, I think actually we are seeing premiums on both TAXUS and Promus.

Okay, great.

Thanks very much.

Okay.

Thank you.

The next question comes from the line of Rick Wise of Leerink Swann.

Please go ahead.

Welcome back.

Thanks so much, appreciate that.

Couple questions.

If you transition accounts to Promus that are currently using TAXUS, maybe help us understand how you transition them back to Liberte, or is that miss the whole point because you are going to go after [cipher] accounts with Promus.

And maybe you could talk as well a little about how you are going to incent sales force to maximize market share which I assume is still the marching order of the day and that's what Paul used to say or has that changed, just given all the margin differentials?

Excuse me.

As far as sales force incentives goes there is no difference between TAXUS and Promus.

We want to sell the market what it wants to buy, period.

As far as transition from TAXUS, one TAXUS to another TAXUS and back and it's really too early to tell how that's going to shake out.

We were doing fine.

And that's -- it's basically too easterly to comment on how this will play out.

Just a follow-up on the theorem front.

I think that you're talking in the US a slightly higher sequential number $280 million to $300 million range versus if I'm looking at it correctly, $276 million you did to high power.

Is that -- how much of that is new product and how much of that, Jim, is just in your view the improving market environment?

I haven't broken it out that way.

I am optimistic about our new product platforms.

I think they are great and I think a lot of people think they are great based on what we were seeing in Europe already.

So there is some market growth.

There will be some share gain in this space as people try new products.

I haven't actually thought about which is which.

Okay.

Thank you.

Okay.

Thank you.

Next question comes from the line of Tao Levy from Deutsche Banc.

Please go ahead.

Good morning.

If I could just ask a quick question on the warning letter, it seems like you are obviously you're still assuming that to be lifted here shortly just given your comments regarding TAXUS Liberte.

So I want to make sure that's still the case and any surprises there on a positive or negative side?

We have been talking for months and months now about mid year defined somewhere between May and August.

That's basically still the case.

We are hopeful that sometime during Q3 we will see that warning letter restrictions lifted and that will result in a renewed flow of new products and so nothing has really changed there from what we have been expecting and hoping for quite some time.

And in the past you'd also mentioned that with that you start shifting resources away from dealing with the warning letter.

Has that started to happen already, or you just don't want to do that until the official lifting happens?

The resources come in two flavors in this regard.

One is the outside help we had for a couple of years here.

And we were kind of past that stage so the tens and hundreds of millions of dollars that we have spent that way have begun to diminish.

As far as our own engineering core goes, there is still process validations ongoing.

There is still a lot of work to be done.

You are never done.

We were still finishing up the last parts of various aspects of this.

But we are beginning to see the opportunity to shift some of our engineering resources back into the VIP space.

And the idea has never stopped.

So we have a large inventory of good ideas that now we can start to implement.

Thanks a lot.

Okay.

Thank you.

Next question comes from the line of Bob Hopkins, Banc of America.

Please go ahead.

Hi.

Thanks, and good morning.

Just a quick question.

Are you guys going to be breaking out Promus sales going forward?

No.

Okay.

Any further color on that, or just not until it gets to a certain critical mass or never?

As best we can see right now we will not be breaking it out because that can move from quarter to quarter.

What we care about is total DES share and that's our focus on how we sell and how we look at the numbers internally as well.

And then I believe on the Abbott call a couple days ago while they admitted it was early there was a suggestion that they are winning the majority of the Promus XIENCE head to head contracts that are throughout.

Can you comment on that just a little bit and just talk about how you think we should talk about the split between XIENCE and Promus.

The overall combined share is what it's going to be.

But how should we think about the split between overall share between XIENCE and Promus?

Thanks.

It's too early to make any comments.

By us or by them for that matter.

So my basic fundamental position is we are doing fine.

Okay.

And then going forward, do you have -- is there a reasonable set of expectation as we look through this uncertain period in the beginning here and look through maybe 2009 and beyond about a split?

In your mind is 50/50 reasonable, is 60/40?

It's way too early to tell.

There is a lot of dynamics at play.

And it's -- the roll out, each of our roll outs is -- they are doing it differently from the way we were doing it.

And we will have enough inventory to support up to 50/50.

I think that the game has to play out before you find out whether that's how it really came out or whether it's something less than that.

It won't be more than that.

Okay.

Thanks.

Thank you.

The next question comes from the line of Mike Weinstein of JPMorgan.

Please go ahead.

Thank you.

First question is for Sam.

Sam, the gross margin is obviously slid this quarter and we are going into the launch of Promus in the United States and likely some decline of the TAXUS.

That should mean more negative mix shift within the DES business.

Can you give us your own thought how first margin plays out from here?

Sure.

I can give you more of the qualitative factors.

First of all in the second quarter if you heard the description of what's going on with our operating profit margin, we did take a reserve for the ultimate writeoff of inventory that we both have on hand of TAXUS Express, as well as inventory that we will take back from our customers and that was in excess of 100 basis points of basis points of margin and primarily in operating profit and mixture between gross profit and operating expenses.

So that goes away going into the third and fourth quarter.

So you get some uplift from the absence of that.

And then the mix will play a role, depending on how well we do Promus.

If we do very, very well that will have a greater downward pressure on overall gross profit margin.

But operating profit margin gets diminished as well, but not to the same degree because the sharing of profits with Abbott takes place within gross profit for us.

So that's something that at least work in your models.

But offsetting the mix issue, we also have the ability we believe to do very well with Liberte and it should push the margins up a bit.

We have already begun as Jim mentioned to focus a lot of our engineers and value improvement programs over time that will be uplifting to us, and we routinely plan and developing our operating plans for 2009 now to take 5% or more out of standard costs every year with value improvement programs.

And 2009 should be no different.

So we have all those mix issues we are dealing with as well.

The benefits that we will get on gross profit margins by a very successful launch and market acceptance of Cognis and TELIGEN should help us as well.

It's not the downward pressure of Promus mix that will be the deciding factor, it's everything that goes with it as well.

And just to clarify, the 130 basis points that you called out in your opening comments, that's the writeoff of obsolete inventory for TAXUS.

That's both the returns of about $22 million that we expect to take as well as writeoff of the associated inventory that will be returned as well as a writeoff of on hand consignment inventory that we have for TAXUS Express as we flip from TAXUS Express to TAXUS Liberte.

That's one question for Jim.

Jim, could you give us your thoughts on I guess, A, the timing of your next generation drug eluting stent.

You mentioned TAXUS Element and Promus Element, the timing in Europe and in the US And then, B, outside of drug eluting stents in CRM what has you excited about the Boston Scientific pipeline?

And then I will drop.

Thanks.

Next generation timing, basically we are expecting TAXUS Element next year in Europe and a couple of years later than that in the US, but that product is real.

And is a terrific product.

The Promus version of that will go into trials next year and we expect to be able to deliver that product in Europe late next year in time to make the deadline for supply that is late November of next year.

So we are pretty optimistic that Element will be our platform in Europe next year and then of course follows a couple years later in the us.

As far as what is exciting beyond that, the list of things is long.

Because 80% of our R&D is focused in the CV space, most of what we are looking at is CV.

This Apex catheter is a -- it's just a terrific catheter.

It's just a wonderful device.

And having the only small vessel in the US stent out there will be a big deal.

We get -- I'm out in the marketplace a lot.

And you would be surprised how often people say, when are you going to have that small stent?

There is a bunch of stuff.

It's not another TAXUS on the horizon.

There is a bunch of stuff that is about to pop out here that I think will create a whole new level of excitement.

Thanks, Jim.

Okay.

Thank you.

Next question comes from the line of Joanne Wuensch of BMO Capital Markets.

Please go ahead.

Thank you very much.

You talked about the timing of getting Promus Element in Europe.

Walk us through the timing of getting it in the United States, and give us an update on the conversations with the FDA regarding how many patients you might need and numbers of years of follow top get that product approved?

Thank you.

Well, the EU version of Promus Element will be next year.

The US version we have in the market in time to meet the deadline of June 30 -- 12th, I expect we will actually -- we will beat that.

As far as what it's going to take for follow-up, the agency's guidelines have been pretty definitive at this point.

You need a third of the patients for two years and the other two thirds heading to two years and it's got to be good data and all those kinds of things.

So we know what we need to do there.

And we expect that will work .

Okay.

And you made a comment on relationship with Abbott in regards to supply has been good.

Can you expand on that anyway?

Should we read into that that you anticipated it to be negative and are surprised or just everything is going a-okay and no worries?

No.

We expected it to be okay and it is okay.

They have been very helpful with expediting product for the launch and that sort of thing.

I'm happy with the way that relationship is playing out.

People are really working as a team on both sides.

Many thanks.

Okay.

Thank you.

And the next question comes from the line of Michael Jungling of Merrill Lynch.

Please go ahead.

Thank you, and good morning.

I have two questions, please.

Firstly, one for Sam on the EBITDA margins, the first half of 2008 seems to have come out about 29%, a nice increase from the same time last year and close to very well -- intermediate companies.

In this context of additional DES competition how sustainable is this EBITDA margin over the intermediate term?

And the second question I have is in relation to your dual DES strategy in Europe, in some European market where you sell both TAXUS and Promus, for instance Spain there is a shift in giving Promus to a distributor.

Can you give us an indication why there was a need to do that?

Thank you.

Yes.

Let me address the EBITDA margins first.

When we announced our restructuring plan to take out roughly $500 million of expenses out of a combination of SG&A and R&D and third quarter of last year, that's pure EBITDA margins.

And you will see the benefit of that occurring now as we continue to record substantial reduction in expenses year on year.

We are not complete with those programs yet.

They will continue to go into next year, offsetting some of the improvement we get from EBITDA margins our gross profit margin pressure which we are well aware of.

But as we go forward, we also said that as we looked at 2010 we had a number of goals in mind.

One is to get down to a debt EBITDA ratio of 1:1.5 times and we will get there in combination with both reducing debt down but as well as strengthening the margins to be more competitive with the likes of Medtronic and St.

Jude and others that are competitive medical device companies.

We think we are well on the track to do that.

Without being specific as to any given quarter, we see if you look at the next two years and the next eight quarters we see and expect we will to be able to improve our EBITDA and operating profit margins to approve those goals.

And as far as using as running Promus distributor in Spain, the Spanish market is unique.

And the Spanish management ask basically to try and experiment with this sort of mixed distribution model.

And why not?

It's a one-off situation that we will see how to goes.

But so far it's going pretty well.

And is this perhaps a benchmark of trying to use a distributor for the other European markets?

ie, is this a better way of selling two stents in one sales force?

I think it works in Spain just fine.

It's not our plan to do that anywhere else.

Okay.

Thank you.

The next question comes from the line of Phillip Legendy of Thomas Weisel Partners.

Please go ahead.

Hi.

Good morning.

I wanted to follow up on some of the comes you made about the Abbott supply agreement.

Would you just remind us what the specific terms and deadlines are for you to transfer the technology no your own platform?

And then maybe talk about any alternatives you might have considered if the next generation stent takes longer in the United States than you expected.

We don't expect it to take longer than we expect.

I think we were in good shape there.

The dates that are relevant here in the US and Japan is the same day, it's June 30, 2012.

And in the EU, November 21, '09.

The rest of the world is December 31, 2010.

Those are the geographies and dates that we are looking at.

And based on everything that we know, we expect to be successful in meeting those dates.

Okay.

And just be sure the Promus Element then is the stent that will completely put you on board and allow you satisfy the requirements there?

That's correct.

Okay.

And then I wanted to ask you a few on Japan, first, I didn't hear you talk about any expected timing for the launch of Promus in Japan and then wondering if you would comment on the market in general.

J&J had a strong performance.

Wondering if you are seeing a rebound in that market, or any color would be appreciated.

Okay.

As far Promus Japan goes, we hope to be there before June 30, 2012.

But that's still quite a ways out.

As far as the market itself goes, it's interesting.

The penetration of coated stents in general is higher there than the rest of the nonUS, and we are seeing the market modest growth, but it's not runaway.

Our share there is less than we see typically in other international markets where we are only up against just J&J.

So it's short of 45%, 55% there, which is down from our peak.

But it came down to 45% and it's been consistent there for some period of time now, maybe measured in months, more than a quarter.

We are not happy about the fact that we are number two in Japan.

It's not like we are 20%.

We are 45%.

Okay.

Thank you.

Okay.

Thank you.

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

Please go ahead.

Hi.

Thanks for taking my call.

I wanted to go back on the results for the quarter when you had given your initial guidance for drug eluting stents in the United States.

I believe you had included $40 million of the sales reversal.

If I adjust for the $22 million that you did take, it actually looks like the number came in a little bit below what your adjusted guidance range would have been.

Can you just talk a little bit about there is anything in the quarter that really surprised you relative to where you were forecasting?

No surprises.

We just did a better job than we thought could do managing how much inventory would be out in the pipeline when we achieved the expected date of launching Liberte.

So what we have now is a benefit of being three month smarter and three months closer to the launch.

We just have done a better job.

If you recall, when I gave those comments coming into the second quarter, I said the $40 million of sales reversal and the subsequent writeoff of the inventory would cost us about $0.03 in the quarter because the sales reversal was a bit lighter.

It's probably gave us $0.01 stronger performance this quarter and that's a takeaway from the third quarter.

Because we said if we took $40 million back in this quarter and replenishment would take place with $40 million and the subsequent quarters.

So as we look at two periods, Q2 to Q3 that's a tradeoff.

So the good news is a good job this quarter and the bad news is that will probably cost us $0.01 or so in the third quarter.

But I guess if I go back, I guess maybe I'm just confused on the math, your guidance US was $160 million to $185 million inclusive to a $40 million reversal, so if I back that out I come up with $200 million to $225 million, you came in at $175 million including a $22 million.

So if I normalize that out you're at $197 million.

That's correct.

I guess I'm wondering what drove the deviation from the $197 million relative to the $220 million, the $225 million, that you were expecting to see excluding that sales reversal.

Well, clearly we came in a bit light on our expectations and on the effect that effect that the -- Medtronic would have coming in late in the first quarter.

Take more share than we thought.

We think that's temporary as Promus is launched in this third quarter and as Liberte is about to be launched.

So they're all estimates.

And this one was a little bit light and we had some that were a little bit heavier.

Okay.

And just thinking about your guidance range, would it be appropriate to assume that the difference between kind of the low and high end is mainly a function of your model and the assumptions that you are making in respect to the mix of Promus and TAXUS, or am I off on that?

That would be probably an oversimplification.

Clearly the mix -- first of all the the total market share is an issue.

The mix of total market share that we enjoy on average for the quarter and exiting the third quarter will play a role in our ability to achieve either end of that spectrum, but there are so many other issues that the launching of Cognis and TELIGEN and how well we do at that, and the launching the products that Jim mentioned.

How well we do in Europe as we get more focused especially on the CRM side and major countries of Europe and how well we do in Japan.

So, no, I would think that would be a little oversimplified.

And then Jim, just real quickly, on kind of timing for the next generation platforms, it's pretty clear you feel comfortable with meeting the deadline that are laid forth in the supply agreement.

Just in the event you don't make that and I correct thinking you still manufacture Promus in-house but still have to split those profits with Abbott?

I haven't thought about that for quite a while.

I would have to sit down with the team and figure out what that alternative looks like.

That's not even something that I spend time on.

So I really -- I don't have the fact base in mind on that.

I could get it.

Let me clarify one point on timing of Promus in Japan.

What I was talking about with regard to 2015 is Promus Element.

The current version of Promus, the Xience version of this thing, is scheduled for Q2 '09, so middle of next year.

And Promus and Xience would be launched pretty much the same time.

Thank you.

Okay.

Thank you.

And the next question comes from the line of Bruce Nudell of UBS.

Please go ahead.

Good morning.

Thank you.

Good morning, Jim.

I had a question for you.

With regards to the US ICD market dynamics, could you give us clarity on the unit growth rates for first time implants as opposed to replacements, whether they are negative, positive or flat?

And will have a follow-up.

Thank you.

I didn't think to ask for that detail.

So I don't have that data right in front of me.

Okay.

And then turning to the ex-US markets, for high powered devices, what would you say the unit growth rates are?

Well, they are not as high as the dollar growth rates because of currency, of course.

But pricing has been relatively stable.

So I mean, it's down modestly.

So I think we were looking at high single digit maybe in Europe and the rest of the world.

Thanks so much.

Okay.

Thank you.

And the next question comes from the line of Larry Biegelsen of Wachovia.

Please go ahead.

Thank you very much for taking my question.

I have two questions.

Just first for Sam, using the mid point of your full year adjusted EPS guidance, you expect the year-over-year growth to be negative 10% in the second half of '08 versus growth of about 30% in the first half of '08.

In addition you expect the second half of 2008 to be about 10% lower than the first half of '08.

Why is that, and what will drive your 18% to 20% EPS growth guidance in 2009 if your EPS growth is declining sequentially?

And then I have one drug eluting stent question after that.

But go ahead, please, Sam.

First of all, as we talked about the end of 2007, you have to go back to that.

We had some items that occurred in the back half of the year that weren't in our original expectation we set that 18% and 20% growth in EPS on an assumed 3% to 5% growth in pro forma sales.

So I try to make that clear when we ended the year our February call to close out Q4.

The base that we are comparing to is more of an operational base of $0.67.

At $0.67 if we were to achieve $0.83, $0.84 that's really at the very top end of our 18% to 20% guidance.

As we look at next year, the benefit that we got in terms of our top line growth issue this year came largely from foreign currency.

We are assuming our guidance for next year that foreign currency rates will not move.

We don't guess at foreign currency rates.

So next year the 3% to 5% growth in sales has got to be all pure operating performance.

Pure operating performance the continuation of our expense reduction program, the continuation of driving our debt loads down pretty quickly, and the benefit would get from interest expense, the benefits we will get from having all of our engineers focus on improving product cost which haven't been able to do with the warning letter and the effort that they had to put forth to get the warning letter behind us.

The benefit of this tremendous volume of new products that are being launched in the back part of this year continue to pick up steam throughout next year and a lot of the products have high margins.

So it's not a big leap of faith to think that we can achieve.

It's still an aspirational goal because we haven't given specific guidance for next year, but it's still not a big leap of faith to think that the 3% to 5% growth in sales and 18% and 20% growth in earnings per share is quite doable.

That's helpful.

And for Jim, it look like you're estimating that the time from study initiation to C-mark approval for TAXUS Element is about 30 months, assuming you started the [Perseus] trial in mid '07 and then today you expect to C-mark approval in 2009.

For Promus element it appears the time line from study initiate to C-mark approval is less than 12 months if I heard correctly that you are starting the study in '09 and expect C-mark approval by the end of 2009.

Can you give us the steps on how you can so much faster than the other?

And in the past you talked about if there is a Promus gap you could fill that with inventory and at 12 to 18 month shelf life.

Is that still the case?

Thanks.

Yes.

The inventory flex, so to speak, is still available to us.

The timing on the trials, in our regulatory strategy around all that is something that we haven't detailed, but there is a plan.

Thank you.

Okay.

Thank you.

The next question comes from the line of Matthew Dodds of Citigroup.

Please go ahead.

Great.

Good morning.

Just one question.

If you look at the CRM numbers of the OUS and back out the total currency and the overall is down modestly for pacers and ICDs.

And Jim, I'm just wondering, is that still a function of Japan changing distributor, or is that broader based?

The numbers actually come out about flat in constant dollars.

But, yes, the biggest hole we have in our bucket on the CRM international space at this point is in Japan.

We are still -- we were still fighting through that change in distribution model there.

It hasn't gone as well as I would have hoped.

And so we have got some quarters yet before that's all annualized through.

So that's a drag on us, no question about it.

And when did that start last year?

When did the comps get somewhat easier?

Is it Q3?

They notified is early last year.

It actually started in third quarter, as I believe.

So we have got another really -- it's -- it wasn't just a turn off the spigot kind of situation.

So there are a couple more quarters of difficult comparisons before we get to -- we sort of get rebased and have apples to apples.

Alright.

Thanks, Jim.

Okay.

Thank you.

The next question comes from the line of Sara Michelmore of Cowen.

Please go ahead.

Yes.

Good morning.

Thanks for taking the question.

Just a few clean-up items.

Sam, you'd mentioned it when you were doing your discussion of gross margins about the FX hedging contracts.

What is your current hedging position?

Could you be more specific with your question?

We hedge multiple currencies and hedge contracts are very different when currency.

We tend to average in and some of our contracts that we averaged in we go out as far as about 30 months or so, everywhere to short term contracts that we purchased quite sometime ago.

The rates vary.

The settlement rates vary from month to month based on when the contract was put in place.

Okay.

But you still have contracts in place it sounds like through the end of the year and into next year?

Oh, yes, absolutely.

We use hedges not to bet against currency, but just to manage the volatility.

And our view is if we have in the short-term the first 12 months of our intercompany cash flows which is what we are hedging, close to fully hedged, and your two and three a little less so, but still we're averaging in all the time.

If we do a good job of managing and consistently bring in the average contracts over time, we will be able to build the effect of the changing dollar into our operating plan and be able to compensate for any movements that we see coming, because we know what they will be into the balance of our operating plan to offset that.

Okay.

That's helpful.

And just back on this growth margin question that was asked earlier.

I think in the last quarterly call you talked about us at least conceptually think being the gross profit margin staying in the low [70%s] for the foreseeable future, and it sounds like we have a lot of down dynamics as well as offsetting dynamics.

And I wanted to double-check if that was how we should be thinking about things.

I think I addressed that in one of the earlier questions.

It's -- so much depends on the product mix.

If we do so well in Promus and poorly in TAXUS, Liberte, and TAXUS Express, which we don't plan on doing we will do what will benefit us, plus we have other things that are going on that we can control like takes product costs out through VIP programs and product mix that will benefit us coming from other parts of our portfolios.

I think for the foreseeable future I don't see any huge swings in gross profit margins.

It should move incrementally or decrementally based on the issues that take place in any one quarter, but over the long haul we expect our gross profit margins to increase.

Okay.

That's great.

And if I could sneak one last one in for Jim.

Jim, Abbott and St.

Jude have a co-marketing agreement between the interventional and CRM products.

I was wondering if you could talk about bundling or bundling position.

How important is that for you as competitive differentiator in the US market?

Thanks.

That's a good question.

It's very interesting because our fundamental approach is to sell to people the way they want to buy.

There are a few -- a minority of customers in the US who have sufficient control of their [docs] to even talk about bundling EP products with interventional products.

It doesn't happen that often, when it does happen, we were in a terrific position to respond.

We have deals like that out there.

And I view the St.

Jude Abbott thing as essentially defensive move to try to position themselves the same way we and Medtronic are already positioned.

Great.

Thanks.

Thank you.

The next question comes from the line of Spencer Nam of Summer Street Research.

Please go ahead.

Hi.

Thanks for taking my question.

I just have a quick question.

Jim, how are you planning to position Liberte in the context of Promus?

Is there some sort of bundling message here, or is that a more a lesion specific and case specific kind of approach?

Every region's different, every situation's different.

Essentially, we're going to have two very deliverable platforms.

One with Everolimus, the other with paclitaxel.

And the way these products get used varies from account to account.

And so it's hard to generalize, but we essentially -- more deliverability is better than less and Liberte will stand toe to toe with XIENCE on deliverability.

And then you choose -- and then you have a choice what drug you want to use for what lesion under what circumstances and that will vary widely depending on how people read the data and what they want to do with the product.

So we're in great shape from being able to offer to the marketplace.

Sort of take your pick.

Just a quick follow-up.

So far have you gotten any feedback from physicians about that, having both stents available?

And also what kind of -- with the real relationships with your accounts, any early feedback with the post the XIENCE approval?

Well, as I said, I'm out there a lot.

And I talk to people a lot.

And what they seem to appreciate is they can pick one vendor, they can deal with us, they can get whatever they want, use it the way they want it.

It's a great position to be in.

And so the commentary that I get around the two drug offering is all positive.

I haven't had one person say, why are you doing this.

So I know I've heard that from analysts, but I've never heard that from a customer.

And it seems to me their vote counts more.

Okay.

Thanks.

Okay.

Thank you.

And the next question comes from the line of Jan Wald of Stanford Group.

Please go ahead.

Good morning.

This is [Erica Saline] in for Jan.

I actually have a question on endoscopy.

It looks like it was a good strong quarter.

And I'm wondering if it looks like you think you'll be able to return to this level of growth, or feel that that you need to see the volatility we've seen recently in that division.

No, I think we put the endosurgery business through a knothole backwards, middle -- whenever it was, middle of '07.

Talking about divestiture or not, and all this sort of stuff.

And I think that sort of put a hitch in their get-along a little bit there.

But they've overcome all that.

They're rolling.

Things are hitting the right direction.

It's always a challenge to get to double-digit growth in businesses that are as diverse as this.

We lump it together as endosurgery, but it is hundreds of products.

So we're going to be around that low double-digit number going forward.

I think it will fairly consistent, it's just so many different things it's hard to put your finger on what's exactly driving it.

That's all.

Thank you very much.

Okay.

Thank you.

And we have a follow-up question from the line of Rick Wise of Leerink Swann.

Please go ahead.

Thanks for letting me sneak a couple of them more in.

Sam, just to -- you've done a great job of debt reduction.

Maybe talk to us a little bit about your second half debt reduction goals, and maybe the implications of interest expense on a quarterly basis.

I assume that continues to move below $118 million this quarter.

Yes, clearly our debt reduction is a long-term issue.

That's why we didn't announce any interim goals publicly although we have them.

What we did say is that we're still shooting to get to one, one and half times debt to EBITDA by 2010 -- by the end of 2010.

Somewhere along the way we believe we'll have all the metrics necessary maybe even before 2010, but I'm hoping by 2010, necessary to regain our investment grade rating.

That's not a big deal.

It just means it's a little less expense with interest, but we'll also be paying down debt pretty rapidly at a time when interest rates seem to be falling.

So that's the long-term view.

We don't talk about what our short-term goals are from quarter to quarter, because there are issues.

For example, interest payments happen twice a year, they don't happen every quarter, so one quarter you'll have an interest payment, one quarter you won't.

And we have issues that move around like that.

We pay bonuses once a year in the first quarter.

So the movement from quarter to quarter isn't as relevant as a long-term goal, reducing our debt down to levels that would get us to one, one and half times debt to EBITDA.

If I could just push it a little bit, but it's not unreasonable to think that at least the second quarter level or lower in the second half might be a --

I won't comment on the third or fourth quarters.

Okay.

I tried.

Last, you mentioned in your commentary, Sam, about operating profit including planned increases in OUS spending, if I heard you correctly.

Maybe I'm just not clear, what's the color on where your spending, what's involved, is it distribution or manufacturing, and what positive benefit should we expect from that?

Thank you very much?

Well we were looking at -- is there an echo on the line?

What we're doing and still are looking at targeted ways to make investments, particularly in OUS and those areas where we think there's going to be a specific benefit for us in both the short and long term.

So the way to think about that is, we're not just taking expenses out because we said we would.

We're taking expenses out because we want to make sure that we free up the expenses that don't drive revenues so we can reinvest in those areas that do drive revenue.

So the expense investments that we talk about, you can assume they're all specifically designed to drive revenue, both domestically and internationally.

Thank you very much.

Okay, Rochelle, we've got time for one more call.

We've reached the top of the hour and then we'll be available following the call for additional questions.

Okay.

Certainly.

And the final question comes from the line of Michael Jungling of Merrill Lynch.

Please go ahead.

Great.

Thank you for allowing me to ask a few more questions.

Especially, Sam, on CapEx in the first half of this year, CapEx rang at 3% and the (inaudible) spent about 5% of CapEx to sales.

Can you give us an indication of why it is so low?

And then secondly on the Q3 EPS guidance of $0.14 to $0.19, it implies an EBITDA margin of 23.5% on the low end and 27% on the high end.

Is this large variance of 3.5 points solely driven by the uncertainties of how the market shares pan out in drug eluting stents?

Thank you.

Let me answer the last one first.

This is very similar to the question we got just a few minutes ago.

The $0.14 to $0.19 range isn't part that.

Clearly there is a wide variety of outcomes that could happen in terms of total market share in the quarter for DES and the mix between Promus and Liberte and TAXUS Express, but clearly that's not the only large moving part of our forecast.

We do provide guidance that doesn't require all the stars to be lined up perfectly in order to achieve it, which is why we have the range.

And there are just so many variables that we feel obligated to include a range, because at any given point, some items could happen well, and some items of our forecast could not turn out as we expected, as we saw in some of the low-end performance of the specific product guidance we gave for Q2.

So it's just wide variety of moving parts.

On CapEx we said coming into the year that we're targeting to spend about $450 million in CapEx.

The movement from quarter to quarter depends largely on how cash flows out of major projects, so what we're doing is working on all the projects that will get us to $450 million, timing just seems to be an unusual issue for us.

We're not backing off the $450 million, although with six months to go it doesn't look like to me that we're going to spend $450 million in CapEx for the year.

I'd be surprised if we spent in excess of $400 million right now.

Okay.

Thank you.

You're welcome

Thank you, everybody, for joining us today.

We appreciate your continued interest in Boston Scientific.

Before you disconnect, Rochelle will give you all the information regarding the replay of today's call.

Thank you.

Okay.

Thank you.

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