Boston Scientific Corp (BSX) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2009 Boston Scientific earnings conference call.

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

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

(Operator Instructions) As a reminder, today's call is being recorded.

At this time then, I would like to turn the call over to Mr.

Larry Neumann.

Please go ahead, sir.

Thank you, Kent.

Thank you for joining us this morning.

With me on the call this morning are Ray Elliott, Chief Executive Officer, Sam Leno, Chief Financial Officer, and Jeff Capello, Corporate Controller and Chief Accounting Officer.

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

Key financials are attached to the release, and we have posted support schedules to our website, which you may find useful as well.

The agenda for this call will include a review of the second quarter financial results, as well as third quarter and updated full year 2009 guidance from Sam, an update of our business performance in the quarter from Ray, as well as his overall perspective on the quarter.

We will then open it up to questions.

As this is the start of Ray's seventh day on the job, he'll also be joined during the question and answer session today by Fred Colen, head of our CRM business, Hank Kucheman, head of our cardiovascular business, Steve Moreci, head of our endosurgery business, Joe Fitzgerald, head of our peripheral interventions business, Michael Onuscheck, head of our neuromodulation business, David McFaul, head of our international businesses, and Dr.

Donald Baim, Chief Medical and Scientific Officer.

Before we begin, I would like to remind everyone of our 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 and launch, regulatory approvals, litigation, our tax position, our competitive position, 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 will now turn it over to Sam for a review of the second quarter financials.

Thanks, Larry.

I'm pleased to report excellent results for the second quarter on a number of fronts.

We delivered top line growth for the quarter on a constant currency basis, excluding divestitures, of 7%, with US growth of 10% and international growth of 5%.

This results in year-to-date constant currency growth of 6%, which is at the midpoint of the 2009 full-year guidance that we provided to you at the beginning of the year.

Adjusting for the impact of sales transition reserves related to the US launch of our TAXUS Liberte stent in the second quarter of last year, top line constant currency growth was still 6% for the quarter, or at the middle of our guidance.

These results were highlighted by outstanding performances across most of our businesses.

We continued to see impressive growth in our CRM division and our worldwide DES business, as well as solid performances in our endoscopy, urology, gynecology, and neuromodulation businesses.

We saw neurovascular continue to hold solid share despite a delay in our new product launches worldwide, and our peripheral interventions business showed a slight upturn.

It's also noteworthy that 41% of our revenue for the second quarter came from new products introduced in the last 24 months.

While we continue to monitor the potential negative effects of external economic conditions around the world, to date, we have seen very little impact on our businesses overall.

We have maintained our gross profit margin rate in spite of the US mix shift between TAXUS and PROMUS and some modest DES share loss in Japan, with a second quarter launch of Endeavor by Medtronic.

Our ability to maintain our gross profit margin rates is directly related to the gross profit margin improvements in our CRM division, as well as value improvement programs throughout all of our manufacturing plants.

Over the next several years, we will look to improve our gross profit margins through the continued implementation of our multi-year plant network optimization program and the launch of our PROMUS Element Stent in the fourth quarter of this year and in the US and Japan in the middle of 2012.

Our expense and headcount controls have been firmly in place for the past seven quarters.

As a result of the success of these programs, we continue to reinvest some of our savings into additional direct sales headcount, as well as new product development-related positions, both of which are targeted to drive incremental profitable sales growth for us.

The combination of good sales growth, stable gross profit margins, and controlled expenses all contributed to delivering both sales and earnings per share at the high end of the guidance range that we provided during our first quarter earnings call.

Now, let's turn to the operating results for the second quarter.

Consolidated revenue for the second quarter was $2.074 billion and at the top of our guidance range of $1.96 billion to $2.08 billion.

This represents a 2% reported increase in the second quarter of last year, but included in our reported results are a negative 4% contribution from foreign currency and a negative 1% contribution from divested businesses.

Excluding the impact of these two items, second quarter revenue was up 7% in constant currency.

Compared to the contribution assumed in our second quarter guidance range, foreign exchange contributed an additional $29 million to our second quarter sales results.

So without this additional currency tail wind, our sales would have been $2.045 billion, and that's still approaching the upper end of our guidance range.

Overall, the contribution of foreign currency to sales growth for the second quarter of 2009 was a negative $83 million.

Compared to the second quarter of last year, excluding divestitures, US revenue increased 10%, while international revenue decreased 4% on a reported basis, but up 5% in constant currency.

Ray will provide a broader overview of our businesses by major product category, but I'll address our sales results for all of our businesses at a higher level here.

Worldwide, drug-eluting stents came in at $441 million, at the top end of our guidance range of $400 million to $440 million, and up 16% from the second quarter of 2008, which represents a 21% constant currency increase.

Our worldwide DES revenue includes $269 million for TAXUS and $172 million for PROMUS.

And this represents a 61%-39% split between TAXUS and PROMUS.

We continue to sustain our worldwide drug-eluting stent leadership during the second quarter with an estimated global market share of 42%, and that's more than 20 percentage points higher than our next nearest competitor.

Geographically, US DES revenue was $238 million at the top end of our guidance range of $220 million to $240 million and 36% higher than the second quarter of last year.

I recall that in the second quarter of last year, we recorded a sales transition reserve, which reduced our sales by $22 million.

Excluding this impact, our US DES revenues still increased 21% over the second quarter of last year.

This includes $111 million of TAXUS and $127 million of PROMUS revenue and represents a 47/53 mix of TAXUS and PROMUS in the US compared to 54/46 mix in Q1 of 2009.

This change in the mix of our TAXUS-PROMUS sales is not surprising, given the very positive TAXUS impact that we saw in the first quarter following the launch of TAXUS Liberte late in the fourth quarter of last year, which continued into the first quarter of this year.

In addition, we are seeing new business gains from a major customer that we contracted with earlier this year, which is resulting in incremental PROMUS volume.

While our drug-eluting stent average selling prices in the US declined in the quarter by about 10% compared to last year and is slightly greater than expected, the selling and service abilities of our commercial team continue to produce a commanding 50% total US market share in the quarter, with 23 share points of TAXUS and 27 share points of PROMUS.

This compares to a US market share of 45% in the second quarter of 2008 excluding the impact of the sales transition reserve that I mentioned earlier.

We remain the only Company in the industry with a two-drug strategy offering our physicians greater choice in treating their patients.

With our two-drug offering coupled with the strength of our commercial team, we have demonstrated our ability to maintain significant leadership in the competitive US drug-eluting stent market with 23 more market share points, or almost twice the market share of our next nearest competitor.

And based on our estimate of the US market for the second quarter, we believe that Abbott had market share of approximately 27%, while J & J and Medtronic achieved approximately 13% and 10%, respectively.

International drug-eluting stent sales were $203 million, exceeding the top end of our guidance range of $180 million to $200 million and represents a decrease from prior year of 2% on a reported basis, but were up 7% in constant currency.

This includes $158 million in TAXUS and $45 million in PROMUS sales and represents a 78/22 mix of TAXUS and PROMUS internationally.

Boston Scientific's drug-eluting stent market share in EMEA is estimated to be 32%, which is down 2% sequentially from the first quarter and flat compared to the second quarter of 2008.

TAXUS market share was approximately 21%, with revenue of $54 million, and PROMUS market share was 11%, with revenue of $29 million.

Together, this represents a TAXUS-PROMUS mix in EMEA of 65/35.

Our drug-eluting stent share in Japan was down 1% in the quarter to 53% with revenue of $68 million.

This outstanding performance was driven by our successful launch of TAXUS Liberte, despite the competitive launch of Endeavor in May.

During the quarter, we estimate that Endeavor gained 13% market share points.

And while our sales in Japan today are 100% TAXUS, we still anticipate approval of PROMUS XIENCE during the fourth quarter with a fourth quarter 2009 or first quarter 2010 launch.

We estimate our Asia-Pacific DES share remains steady at about 19% during the second quarter, split 12% TAXUS with $16 million in revenue and 7% PROMUS with $10 million in revenue.

Or a TAXUS-PROMUS mix of 63/37.

Drug-eluting stent sales in our Americas International region was $26 million, representing approximately 58% market share, with 45%, or $20 million, in TAXUS revenue and 13%, or $6 million, in PROMUS revenue.

This represents a 77/23 mix of TAXUS-PROMUS.

In summary, our 42% global DES market share gives us clear worldwide drug-eluting stent leadership.

Now let's look at the drug-eluting stent market dynamics during the second quarter.

We estimate the worldwide DES market in Q2 at approximately $1.049 billion and down about 2% versus the second quarter of last year, including a negative contribution from foreign currency of about 5%.

This includes a worldwide unit volume increase of approximately 11%, offset by a worldwide market decline in average selling prices of approximately 13%.

Excluding the impact of foreign currency, we estimate the worldwide DES market increase of approximately 3%, including the impact of our second quarter 2008 new product sales transition accruals.

The US DES market is estimated to be about $480 million, representing an increase of about 9% over the second quarter of last year.

And again, this excludes the impact of our sales transition accruals from last year.

This represents a unit volume increase of about 17%, offset by an 8% decline in US average selling prices for the entire industry.

In the US, TAXUS stent pricing was down approximately 8% from prior year.

That was in line with our expectations.

US PCI volume in the quarter was approximately 256,000 procedures, and that's up 2% compared to both last quarter, as well as the second quarter of 2008.

We estimate that US DES penetration remained at 75% in the quarter.

That's a 9% increase over the second quarter of 2008.

So combined with the stability in [stented] procedure rates and stents per procedure, we estimate that the total unit market of US stents in Q2 was approximately 342,000 units, including 256,000 units of drug-eluting stents.

The international DES market remains strong for the quarter with 324,000 PCI procedures in EMEA, 55,000 procedures in Japan, 92,000 procedures in Asia-Pacific, and 63,000 procedures in the Americas.

Penetration rates in international markets remain consistent with EMEA at 52%, Japan at 67%, Asia-Pacific at 76%, and the International Americas at 32%.

Turning to our CRM business, we continued to see very good progress, driven by the launch of several new products in the back part of 2008.

Most notably, we began the launch of our COGNIS and TELIGEN platforms.

That launch is continuing, and we expect to receive approval for COGNIS and TELIGEN in Japan in the fourth quarter of this year.

We will begin the launch in Japan upon approval.

Once we have launched in Japan, we will be competing with COGNIS and TELIGEN in all of our major markets around the world.

Reported, worldwide second quarter CRM revenue was $609 million, and that represents a reported increase of 5% and a constant currency growth of 10% over the $578 million reported in the second quarter of last year.

US CRM revenue was $405 million, and that represents an 11% increase over the prior year, and the fifth consecutive quarter of double-digit year-over-year growth.

International CRM sales of $204 million represents a reported decrease of 5% from prior year, but up 8% in constant currency.

Worldwide ICD sales of $454 million were in the lower half of our guidance range of $445 million to $480 million.

This still represents a reported increase over the second quarter of last year of 9% and a constant currency increase of 13%.

ICD sales in the US were $315 million, representing a 14% increase over last year.

And international ICD sales of $139 million, represents a 2% reported decrease from last year, but up 10% in constant currency.

Excluding sales from our five non-core divested businesses, our non-DES and non-CRM worldwide revenues decreased 2% compared to the second quarter of last year to $1.022 billion and were up 1% in constant currency.

This includes constant currency increases of 7% in our urology gynecology business, 6% increase in endoscopy, 18% increase in neuromodulation, and a 2% increase in our peripheral intervention business.

Our neurovascular business remained flat versus last year due to the delayed launch of Target, our new coil, which is now expected to be launched in the fourth quarter of this year.

In our non-stent interventional cardiology business and in our electrophysiology business, we saw constant currency decreases of 4% and 1% respectively.

As we continue to develop our new product pipelines for these businesses, we expect the growth in these divisions to accelerate and begin to exceed market growth rates.

We should see these benefits for our non-stent interventional cardiology business in the next 18 to 24 months and in our electrophysiology business in the second half of this year.

Ray will talk more about some of the new product launches in these businesses in just a few minutes.

Reported gross profit margin for the quarter was 69.6%.

And adjusted gross profit margin for the quarter, excluding restructuring related charges, was 70.2%, which was 10 basis points lower than both last quarter and the second quarter of 2008.

The change in the volume and mix of our DES revenues between TAXUS and PROMUS contributed to a gross profit margin reduction of about 190 basis points compared to the second quarter of last year.

We expect to begin earning back this gross profit margin during the fourth quarter of this year with the launch of PROMUS Element in EMEA.

Partially offsetting the reduced gross profit margin due to DES product mix was the strengthening US dollar and the resulting settlement of our foreign currency hedge contracts and cost of sales, which improved our gross profit margin by about 130 basis points compared to the second quarter of the prior year.

Our gross profit margin also improved by 40 basis points compared to last year, as a result of the sales transition accruals that were recorded during the second quarter of last year.

Remaining positive contributors to our gross profit margin came from a number of other smaller items with no single item being significant.

Our expectations for our gross profit for the full year 2009 remained in the range of 70% to 71%.

We expect further gross profit margin improvements going into 2010 as we continue to launch PROMUS Element in Europe, which will help to offset the negative gross profit impact of launching PROMUS in Japan in the fourth quarter of this year and spilling into the first quarter of next year.

Additionally, we will begin to realize cost reduction benefits from our plant network optimization program and our continuing value improvement programs in all of our plants throughout 2010 and into 2011.

Our reported SG&A expenses in the second quarter were $671 million, and adjusted SG&A expenses, excluding restructuring relating items, were $667 million, which was 3% higher than both the last quarter, as well as the second quarter of last year.

The increase is primarily due to the addition of direct selling expenses, including the previously discussed targeted increases to our worldwide CRM field salesforce and expenses related to the large number of congresses and trade shows that occurred in the second quarter of the year.

We also have a $5.5 million of interest associated with legal adjustments that are included in our SG&A this quarter, $3.5 million of which we will cease when we pay the [near] stent judgment, which we believe will be in the second half of this year.

While we continue to manage our expenses conservatively to ensure that we stay aligned with our top line performance, we will continue to make investments in additional customer-facing positions, targeted to drive incremental [profitable] sales growth.

Reported research and development expenses were $263 million for the quarter.

And adjusted R&D expenses of $262 million and 12.6% of sales were consistent with last quarter and represent a 40 basis point increase over the second quarter of last year.

Our annual R&D investments will remain somewhat consistent at about $1 billion per year.

These investments together with pursuing strategic acquisition opportunities will continue to support our commitment to advancing medical technologies.

Operating expenses in total remain well controlled and our head count management and approval process provided us with the tools necessary to maintain tight control over expenses in the future.

We continue to make targeted investments in customer-facing field forces and R&D programs to drive profitable revenue growth in the future.

Based upon our results for the first half of this year, combined with our external forecast for the balance of the year, we expect to spend approximately $3.65 billion for the full year 2009, in a combination of SG&A and R&D expenses.

Our reported GAAP operating income of $275 million for the quarter on an average -- on an adjusted basis, excluding acquisition and restructuring-related charges, certain intangible asset impairment charges, and amortization expense, adjusted operating income for the quarter was $458 million and 22.1% of sales.

That's down 100 basis points from last quarter.

Down 140 basis points from Q2 2008.

This reduction in operating income margin in the quarter relates to a $16 million loss associated with an R&D program cancellation, which reduced our operating margin by approximately 80 basis points.

This charge relates to future liability obligations that we are contractually bound to, regardless of the status of the canceled R&D programs.

We also increased the level of spending in R&D by 40 basis points year-over-year, as we continue to focus on developing new technologies that will contribute to profitable sales growth in the future.

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

First, we reported acquisition-related charges of $17 million, both pre- and after-tax associated with asset acquisitions during the quarter.

Second, we recorded intangible asset impairment charges of $10 million pre-tax or $8 million after-tax, associated with certain previous acquisitions.

Third, total amortization expense was $126 million pre-tax or $103 million after-tax, and this was $9 million lower than the second quarter of 2008.

Going forward, our quarterly amortization expense should remain at this level.

Fourth, we recorded $30 million pre-tax or $22 million after-tax of restructuring related charges in the quarter, which are primarily related to the production transfer costs, as well as retention and certain other costs in connection with our previously announced plant network optimization program, and our expense and headcount reduction initiatives.

These charges are all in line with our previous estimates.

The cumulative effect of all of these items was $103 million pre-tax and $150 million after-tax.

Interest expense was $92 million in the quarter and was $26 million lower than the second quarter of 2008, primarily as a result of our $1 billion in debt repayments during the last 12 months together with lower interest rates.

Interest expense in the second quarter was also $10 million lower than the first quarter of this year due to our $500 million debt prepayment in the first quarter, together with lower interest rates.

Our second quarter 2009 average interest expense rate was 5.5%.

That compares to 5.9% in the second quarter of last year, as well as the first quarter of this year.

Other net expense was $3 million in the quarter and includes $2 million of interest income.

Interest income was $9 million lower than the second quarter of last year and $2 million lower than the first quarter of this year, primarily due to a lower rate of return on our cash investments.

As a reminder, our other net expense in Q2 2008 included approximately $96 million of losses related to the monetization of nonstrategic investments, a process that was completed in the first quarter of 2009.

The reported GAAP tax rate for the second quarter was 12.2% on an adjusted basis, our tax rate was 18% for the quarter, including discreet tax benefits of $2 million, which have a 60 basis point favorable impact on our second quarter effective tax rate.

Our adjusted tax rate excludes the current tax effect of any item that has been excluded from our adjusted pretax earnings.

Our adjusted taxes also exclude an $11 million deferred tax benefit recorded in GAAP earnings, resulting from the state tax law change.

Our operational tax rate on an adjusted earnings basis for the remainder of 2009 is expected to be approximately 18% to 19%.

And this change, from our previously expected 21% adjusted tax rate, is driven largely by the decrease in global interest rates required to be applied to the tax reserves carried on our balance sheet.

GAAP earnings per share for the second quarter were $0.10 per share compared to income of $0.07 per share in the second quarter of last year.

GAAP results for the quarter included acquisition and restructuring related charges, intangible asset impairment associated with the prior acquisition, amortization, and the discreet tax benefit that I mentioned earlier.

Our adjusted earnings per share in the second quarter, which excludes these items, was $0.20 and at the high end of our guidance range of $0.16 to $0.21.

This compares to $0.20 in Q2 2008.

As a reminder, the second quarter of 2008 adjusted earnings per share excluded $0.07 per share related to amortization.

It also excluded $0.01 per share of acquisition-related charges, $0.04 per share of divestiture-related losses, and $0.01 per share of restructuring-related charges.

Stock compensation was $33 million and all per share calculations were computed using 1.5 billion shares outstanding.

Day sales outstanding were 63 days, a one-day improvement over the second quarter of last year, but a two-day slippage compared to last quarter.

Continued strong cash collections in Japan and the US were partially offset by a deterioration related to slower collections and our European operations.

Slower collections are largely related to Southern Europe, where we are monitoring the situation closely and are taking steps to improve collections going forward.

Our days payable outstanding for the quarter were 31 days, which was seven days lower than the first quarter of this year and two days lower than the second quarter of last year.

This reduction is generally related to lower trade accounts payable balances in the US and the IC regions, as well as a large tax payment made during the quarter.

Days inventory on hand were 127 days, relatively flat with the first quarter of this year and up five days from June of 2008.

The increase in days over last year were mainly a result of the introduction of PROMUS to support our dual drug strategy, as well as inventory builds in support of product transfers related to the plant network optimization strategy.

Reported operating cash flow in the quarter was $419 million, which was $160 million higher than the second quarter of last year.

Q2 2009 reported operating cash flow includes $74 million in payments related to legal settlements, while Q2 2008 included $189 million in taxes related to divested businesses.

So excluding these items, Q2 2009 adjusted operating cash flow was $493 million, which is $45 million higher than Q2 of last year.

Second quarter 2009 reported operating cash flow was also $158 million higher than the first quarter of this year.

Q1 2009 reported operating cash flow included $36 million in legal settlements.

So excluding these items, Q2 2009 adjusted operating cash flow was $196 million higher than the first quarter of this year, primarily due to the timing of our annual bonuses and royalty payments, as well as a net tax refund partially offset by higher accounts receivable balances.

Capital expenditures were $74 million in the quarter, which was $5 million lower than Q2 2008 and $14 million higher than the first quarter of this year.

Capital expenditures for the full year are expected to be approximately $375 million and reported free cash flow was $345 million in the quarter compared to $180 million in the second quarter of 2008 and $201 million in the first quarter of 2009.

We closed the quarter with $6.25 billion of total debt and $1.2 billion of cash on hand, resulting in net debt of $5.1 billion.

Total debt is $1 billion lower than the second quarter of last year, as a result of our debt repayments during the last 12 months.

Net debt is approximately $600 million lower than the second quarter of last year, reflecting net cash flow generation.

We continue to focus our strong free cash flow on debt paydown, and we expect to refinance a portion of our 2011 debt maturities by the middle of next year.

We currently have access to approximately $2.6 billion of liquidity, consisting of $1.2 billion of cash on hand and approximately $1.4 billion through our revolving credit facility and our accounts receivable securitization facility.

At the end of the second quarter, our debt to EBITDA credit facility covenant ratio was 2.9 times, which is well below the maximum permitted level of four times, providing us with $600 million of EBITDA cushion.

This covenant as a reminder, steps down to 3.5 times at the end of the third quarter of this year.

Fitch rating services raised our rating outlook one notch to positive from stable.

This follows Moody's and S&P's outlook upgrades in the first quarter of this year.

Fitch also confirmed our corporate credit rating at BB plus.

Our upward ratings momentum reflects the progress that we are making in strengthening our financial fundamentals, simplifying our business, driving profitable sales growth and the overall improvements in our operations.

We continue to work on improving our profit margins, increasing cash flow, paying down debt, as well as continuing to instill financial discipline.

Turning to the sales guidance for the third quarter of 2009, reported consolidated revenues are expected to be in a range of $2 billion to $2.1 billion.

And that's a range that would give us an increase of 2% to 7% over the $1.966 billion of revenue recorded in the third quarter of 2008, excluding divestitures.

And foreign currency exchange rates continue constant throughout the third quarter, the negative contribution from FX should be approximately $30 million, or approximately 1% relative to Q3 of last year.

On a constant currency basis, Q3 consolidated sales growth should be in the range of up 3% to up 8%.

For drug-eluting stents, we are targeting worldwide revenue to be in a range of $390 million to $430 million, but US revenue of $220 to $240 million and OUS revenue of $170 to $190 million.

For our defibrillator business, we expect revenue of $445 million -- $475 million worldwide with $310 million to $330 million in the US and $135 million to $145 million outside the United States.

The strength of our renewed product pipeline across all of our businesses is resulting in top line performance -- even solid top line performance -- even during turbulent economic climates around the world.

As we indicated earlier, we saw 41% of our second quarter revenues come from new products, and we expect that trend to continue throughout this year.

The good news for us is that only a small portion of our business is considered elective, and we are seeing only limited effects of the economy on the results of those franchises.

Additionally, the sales growth and strength that we are seeing across our diversified portfolio of businesses is more than offsetting any broad economics effects.

For the third quarter, adjusted earnings per share, excluding charges related to acquisitions, divestitures, restructuring, and amortization expense, are expected to be in a range of $0.17 to $0.21 per share.

This includes an effective tax rate on adjusted earnings of 18% to 19% in the third quarter of 2009, as a result of the change in published interest rates that I discussed previously.

The Company expects earnings per share on a GAAP basis in the third quarter of 2009 to be in the range of $0.08 to $0.13 per share.

Included in our GAAP earnings per share estimate is approximately $0.01 to $0.02 per share of restructuring-related costs and $0.07 per share of amortization expense.

During the third quarter, we will see the anniversary of last year's transition in the DES business and the shifting of market share from TAXUS to PROMUS.

As we have previously disclosed, a profit contribution of a PROMUS stent is 50% of the dollar contribution of selling a TAXUS stent.

So the bad news is that we have an adverse mix of PROMUS and TAXUS compared to our expectations of a year ago.

But the good news is we have more total US market share of anyone outside of Boston Scientific ever expected.

And this reduced profit contribution will be restored over time, beginning with the launch of PROMUS Element in Europe in the fourth quarter of this year.

The strength of our TAXUS drug-eluting stent franchise, along with our improvement in DES market share, helped to offset some of this impact.

And we anticipate this beneficial mix continuing.

We're also seeing the benefits of our CRM acquisition with significant improvements in operating profit margins that are helping to offset the impact of the shift of the profitability of our DES franchise.

With the first half of 2009 behind us, we are tightening our guidance range for the full year, and we are now expecting revenues to be in the range of $8.1 billion to $8.4 billion.

We are also now expecting to achieve adjusted earnings per share for the full year between $0.82 and $0.86, excluding acquisition divestiture, major litigation and restructuring related charges, as well as large discreet tax items and amortization expense.

Included in this estimate is an effective tax rate of 18% to 19% on an adjusted earnings basis for the last half of the year.

The Company now expects net income on a GAAP basis of between $0.47 and $0.53 per share.

So that's it for guidance.

Our third quarter earnings call will be at 8:00 a.m.

Eastern Standard Time on October 20, 2009.

Now, let me turn it over to Ray for a more in-depth review of our business.

Thanks, Sam.

Boston Scientific is apparently the only institution in creation where you don't get to rest on the seventh day.

Let me begin with both a qualitative and strategic review of our businesses, starting with CRM.

Then I'll share some impressions on the quarter overall, where I believe we can and should go for the next hundred days or so.

Since this is my first opportunity as CEO to report on the CRM business, I want to acknowledge the excellent work done by thousands of CRM employees over the past few years.

They have revitalized this business from top to bottom, transforming quality, realigning R&D priorities, and developing a pipeline capable of impressive results.

Our CRM business is in solid shape today thanks to their efforts.

Second quarter results show continued positive momentum from our recent product introductions, particularly COGNIS and TELIGEN.

As Sam said, we have delivered steady overall growth in CRM revenues, due mainly to the strength of our US defib sales, which grew at 14% for the second straight quarter.

This is more importantly the fifth consecutive quarter of double-digit sales growth in our US CRM business.

We also saw the highest US pacer revenue in four years, supported by the growing adoption of our advanced ALTRUA platform.

International defib sales were up double-digit as well at 10% on a constant currency basis, and we anticipate accelerating international performance in the second half of the year, as we begin to roll out our LATITUDE patient management system in Europe, happening as we speak.

CRM sales this quarter, both worldwide and in the US, were at their highest level since we purchased Guidant.

It's also important to note that our CRM business reported sequential quarterly growth across every major product segment, both worldwide and in the US.

While de novo implantations in the US market have been flat to down since 2006, replacement [cans] have increased by more than 30% per year.

We expect to sustain these positive trends on the strength of our new products, which remain on track to generate an amazing two thirds of CRM sales in 2009.

COGNIS and TELIGEN, the world's smallest and thinnest high energy devices, achieved 100% full field inventory levels during the quarter.

Importantly, up from only 70% in the first quarter.

They continue to be very well received.

Since their recent launch, we believe that we have gained almost 3 share points in the US.

In May, we announced European approval and the first implantations of our ENDOTAK RELIANCE foresight defib lead system, which combines the three lead connections into a single pin to port connector.

Last week we announced CE market approval for the LATITUDE patient management system, and we began a phased rollout in 14 European countries.

The introduction of LATITUDE in Europe will build on our experience in the US, where we already have astonishingly more than 130,000 patients enrolled on the system.

Since 2006, LATITUDE has been the most rapidly adopted remote cardiac device monitoring system in the industry.

We fully expect to extend the success as we introduce its demonstrated benefits to patients and physicians all over Europe.

We would aspire to document and prove its economic benefits, the healthcare system coincident with its clinical significance.

In the second quarter, we also launched our first RF wireless ICD system for programming purposes in Japan with the introduction of CONFIENT.

Turning to clinical trial updates, there were several highlights from the second quarter that underscore our long-standing and continuing commitment to clinical science.

Most notably, less than a month ago on June 23rd, the landmark made its CRT trial, reached its primary end point.

Preliminary results indicate that CRTD therapy significantly reduced the relative risk of all caused mortality or first heart failure intervention by 29% when compared to traditional ICD therapy.

This result comfortably exceeded the target reduction goal of 25% and clearly demonstrates that early intervention with CRTD therapy can slow the progression of heart failure.

Boston Scientific is the sole sponsor of this trial, the world's largest device trial for high risk, mildly symptomatic heart failure patients.

US reimbursement for CRTDs in patients who fit the MADIT-CRT criteria is already in place, and we believe this trial has the potential to significantly expand CRTD indications.

We estimate that over the next few years, MADIT-CRT could expand the CRTD market by as much as $250 million in the US and $400 million to $500 million worldwide.

We expect to file for label indication around year-end and anticipate FDA approval in mid-2010.

Additional data from the ALTITUDE clinical science program, which analyzed nearly 86,000 patients monitored by the LATITUDE system, showed that real world survival rates for ICD patients exceeded rates from the clinical trials, confirming and enhancing the benefits of ICD and CRTD device therapy.

An analysis of long-term data from MADIT II clinical study was presented at the HRS, demonstrating that the lifesaving benefits of ICD therapy actually improved over time.

At eight years, one life was saved for every six patients who received an ICD.

A dramatic improvement over the two-year MADIT II data which showed one life saved for nearly every 17 patients.

This was the first time long-term data were presented on the life-saving benefits of ICDs in a primary prevention population.

We're confident the results from these two studies will reinforce the clinical effectiveness of ICD and CRTD therapy.

And this alone could ultimately help grow the market.

We should also benefit from the potential impact of the Joint Commission referred to as Core Measure for ICDs and sudden cardiac death.

Let me give you a quick update on our EP business.

This quarter we launched our Blazer Dx-20 steerable diagnostic catheter in the US, and early sales are exceeding expectations.

We anticipate a European launch in the third quarter.

Additionally, the Blazer Prime, an improved version of the Blazer ablation catheter, which enhances torquability, trackability, tip control and durability, is on target for launch in the US in the third quarter, pending FDA approval.

Looking to the fourth quarter, we anticipate the launch of Blazer open irrigated ablation catheter in Europe with US clinical trials beginning around the same time.

Overall, EP market growth continues in the double-digit range, and we plan to maximize our share of this growth by leveraging our historic strengths, our current product line, and the new CryoCor technology platform.

With respect to CryoCor, we anticipate the A fib portion of the market to grow at rates in excess of 20% per year for the foreseeable future.

Our CRM strategy is working and with additional MADIT CRT data to be presented in September, this market is poised for substantial expansion.

Our CM business is now and will continue to be a major growth driver for Boston Scientific.

Now, let me turn to the cardiovascular business with an equally public hats-off to our CV group.

It's hard for me to believe that anyone other than ourselves going back a year ago and with knowledge of anticipated competitive releases believed that we could be sitting here today with a 50% share in the US and DES market, but in fact we are.

We also report another strong quarter of DES results with 42% worldwide market share.

We maintained our US leadership in part due to the launch of our TAXUS Liberte Atom stent, late in the quarter.

TAXUS drove 23% of the market share with PROMUS at 27%.

Over the remainder of the year, we expect gains in our US TAXUS share position, as we complete the TAXUS Liberte Atom launch and introduce the TAXUS Liberte long stent.

As previously announced, we received FDA approval for TAXUS Liberte long on July 13th and expect to begin launching later this quarter.

We gained incremental TAXUS share at a premium price, especially with TAXUS Liberte long.

We also saw continued strengthening of the stent market during the quarter.

US PCI growth year-over-year was approximately 2%, while penetration held steady at the solid first quarter level of 75%.

We believe that in the US, XIENCE had a 27% share for the quarter, while Cypher and Endeavor were at 13% and 10% respectively.

Giving us a 23 share point lead over our nearest competitor.

In Europe, DES penetration was up to approximately 52% and our DES share was estimated at 32%, split approximately 21% TAXUS and 11% PROMUS.

In Japan, the launch of TAXUS Liberte has continued to go very well with the second quarter share estimated at 53%.

All of which is TAXUS.

Our TAXUS Element and PROMUS Element product introductions are progressing as planned.

TAXUS Element has already been launched in unregulated markets with extremely positive feedback.

Both PROMUS Element and TAXUS element are on target for CE market approval and launch in the fourth quarter of this year, coinciding nicely with the recent announcement by Abbott with respect to the launch of XIENCE Prime in Europe.

The PROMUS Element US and Japan launches are on target for mid-2012 with TAXUS Element US launch on target for mid-2011 and in Japan in late 2011 or early 2012.

Also slated for launch in the fourth quarter of this year or the first quarter of 2010 is PROMUS in Japan, which is consistent with Abbott's announcement of XIENCE-PROMUS timing there.

Finally, our Platinum trial is progressing very well throughout the world, with the workhorse portion of the study's enrollment far exceeding our own internal plan.

The Element platform will provide a noticeable improvement for physicians in terms of deliverability.

We are confident that our Element launch cadence will be highly competitive with XIENCE Prime on a worldwide basis.

We are pleased with our progress on the integration of Labcoat, which we view as a true next generation DES technological platform, beyond both TAXUS Element and PROMUS Element respectively.

Looking briefly at other CV product lines, our US leadership in PTCA balloon catheters continued with a 57% share.

We continued the launch for a new imaging catheter, iCross, and are planning a number of additional new product launches over the next four quarters, including the Apex platinum predilatation balloon catheter for improved radiopacity, the NC Quantum Apex post-dilatation balloon catheter and kinetics guidewires.

In our peripheral interventions business, we maintain a strong worldwide position in a growing market.

We continue to hold the number one position in multiple product categories.

The US launches of the Sterling ESPTA balloon catheter, the carotid wall stent, and the Express [reanalesde] stent, as well as the international launch of the Epic vascular stent continue to drive positive momentum for this business.

With these launches, we expect to expand our PI leadership.

In summary, our cardiovascular business continues to be very well positioned with the unique two-drug offering, a long list of leading franchises, improving market fundamentals, and a robust product launch cadence for 2009 and beyond.

We firmly believe our overall cath lab leadership will increase over the next two years.

Our neurovascular business continued to maintain its global leadership position, recording another quarter of strong sales in spite of new competitive product offerings.

Our access business, catheters and guidewires, grew 10%, as our customer base continued to expand and convert to our Synchro 2 guidewire technology.

Our ICAD, intracranial atherosclerotic disease, stent business grew 16% worldwide and of note, experiencing a record 68% growth in China.

Despite some softening of in our Coil business as a result of competitive launches in both coils and rejunctive stenting, we maintained approximately 42% market share and approximately 60% share respectively.

We are looking forward to providing with you more details on the launch of an outstanding new coil and stent later this year.

The Endosurgery folks have continued their string of steady performance, up 6% constant currency for the quarter with endoscopy growing 6% and urology gynecology growing 7%.

Endoscopy's second quarter results were driven by the US launch of the WallFlex biliary stent and continued commercialization of the WallFlex esophageal stent.

The WallFlex family is our third generation of market-leading stents for the treatment of GI obstructions.

Endoscopy continues to see strong global market and technical adoption of our Resolution Clip for GI bleeding.

These types of improved technological adoptions in such areas as hemostasis and esophageal stenting continued to expand the footprint of the endoscopy market, now approaching $2 billion.

We will enhance our expansion of the GI market with future product launches into enteral feeding.

Urology gynecology's growth for the quarter was based on strong performance in our growing women's health business, which was offset by slower momentum in our urology business.

Our women's health business continued to deliver double-digit growth of 15% on the strength of several new product launches.

The urology business maintained its leadership position and grew in line with the market at 4%.

Momentum continued in our pelvic floor franchise with the recent launch of our Solyx Single Incision Sling System and our Uphold pelvic floor repair kit.

In addition, we executed two new women's health launches during the quarter with our second generation [Proserva] HTA procedure set, as well as our new Pinnacle posterior pelvic floor repair kit.

We expect these launches to continue to drive growth in our women's health business in the third and fourth quarters.

Based on our current growth trend in pelvic floor products versus the market growth of 10%, we should overtake Johnson & Johnson for the number two position by year end.

The Endosurgery pipelines will continue to be productive in the third and fourth quarters.

We will begin to commercialize the WallFlex esophageal fully covered stent, which received FDA clearance last month, along with newer [aux] biliary catheters, expanded sizes of our market leading radial jaw for biopsy forceps, along with Duet for pelvic floor, and a next generation laser fiber for kidney stone retrieval.

Finally, our worldwide neuromodulation team delivered a constant currency sales growth of 18% in the second quarter, with the US growing at 17%.

It's good work.

As we said earlier, trial implants, a significant leading indicator for permanent implantation procedures, were up 20% in the first quarter.

So the strong performance in the quarter was as expected.

Trial implants in the second quarter were also up more than 20%, leading us to expect a strong third quarter as well.

As a demonstration of our commitment to strengthening clinical evidence with spinal cord stimulation, we're initiating a trial to assess the therapeutic effectiveness and cost effectiveness of spinal cord stimulation compared to reoperation in patients with failed back surgery syndrome.

The trial is called Evidence and it is the first randomized, controlled, multi-center trial using rechargeable devices.

The study will enroll 128 patients at 20 sites in the US, Canada, France, and the United Kingdom.

In the important age of comparative effectiveness and cost justifications, we believe this trial will become a seminal study that could initiate consideration of spinal cord stimulation much earlier in the continuum of care.

During the second quarter, we successfully launched our lead adaptor, the M1, which allows a precision plus system to connect to the previously implanted leads of a primary cell non-rechargeable competitive system.

This gives us access to an otherwise captive replacement market.

As well as offering an alternative that doesn't require removing and replacing the previously implanted leads.

Let me finish in the next few minutes with some overall perspective on the following.

First, some thoughts on what we liked about the quarter, and whether it's sustainable.

What we didn't like, or at least feel we could do better, and then a few hot topics or takeaways from the quarter.

Second, I would like to share a few more thoughts on strategy, tactics and areas of focus over the next 100 days or so.

Likes and dislikes.

Let's begin with what we liked about the quarter.

Number one, solid and diversified sales performance across almost all products and geographic segments.

7% growth despite worldwide recession and strong product competition with the associated price pressure.

I can see no reason at this point in time to alter our 2010 and 2011 aspirations of 5% to 7% constant currency sales growth.

My confidence in no small part is based on what I believe is the finest, and clearly on a per person basis, the most productive salesforces in the business.

We just need more of them.

Number two, if what I said about our salesforces is true, and it is, then we must give them new products and patient solutions to sell, and we are.

The pipeline build and new product flows are very strong from TAXUS Liberte Atom and Long to LATITUDE in Europe to a vast new array of both PI and endoscopic stents.

In the second quarter, new products were 41% of sales exceeding our own internal goals.

Number three, those new products have a great deal to do with both our CRM and DES momentum.

CRM is growing double digits, had a dozen new product approvals last year, is taking share points and improving profit margins.

The fifth consecutive quarter of double-digit defib growth and the highest pacer growth in four years in the US.

DES has market leadership with a 23 share point lead over our nearest US competitor, the unique two-drug strategy, four different platforms, and a robust pipeline that we will try to share a little bit more about as we plan for a prior to year-end Analysts' Day.

Number four, new product momentum without leadership in clinical science would carry dramatically less weight.

It is particularly relevant with the potential for seminal groundbreaking trials that marry together both advanced patient care and cost effectiveness.

We have this strength in spades, with recently reported or in-process trial results such as MADIT-CRT, MADIT II, ALTITUDE, SYNTAX, [SAMPROS], MAPS, and PLATINUM, to name only a few.

Number five that we liked in the quarter, innovation in the aforementioned academic and clinical sciences are fundamental to our beliefs and a core strength, but we are not an academic institution.

We are commercial.

Our sales growth, new products, CRM DES momentum and clinical science strength are producing cash.

And this free cash flow generation, year-to-date at $546 million, is allowing for an accelerated debt repayment and the important potential return to investment grade status sooner rather than later.

How about what we didn't like in the quarter, or at least those areas we could do better?

In some cases, of course, these are just inverses of the things we liked.

Number one, while we liked the new product flow in the CRM DES momentum, we are less enthusiastic about our time to market.

We need to improve our processes, even in a difficult regulatory environment, and we need to rethink our funding and project prioritization.

Endosurgery must get more resources, and we must restore healthy growth to the non-DES portion of our cardiovascular business.

A common belief would be that the vast majority of this funding must come from CRM and DES reductions.

I disagree.

We have made substantial one-time investments in, for instance, quality.

While we must maintain our enhanced and hopefully best-in-class status in quality systems, we must also learn to convert in this case one-time non-repeating remediation dollars to innovation dollars.

Number two, while no one could deny the exceptional nature and outputs of our clinical science and study programs, the healthcare reform world is changing around us rapidly, and as we speak.

We have to build the infrastructure and communication systems.

This should include Internet, where appropriate and not just traditional peer review publications.

We should make a stronger case for Boston Scientific's product benefits.

Both comparative clinical effectiveness and cost efficiency, not just to customers, but also to patients, healthcare systems, payers, governments, and society-at-large.

And number three, I said previously that we liked the cash in the quarter, but we were less enthusiastic about both the leverage drop-through to operating profit and the resulting conversion to cash ratios.

One could argue that in this quarter operating expenses, including substantial investments for worldwide CRM and neuromodulation field force expansion, accrued interest for the [near] stent case, and a $16 million loss on an R&D program termination, but we all know there is always something.

Suffice to say that I would intend to have a laser-like focus on quality of earnings.

I'll talk more about that subject under go-forward strategies and tactics.

Finally, on this portion of the wrap-up, what about our own hot topics, or at least takeaways that we would like you to think about relative to our second quarter?

Here are mine.

There are many industry studies and trials, but MADIT-CRT is a landmark.

It could conceivably change the market's face and size through significantly expanded indications.

Next, CRM sales for the quarter were at their highest levels since we acquired Guidant.

Despite all the competitive buzz in the US, we are 23 share points in DES above the next player in the US.

Sometimes a single sentence is self-explanatory.

Next, we have no reason not to believe and every reason to believe that PROMUS Element, and for that matter, TAXUS Element, will receive a CE mark and be launched in the fourth quarter.

Once again, during the upcoming Q&A period, we will not disadvantage ourselves by disclosing the ins and outs of our European regulatory pathway strategy.

Next, we have very real confidence in our sales and EPS guidance ranges for the second half and the splits between the quarters.

We have less visibility and confidence in the eventual detailed outcome incurred on certain status of healthcare reform legislation.

However, we are heavily involved and firmly believe we have been in the past and will be in the future part of the solution and not part of the problem.

Let's go now to strategies, tactics and areas of focus for the next hundred days or so, and assuming they are correct for well beyond that timeframe.

First, let's think about the likely strategic formula, or at least at this stage, the thesis of that formula.

And then we can talk about the tactics that may help us arrive at a successful conclusion.

That strategic formula is likely a three-step process and frankly, a playbook that Sam and I are both very familiar with.

Step one, drive sales and marketing growth with both new product and new market expansion.

Correspondingly, drive margin expansion with volume effects on standard costs, mix, and active cogs-based effort toward being the low cost provider, not just the low price manufacturer.

Use price sophistication as a key tool.

Not just price increases, which may or may not be available to us in the near-term or further out.

Our research has already shown that price leakage is also a significant opportunity.

Shift to true marketing, i.e., needs creation from mostly sales support tactics.

Step two, structure the business with increased capability to produce a leveraged or positive drop-through effect from sales to operating profit.

Improve the intraCompany internal rate of return on our expense base.

Zero base budget the non-sales base functions and shift costs where possible to areas of greater direct return.

Use our expert knowledge of the fixed variable components of costs for an improved construct.

Allocate our costs to fully loaded top to bottom managed businesses.

Verify that our various country models and international structures support profitable sales growth while maintaining the current set of channel options.

Target a minimum 30% consolidated adjusted operating profit-to-sales ratio over the first strategic planning period and a minimum 15% compound annual growth rate in earnings per share.

Step three, take the improved operating profit and tax rate focus, along with increased working capital attention and metrics to translate net profit to cash with a higher conversion ratio.

Accelerated cash production could obviously be used selectively for acquisitions, but job one must be increased velocity of debt paydown and the recovery of our investment grade rating.

The debt financing obligations for 2011 will be targeted for mid-2010 completion.

The beginning of our formula will start with our focus on and attention to sales and marketing.

What might that look like?

Here's a sampling of a few out of many tactics for real focus over the next 100 days.

Corporate and interdivisional cross-selling efforts and fully integrated cardiovascular product offerings to healthcare systems and GPOs will be executed.

We will need to be certain of uncluttered and non-duplicated common primary call points.

No one has the strength of share or current CRM and DES platform to do it better, if at all.

Our Boston Scientific offering will be trademarked and branded cross-care.

Number two, pricing sophistication gained through integrated price, volume mix analysis at the SKU level, finer segmentation, strategy-driven and disciplined negotiation, tiered marketing of our broader offerings, and validation of the need for a close correlation between field force size, compensation, and corporate profitability.

Initial thesis would suggest that we could benefit handsomely from an additional 300 to 500 feet on the street during 2009 and 2010 combined.

Next, structure a best in class comparative effectiveness functional group in our Company that merges our clinical science and evidence-based outcomes with healthcare economics that will be usable on a global basis.

With the digitization of healthcare, the Internet, e-marketing, and remote monitoring, along with other linked in tools, become a necessity.

We have governments around the world focuses on increased coverage, efficiency, and transparency.

We will need to advocate, educate, and engage.

Where necessary, we'll need to change our business models.

I was sorely tempted to do a more definitive piece here on healthcare reform scenarios.

But as it relates to Boston Scientific, the lack of clarity currently and the need to collectively understand and execute our [Avoment] position, I decided to postpone that discussion from today's earnings call.

As a final example of detailed focus for the next hundred days or so, the issue of R&D and innovation superiority.

The initial thesis is to focus our intensity more with fewer projects, and a reallocation of resources that should help us to accomplish a number of goals.

First, more targeted intellectual horsepower behind each product.

Diversify our base through both buy and build philosophies.

Target diseases, not subsets, with -- where possible, integrated and more complete patient solutions.

Next, extend our viewpoint to early intervention as much as possible in addition to both quality of life and longevity.

Next, manage the PDP, or product development process better through disciplined return on capital invested and internal rate of return tracking.

Post-mortem analysis for learning, increased speed to market techniques, cross-divisional application of core technologies, and if applicable, centers of excellence.

Disease areas or subset solutions for strong consideration would certainly include disruptive advancements in CHF -- congestive heart failure, A-Fib, structured heart, the high mortality issues of acute ischemic stroke, and sudden death cardiac arrest, a broad array of GI track changes or needs, including both [GERD] and enteral feeding, women's health, and the potential even for our current endplant technologies to address the obesity, diabetes, and migraine worlds.

In closing, I would be remiss if I didn't mention that it is a great privilege and an honor to return to working with both friends on the Board and in management of Boston Scientific.

It is a Company with great promise for which we will create a new value proposition for both patients and stakeholders.

I would be equally remiss if I didn't mention that it is exciting times as always to be back working with Sam, my colleague and friend for, as of next month, believe it or not, 38 years.

With that, I'll return it back to Larry, who will moderate the Q&A.

Larry?

Thank you, Ray.

Kent, let's open it up to questions.

In an effort to enable us to field as many questions as possible in the time remaining, I would request that you limit yourself to one question and a related follow-up.

Again, I would like to remind you that Ray will be joined during the question-and-answer session by Sam and several of the business presidents, as well as Dr.

Baim.

Kent, please go ahead.

Certainly.

(Operator Instructions) Our first question then comes from the line of Bob Hopkins with Banc of America.

Please go ahead.

Thanks, and good morning.

Can you hear me okay?

We can.

Great.

Thank you.

First, a question for Ray, and then a question for Sam.

Ray, just to be clear, the commentary that you just made sounds like you're reiterating the long-term guidance that Boston Scientific has in place today.

Is that -- first of all, is that correct?

That you're comfortable with the 5% to 7% constant currency top line and 15% bottom line growth that exists today?

And in part, is that a function of your enthusiasm toward MADIT-CRT?

And are you seeing any signs of acceleration here in the near-term, post those trial results?

Well, I'll comment on the first part, and ask Fred to jump in on the CRT.

Because I haven't had the chance to go beyond the review of it, as you heard.

I wouldn't say reiterate.

I would -- again, Bob, what I said in the script, and it's not long-term guidance, obviously.

It's two-year guidance.

I would suggest that based on everything I've seen at this point in time from a data review, I am comfortable with what I'm seeing.

If additional factors come into play, then obviously, we would inform you.

There is a range to it.

So I mean obviously we're not arguing that 7% is the magic number for the next two years.

We're simply saying that based on the data that range I'm comfortable with as I see it at this point in time.

Fred, did you want to come in and talk, if you would on MADIT, please?

Yes, Ray.

That's great.

So we are very, very optimistic about MADIT-CRT.

Obviously, the MADIT-CRT executive committee is working feverishly to prepare for the presentations.

And as well, figuring out how the data can be presented as soon as possible in some medical journals.

I can tell you that the MADIT-CRT data will be presented at the European site of Cardiology Meeting in Barcelona on September 1, as well as at the [Heart Field] Society Meeting in Boston about two weeks later.

I think that you will see at that point in time that this is indeed a very exciting clinical study, and we believe it's going to be marked indeed as a landmark trial in the treatment of heart failure patients.

We are very excited about this upcoming event, and we believe that the industry at large, but we in particular, will benefit from the positive outcomes of this study.

And then just real quickly for Sam, on the gross margin side.

You have talked about this plant network optimization and the $100 million potential benefit.

Is the right way to think about that $100 million -- that the majority of that will accrue in 2010?

Or is there some that accrues in 2009?

And also on Cardiac Rhythm Management margins, would you say they were 70% of the way there in terms of your goal?

Or, is it more like 50%?

Or is it closer to 90%?

Thank you.

First question, gross profit margins -- I'm sorry, Bob.

I forgot the details of the first question.

Sure.

Just in terms of the plant network optimization, you -- ?

Where we are on that is, we started the process.

We have about a three-year program under way.

We have said before that we'll see very little of that in 2009.

We'll begin to see it showing up early in 2010, and we'll continue on through 2010.

And we should be complete with that somewhere in the middle to the end of 2011 timeframe.

So we'll see the -- we'll see the vast majority of that show up in 2011 with the full year impact ultimately taking place in 2012.

CRM margins.

Overall, we have made very good progress on CRM margins.

I won't quote an exact number, but as you know, we said that last year overall operating profit margins for CRM were about 15%.

We thought we would add about 12 points of margin to that business this year with a target to be at 30% overall operating profit margins going in or some time in 2009, and we are on track to do that.

The margins are driven a lot by new products.

They are driven by better management of scrap, which had been an historic issue for that business, as you know.

And we're also focused maybe for the first time ever at serious value improvement programs that will be taking place throughout this year and forever more.

So bottom line is we're on track to accomplish those previously stated goals.

Great.

Thanks, Ray.

Thanks, Sam.

Yes, Bob, I didn't mean to skip over your 15% in moving on to Fred there.

As you heard in the script, we'll be focusing a minimum goal of both the 30% ratio on operating to sales and the 15% compound on EPS.

So to the extent that of what I know at this point in time and to the extent that those are going to become absolute internal goals as minimum to the Company, I would suggest we'd keep those where they are.

And Bob, we're also in the midst, as we always are at this time of year, of updating our five-year strategic plan.

We have also launched the beginning of our operating plan for 2010.

Those will continue on for the balance of the year, and we typically have those presented and approved by the Board very late in the year.

That will give us the ability to firm up our go-forward view of the world when we close out the year in January.

Great, thank you.

Thanks.

And we have a question then from the line of Mike Weinstein with JPMorgan.

Please go ahead.

Thank you.

A couple questions just coming out of the comments on the quarter.

First question will be on the drug-eluting stent market.

Seemed like the pricing environment took a step down this quarter.

I think your pricing was down 10% on a year-over-year basis, and I think you said the market was down 8%.

So I would appreciate any additional color on what's transpiring there?

And then, Sam, on the guidance for the year.

I think your tax rate guidance when we started the year was 21%.

Looks like for the year it's going to average now around 18%.

And so contribution from a lower tax rate for the full year would be about $0.03 to the bottom line.

So if I adjust your new guidance, $0.82, $0.86 for the $0.03 tax guidance.

It would suggest for the year you're closer to the low end of the range than maybe the high or the middle of the range where you started off the year.

And would just appreciate any thoughts on that?

And why that might be versus maybe where you thought you were back in January.

Thanks.

Yes, let me address them in reverse order.

The tax guidance -- you said 18% to 19% operationally.

We always have also discreet items that go up and go down.

We've been blessed most recently last several quarters with favorable discreet items, but we don't know what they are, which is what makes them discreet items.

So the reason we give an operational range is because we don't know exactly what the source of earnings will be.

And the reason that we don't give full credit to even that improvement is we don't know for sure if we'll get tagged with any negative discreet items that do happen from time to time.

So I think you're a bit heavy with your assumption that it's an additional $0.03, based on how we look at the world.

What we don't know is if the tax rate going forward in 2010 will prevail at those rates.

Our operating plan process will shake that out.

But clearly, we've been helped by the benefits of a lower effective tax rate for this year.

We gave a range to start the year of $0.80 to $0.90.

I don't know that I would conclude that we're operating at the low end of the range because we haven't finished the year out.

But going against us is -- is still heavy PROMUS mix versus TAXUS and that's a drag on our -- as you know, on our gross profit margins.

If we see some continuous improvement in our TAXUS share.

With Long, for example, it's just been recently approved.

That may help our gross profit margin going forward.

I think, in the aggregate, the range we gave -- we're probably hovering close to the midpoint of that range.

Maybe a tad below it.

But I don't think we're operating at the bottom part of the range.

On the pricing, I thought we said we were declining, Bob, by 8% in US stent TAXUS pricing compared to prior year.

I did make one reference to 10%, but it wasn't our pricing declines.

It was 8% for us in Q2.

Yes, I think, Mike, I think it's the other way around.

I think we're 8%, and I think we anticipate the market -- .

The market being 10%.

Market being 10%, so I think it's the other way around.

But that would be an acceleration from your prior comments in the first quarter?

In market pricing?

About the same.

I thought it was about 8%.

I would have to look, Mike, to be sure.

May be 1% difference, Mike, but I think it's pretty close to the same.

One follow-up, Sam and Ray.

On this discussion, Ray, your quasi-endorsing that this idea of 15% long-term earnings growth.

You're quasi-endorsing the 5% to 7% top line growth for the next couple of years.

I think the street's a little bit below that, but let's say the 5% to 7% is right.

To get from 5% to 7% top to 15% plus bottom -- in addition to the deleveraging the Company would have, you obviously would have to have margins expand and potentially some benefits from tax.

So part of my question is one, how do you go from 5% to 7% to 15% plus?

And is there some implied assumption that the tax rate is going to continue to come down that's going to help you to get there?

Thanks.

I'll let Sam talk to the tax.

The quasi-support, I would state as affirming the work that's been done to date prior to being here and in reviewing the data, feeling comfortable with that.

It's strong support relative to time here, I guess, if you want to call that 'quasi-'.

It's got a lot to do with as I mentioned in the commentary on new products and the continuing flow of new products, new markets, taking a look at the structures of how we run the business, the cost structures, the shifting of costs into things that give more immediate returns back.

In many cases to the extent those are cogs-related, Mike, sure, there's opportunity for margin expansion.

I think often times people focus on margin expansion as -- are you selling your stuff for more?

And as opposed to doing what you know we've done in the past and that's work every line of the cogs and make sure that as Sam commented everything from scrap rate and all the other variables we are focused on.

The other thing I would take a very close look at is there's a high fixed component here, or at least higher fixed component than I've traditionally probably liked and med device businesses.

And one of the ways of getting at that is the cost shifting, making your business more variable.

Of course, it works as well on the way up as the way down, so you got to make sure you're selling more.

So there's a lot of -- as good a business as this is.

And as good as the improvements have been made here, and they are good improvements.

I'm amazed by the opportunity here, and I think we'll all get after that.

Again, on a week's worth of data and time as a Director, I'm comfortable with the opportunity and with laying out those kind of targets.

I would also say that we have a lot of leverage points.

Clearly insourcing PROMUS Element.

We said that PROMUS as a mix issue has taken away about $220 million of gross profit, and we'll claw about 20% of that back starting in the middle of the fourth quarter of 2009 this year and that will go into next year.

So that will be a big recovery.

We're also, as you know, have routinely been able to drive in the $0.03 to $0.05 cost reductions through our VIP focused improvements.

And prior to this year, we never saw any of that really in the CRM business.

And now we have the CRM businesses and plants focus as well.

So we do expect to see those improvements that will -- are always there with some capital investments to help drive them -- available for the taking to help shore up margins.

Ray mentioned in his comments that it's also an opportunity for us to look at what we have invested in quality without losing our focus on quality to conduct our quality programs more cost effectively.

And that should help us.

As well as when you're a Company our size with our kind of margins, it's easy to stop paying attention to the details.

And what we found in a recent focus on how we price product, we do have some profit leaks that we can shore up.

And we are in the process of shoring them up now.

And those all effect gross profit margin improvements.

Then we have operating expense leverage and significant leverage interest expense, as we continue to pay down debt pretty rapidly.

I think, Mike, too, and I mentioned it just in passing, and it's one of many points I made.

So it may have gotten lost in the shuffle, but I'm also fascinated and excited by the opportunity of that cross-care and the cross-selling opportunity we have.

We have an amazing product lineup when you start putting all of those products together for call point focus.

And if you compare it to the other companies where, yes, they have strength in one and probably a little less in the other.

The combined strength, and in some cases obviously people don't have both product lines.

But as you combine those together, and then you add in the ability to put in Endo and other things with obviously broadly service hospital areas that are a different call point.

The opportunity there is huge, and I have some early data, which I'm not going to share right now.

But some early data on the impact of the programs in terms of sales growth versus when they were individual sales there against the combined sale when you do that and the opportunity to grow volume profitably is really outstanding.

Great, thank you.

You're welcome.

Thanks a lot.

And our next question comes from the line of Larry Biegelson with Wells Fargo.

Please go ahead.

Good morning.

Thanks for taking the call.

One on MADIT-CRT, and one on drug-eluting stents.

On MADIT-CRT, you said reimbursement is already in place.

Could you give us a little bit more color on that?

And should we start to see an impact immediately following the results at ESC this summer?

And the dollar impact you provided on the call, what does that assume for growth in de novo implants?

Thanks.

Fred, do you want to take that question and expand on it?

Yes, absolutely.

Thanks, Ray.

So as it relates to the reimbursement.

So first and foremost, the reimbursement for CRTD patients is largely in place.

When you look at the details, I'm talking about the United States.

Now, when you look at the details, that is in place in 47 out of 50 states in the United States.

It is basically an indication for treatment for heart failure.

And so from that standpoint, we don't think there was a lot that needs be done on the reimbursement side.

It's more a matter of creating the confidence in the mind of the physicians that this is indeed the right therapy for heart failure patients.

As it relates to when that will happen, I think that will happen over time.

It will not be a one-time event.

I think that confidence will continue to rise.

That certainly will be the case once the world will see the results as presented on September 1, and then I think that will go on with continued analysis of the data and for the publications of the data.

And I think so, over time we will see an uptake in penetration.

As well as obviously an improvement because of the fact that there will be an implant of a CRTD device versus an ICD.

So there is benefit on both penetration, as well as on the system opportunity.

So I think that's largely the answer that I would have on that.

As it relates to numbers -- so our estimate, I think we said this before.

Our estimate is that in the next three years, we believe that this could be an opportunity in the United States for about $250 million.

And on a worldwide basis, as it relates to the overall market impact of about $400 million to $500 million worldwide.

So those are the dollar numbers that we have estimated that this would, in total, drive that.

Right.

Does that imply any improvement in the flat to slightly down de novo implant growth that you mentioned earlier in the call?

Yes, it takes all the effects into account.

So it takes into account the current situation around de novo market scenarios.

It takes into account a further improved market growth penetration, as well as an improved system price opportunity.

Okay, and then on drug-eluting stents -- .

Sorry, Larry, before you go on, it's Ray.

Let me just add a little additional comment to make sure we've got it dead accurate.

It is covered by Medicare, and it is covered if the medical -- if it's considered medically necessary.

So just to make sure we're giving you the fullest information.

And then if you really care about minutiae -- Idaho, Tennessee, and North Carolina are the three states that don't cover it.

Thank you.

And the de novo implant question.

Can you quantify that?

If it's flat to slightly down, how much you expect that to improve?

It sounds like it's incorporated in that dollar amount, but you're reluctant to say by how much it's dependent upon de novo implant growth.

The trends catch up.

I can't remember.

I don't have the data in front of me, and I think maybe Fred could tell us.

I think it's something like 2012 or 2013.

And this has been going on for three years.

So you've got a five- or six-year period where the lines start to cross again, and what will happen is replacement [CANS] will in fact reverse position over time with de novo.

Fred, I think it's 2012, 2013?

Yes, I think that is right.

We're looking at a time window of 2009 to 2012.

So that's the three years we're talking about.

Okay, and then on drug-eluting stents.

In Japan, if the 13% number you gave for Endeavor was calendar year, it assumes they probably exited above 20% for the quarter in June.

And if that's the case, who are they taking share from?

Thanks.

David, do you want comment on that?

Sure.

I think the 13% that was mentioned was a worldwide number or a US number.

It wasn't mentioned specifically for the Japan market.

I think if we look at the Japan market, we've been very fortunate with having such a strong team there hold on to market share with the introduction of a third player into that market.

And I think we could safely say that their exit percentage is around 20% to 21%, I think is what we estimated at and far lower than we would have expected from the launch of the third player.

So in terms of where is that -- most of that market share coming from?

When we do the analysis because our team has held on to share at the 47% level on an exit and over 50% for the quarter.

We believe that most of that share is coming from the other competitor.

Thanks.

And just lastly, have you heard back from the European Trade Commission on an extension to the supply agreement for PROMUS there?

Thanks.

And then I'll drop.

We're in discussions and have constant contact with them, but we wouldn't comment on the call back at this point in time.

Thank you.

Thanks, and our next question comes from the line of David Lewis with Morgan Stanley.

Please go ahead.

Good morning.

Good morning.

Ray, just a quick clarification here.

Would you say that given the existing cost initiatives that there would be CRM leverage or anniversarying [QAQC] spending?

In the next two years, 2010 and 2011, do you have a significant amount of visibility if you were to drive that 15%?

But if we take it out past 2011, some of the initiatives that you talked about this morning -- gave that great detail on.

Those things would have to play out to sustain those levels.

Do you see that in two discreet components?

I don't.

But because we're going to -- I don't want to say redo strategic plan, but we're going to rework the strategic plan.

I haven't got data that suggests my ability to answer that, David.

That's the problem.

So that would be one answer, and therefore it is focused on the two years at this point in time.

Secondly, at least in the past, I've been hesitant other than with a major acquisition or something where it's important to communicate the outyears for people to understand what may happen.

I've been hesitant to go beyond a couple years at the most and preferably just next year in medical devices -- just because our world -- there is a lot of variables in it.

And I want to make sure that we're giving people the best we can.

So at this point, it's focused on the timeframe as stated.

Okay, and given the various line managers we have on the phone here.

I was wondering if you could comment on two specific areas.

One, just specific European strategies to fix holes in distribution that have been talked about here at the Company the last -- call it, four to six quarters.

And then secondarily, on neurostimulation.

It looks like these share losses continue a little bit on an incremental basis.

And when we could expect share stabilization in neurostimulation?

David, do you want to talk on the Europe -- ?

Thanks, Ray.

I wonder if I could ask a little more clarification in terms of what you're specifically meaning in terms of holes of distribution.

Specifically on CRM outside the US.

You're looking more worldwide in terms of -- not just Europe.

Because in Europe, we've added a large number of feet on the street, and I believe that we're directing in a lot of smaller places around Europe that give us good coverage.

We're enhancing that.

So I think Europe is in very good shape as far as coverage goes.

And anyplace that we see an opportunity to add more feet on the street to give us more coverage, we're certainly aggressively pursuing that.

I think around the world when you look at certain markets -- when you look at, for instance, the emerging markets, like Brazil or China.

We're certainly taking very good steps in order to make sure that we're able to penetrate those markets in a way that we've never been able to before.

I think, too, David, if I can just add something there.

The comment of adding feet on the street that I put in place between 300 and 500.

A chunk of that is obviously in Europe.

It's not all in the US.

But I think there is a feeling on all of our parts, and certainly on mine -- that looking at the new product opportunity and the level of productivity we have on a per-rep basis.

That there's an opportunity here to grow the salesforce.

And therefore particularly in CRM, fill in a lot of the gaps that may be perceived.

On your second question, is Michael on the line?

Yes, I am, Ray.

Do you want to take that, Mike?

Sure.

So first thing I would say is that we actually came off a pretty good quarter.

Q1 for us was very soft.

But domestically, we've reestablished ourselves in this marketplace and have -- we won't really know who has gained share or lost share in this quarter until both St.

Jude and Medtronic report.

When we look at the domestic market, we did a ton in this division last year in terms of doing a quality system upgrade and a move into a new facility.

And so we felt a little bit of that impact in the early part of this year.

But we did launch a new product in the first quarter.

We've got new products that are actually submitted to the FDA right now, which will help us accelerate our growth in both the domestic and international markets.

We're feeling pretty confident right now that we've got the right strategy in place to get back on what we've done traditionally in the pain segment.

And we're really pretty pleased with the results in the quarter.

Our expectations are that we're back to being healthy again in our top line growth.

Okay.

Just one last question here, and then I'll drop.

Sam, in terms of your internal plans, you related to the conversion of PROMUS Element.

Do plans call for a high degree of conversion, let's say 80%?

Or do they call for a full 100% conversion by the second or third quarter of next year?

Thank you.

We won't comment on the second to third quarter of next year, but our plans do call for a very high rate of conversion.

We won't give a precise number.

We have an opportunity not only to convert the vast majority of PROMUS to PROMUS Element, but also with PROMUS Element we take additional share.

We haven't disclosed what our plans are, but the upside is pretty significant.

Great, thank you.

And our next question comes from the line of Tao Levy with Deutsche Bank.

Please go ahead.

Good morning.

Good morning.

And on the operating expense side, Sam, I think you mentioned -- it looks like it's going up a little bit versus prior comments.

Is that related to the additional folks you want to add on the salesforce?

Or is there any CEO transition costs embedded in there?

There's no real CEO transition costs that's notable.

Primarily, it's a focus at adding more sales and sales-related personnel, as we talked about in previous calls.

And we think that's an investment worth making.

So it's primarily that.

It's a few other odds and ends that are more timing-related from one quarter to the next.

But in general, we were not surprised at our level of operating expenses.

But what we wanted to do, and my comments was -- laying expectation of the full year.

Which is why I said -- a combination of SG&A and R&D expenses with the approximately $3.65 billion.

Just so there was no confusion.

Got you.

Will that still allow you to achieve the -- I think you had mentioned on prior calls -- 150 basis points of operating margin improvement with that added expense?

Can you help refresh my memory of where I made that comment, and what it was about?

I think you were just talking about annual improvements of around at least 150 basis points of operating margin.

You made it in the last couple conference calls.

I think it was not specific items, but big picture outlook of how you managed your expenses.

Yes, I think what we said was that over the next several years -- if we can go back to 2007 when we announced our restructuring plan, we had targeted to be at 30% operating profit margin in 2010.

But as a result of doing much better with total market share, driven by a bigger proportion of PROMUS than we had originally thought.

That that 30% target would go up by a year, maybe a little more than a year.

As we now have to overcome the margin, gross profit and operating profit margin pressure that that much TAXUS has provided to us.

So we're still improving our operating margin year-on-year.

That is our expectation.

A lot of it is driven by the improvements that we're expecting.

12 points of margin improvement coming from our CRM business, which is 30% of our total portfolio.

Alright.

And then just on the gross margin, you talked about 70% to 71%, continued view.

Is that going to be intact also for the back half of the year?

Just because, obviously, the hedging benefits are going to probably be a bit lower in the back half of this year.

So I wasn't sure if your comments were just on full year basis or in the back half of the year?

Yes.

My comments were for the full year, as well as the back half of the year.

It's pretty broad range -- 70% to 71%.

So that gives us the ability to have different mix contributions, especially on the TAXUS side.

But also with the expected -- continued market share movement that we ought to get from COGNIS and TELIGEN.

That should help our gross profit margins as well.

So, it pertains to the back half just as much as the front half.

Great.

Thank you very much.

Thanks.

We have a question from the line of Rick Wise from Leerink Swann.

Please go ahead.

Good morning, Ray.

Good morning, Sam.

Good morning, Rick.

Couple of questions.

Maybe I'll start with a strategic one for you, Ray.

You very emphatically made the point that you're anxious to drive innovation.

Maybe talk to us about your early thoughts about driving innovation outside Boston via acquisition.

Is this a priority?

You highlighted a lot of interesting markets.

When, how, where, how big?

How soon could we see some external initiatives?

And you want a list of targets, too, Rick?

I'd take the names right now.

(Laughter)

Those are the target areas subject to further review.

In all those areas I mentioned, we also have internal projects.

So it's not -- it is a buy versus build, or a buy and build in many cases where we're acquiring technology from the outside to merge with existing programs inside.

But there's nothing on that list, even as you get into obesity, diabetes, and other areas, that is not being worked on as well internally with some really interesting technology.

So the question becomes -- what portion of the disease or subset, or if you can get after whole disease, are we targeting?

And we have databases here in our medical group and in our clinical science group that focus very carefully on disease indications and portions thereof, or the entire disease.

My preference is to lean more to start to finish disease profiles, continue of care.

And therefore if, if I did send you a copy -- of which I never would.

Our plans that combined acquisition and internal technology.

You would see that kind of approach.

The problem we have today is -- bless everybody here.

There's just too many, too much, and too many multiples of things.

So what we want to do is tighten that down to some very specific diseases, and then you will see a blend.

You're not going to see big acquisitions.

In start, we can't afford it.

Don't want to do it, and we're focused on investment grade rating return.

And secondly, there's nothing big to buy in most cases in those areas anyway.

They tend to be a combination of smaller technologies, and we have the ability to merge those together in here to target specific diseases.

Okay.

Fred Colen, maybe?

Can I ask a quick follow-up on MADIT-CRT.

Post the MADIT-CRT data, maybe just talk a little bit about your strategy to drive the penetration you're envisioning.

Is this an ET or heart failure doc-oriented synergy?

Maybe just help us understand how it's -- how you're going to make it happen.

Yes, thanks, Rick.

So first of all, I think that once the data is going to see the day of light, there's going to be a lot of enthusiasm in the medical community.

And obviously that is important not only for the implanting physicians, but also for the referring physicians and the heart failure specialists.

I think in the heart failure space, this is actually going to be a pretty big stimulus for heart failure treatment, and probably one of the most important things that has happened in the last five years or so as it relates to treatment of heart failure patients.

So I believe that once the data will see the day of light and all of the detailed analysis gets done over time.

All that's better understood.

Obviously, with our goal to make people understand the data as best as possible in terms of education and marketing events that we will obviously undertake.

I believe that the -- in particular, the heart failure physicians will be very enthusiastic about this opportunity.

And I think that's going to be a big stimulus in the referring chain to get more patients to electrophysiologists for implant.

Typically, the bottleneck has been with the referring docs.

It was understanding of the benefits of the therapy, and I think this is clearly going to be, I believe, a major step forward in in proving to the referring docs and the general cardiologists, that this is an excellent treatment for heart failure patients.

Also in the very early stage to prevent worsening of the ongoing disease.

So I think there's going to be a lot of buzz and interest in this.

There hasn't been a lot of new innovative approaches in the heart failure space in the last several years, and so I believe that this will indeed provide that kind of a fuel to drive that engine a lot better.

And then I think you have to look at, not just MADIT-CRT, but you have to look at all the other things that we are working on.

The MADIT II eight-year data, as well as our work that we are doing on the LATITUDE database in terms of the ALTITUDE initiative, is creating a lot of enthusiasm in the medical community at large.

You have seen it at HRS.

And so, we clearly are working on the signs that matters and that will indeed prove that this is an effective therapy and that over time we can also prove that there's going to be a more cost-effective strategy for the treatment of heart failure, in particular.

And, just a last quick one for Sam.

Sam, if I'm doing the numbers right, your nine months reported for this year.

Nine months reported and guided third quarter GAAP numbers suggest $0.18 to $0.23 for the first nine months of GAAP EPS.

That implies, given your full year guidance, a fourth quarter of like $0.29, $0.30.

Something like that.

Again, if I'm doing it right.

I assume that's part tax rate.

Is the big driver -- since the fourth quarter sales don't seem to be dramatically different than the first nine months quarterly rate, is that all about PROMUS mix?

Is that the biggest element in making that dramatic fourth quarter?

Thanks.

Yes, in the GAAP numbers, we have an Abbott milestone payment that's coming in that we expect to get later on this year.

And that's a big number.

It's $250 million.

So that throws off any reasonable comparisons of the first nine months to the last three months of the year.

Okay.

And the tax rate is largely -- the benefit is coming from two areas.

Most significant of which is, we're obligated to accrue interest under FIN 48 based on published government rates.

And they went down by about two points.

And as a result, they gave us a pretty significant improvement in the effective tax rates for the year.

There's always some mix shift issues on an operational basis that take place from one quarter to the next, but the principal reason that you're seeing us with a different number is because of the interest rates.

Those interest rates could bounce right back again three or six months from now, right back at 21%.

Thanks so much.

Thanks.

And we have a question from the line of Kristen Stewart with Credit Suisse.

Please go ahead.

Hi.

Thanks for taking my question.

Sam, I was wondering if you could give us any more details around this program termination, what specifically it was?

Yes, the -- what I will say is that we canceled an R&D project.

And with the R&D project, came a liability that if we had stayed with it, liability would be experience an expense over time.

But as a result of mothballing the R&D project, we are still obligated to pay that liability over time.

But under GAAP, because we no longer have an expectation of the benefit that comes with an R&D and the related commercialization of the project, we're obligated to accrue that liability up front.

Is that more in the CRM or stents or endosurgery -- ?

No, we won't disclose exactly where it was.

So that would be a competitive disadvantage to us.

That happens from time to time.

This one happened to be a bit unusual that cost us $16 million in the quarter.

In your ASP commentary, I think you said worldwide ASPs were down 13%.

Is that including the negative effect of currency?

We don't include currency in our ASP calculation.

So it's without that.

I want to go back also and make a correction in a comment that Mike Weinstein had asked.

He had picked up on the fact that I did make a statement that the US DES average selling price declined 10%.

That was wrong.

It's 8%.

It's in line with the market also, which declined at 8%.

I guess thinking about the DES market, we've now seen penetration in the US being stable around 75%.

I think you said volume growth was around 2%.

Where does the market go from here if you're facing 8% headwinds?

Is there anything at all that you perceive that could perhaps drive higher volume growth?

Or perhaps decelerate it in terms of the ASP declines?

And have you seen -- or would you expect to see any impact from the BARI 2D trial?

We've been pretty consistent in our expectation that the DES market is a flat market and will continue to be a flat market for as far as we can see.

And I guess, just lastly, Ray.

I guess you had mentioned healthcare reform, and you were going to hold back some of your comments.

I was wondering if you could share with us -- what do you see as the major area of concern facing Boston Scientific going forward from a reform standpoint?

Well, I think it depends where it comes out, Kristen.

That's the problem, trying to speculate at this point.

I think what we want to make sure is that we don't have back door taxing as a major concern.

What I mean by that, we don't want to end up with in the period we're in in this country to ensure that corporate taxes in our case, as we reinvest higher portions back into the business -- that we don't end up with a financing process initiated by the government that, in effect, does not enhance innovation and patient outcomes.

And it becomes, in effect, a back door tax.

That would be one large area.

There are so many things on the table right now.

The reason I frankly didn't put it in, because it's an interesting subject that affects all of us.

I would have returned to my history of two-hour earnings reports.

Because right now, there are a number of things on the table.

But the big one, or I would say the one that caught my most attention would be, trying to stay away from that kind of financing to the government and focus on innovation and development.

I think we also -- I don't know whether we did it intentionally, Kristen.

But I think the BARI 2D trial -- I think we skipped over that, and maybe I could ask Don to pass comments on that.

Sure.

I think the important point about the BARI 2D trial was it was really a study as to whether pre-emptive revascularization, using either in a non-randomized way, PCI or surgery, would improve the outcome of patients with diabetes.

And there are very few situations where pre-emptive revascularization in people with minimal symptoms actually do improve outcome.

This was another example of that.

So we shouldn't move to pre-emptive revascularization, but it doesn't change the current management strategies of people with either symptoms or large areas of myocardial [ischemions] nuclear testing being referred for whichever revascularization treatment is most important.

And the fact of the matter was that trial wasn't randomized anyway, was it?

No, it wasn't.

In terms of revascularization, it was not between surgery and PCI.

And I guess just on the diabetic population.

What risk do you really see from the [SPIRIT IV]?

What level of confidence do you have that TAXUS will, in fact, prove to be better than, or equivalent to XIENCE?

So SPIRIT IV removes the [oculostenotic] reflex of routine angiography, but still includes the fact that it's a trial against TAXUS Express, not TAXUS Liberte.

So therefore without the benefits that we know TAXUS Liberte has in a small vessel restenosis and long lesion periprocedural myocardial infarction, which are all part of the composite endpoint.

But that said, the SPIRIT II, III, pooled data point to an advantage of TAXUS in diabetics, and it will be interesting to see.

We have no reason to think it wouldn't be extended in the SPIRIT IV data, but we won't know until September.

Kent, I think if we could move to the next question, please.

Certainly.

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

Please go ahead.

Thanks for taking my question.

I have a CRM, then a stent question.

For Fred, I guess, it was interesting to hear that 47 of 50 states basically allow CRTD to be extended to Class 2 patients with wide QRS.

Today, do you feel that the patients who are coming in to -- who are in the device funnel, as it were, who have very low injection fractions -- I think the (inaudible) in reverse was 25% or lower and the sweetspot was 150 milliseconds QRS.

Do you think that they are actually not getting CRTD today?

And when you take your $250 million estimate, that either equates to 10,000 CRTD units that you wouldn't have gotten otherwise.

In other words, more patients in the funnel versus 50,000 upgrades.

And where's the balance?

And where you think that -- those $250 million are coming from?

So, Bruce, this is Fred.

Thanks for your question.

As it relates to the reimbursements, so basically we covered that part.

Patients who need a CRTD device can get those devices, and that's essentially in place for reimbursement.

There is a little bit of spillover into Class 2 array today.

We know that, and that is a minor portion.

But that is happening here and there.

That clearly has been taken into account also in our prediction models for the future.

So there is some spillover, and some patients are getting treatment even today off-label by physicians in case they needed them in particular with very low injection fractions, as you said.

The other side is, there are a lot of patients out there who could indeed benefit from an expanded use.

We believe that there are somewhere in the range of 150,000 to 200,000 patients that could benefit from an expanded use of CRTD.

I think that, combined with a larger penetration and uplift in the system price -- all of that together gets us to the estimate that we made.

Also taking into account some of the spillover that is happening even today.

So that's about as best as I can explain to you on the phone today, Bruce.

Sure.

But fundamentally, it sounds like most of this is going to be, or a lot of it's going to be from new patients recruited into the system who are not otherwise committed to device therapy today.

Is that a fair assumption?

That's probably a fair assumption, although I also would not underestimate the effect of a higher system price because of the additional left ventricular leads and things like that.

But I think your assumption is correct.

Okay.

Then on the DES side, thanks for that great detail, Sam.

Could you just -- and I just lost my place in all the commentary.

Could you just recap what the US -- ex-US pricing environment was?

And then more generally, either Ray or Sam.

The US was down, I guess 8%.

Is 2010 the year with the new product introductions that that trend could be reversed, or are those trends likely to continue until there is actually a major, shift in technology?

On the price, you're right.

The US decline, as we mentioned, was about 8%.

I think we said OUS, if I recall, was about 10%.

That was like 10%.

I have to look at my notes again.

But the price decline is a bit greater globally than it is in the US on average.

Whether or not that continues, I think it's too early to predict because there's just no way to separate the effects of the broader economic issues from the competitive issues that take place as a result of new products coming to market.

But I think it's our expectation, like other new products that come to market.

There is always an upside for potentially higher average selling prices when new products and new technologies come into the market space.

It's just difficult to say what they are.

Yes, I think I would add, too, Bruce, that a lot of the contracting that's out there is step function contracting that varies by date.

It's not always as if it's a [Jan] one date.

Part of -- I think your point's valid that there would tend to be extended pressure of some kind, both in the economics that Sam mentioned, as well as the fact that no new large technologies tends to move it slightly in that direction.

Offsetting it, though, is what I mentioned, is the timing and language contained in various major agreements and groups we deal with, layered in over time.

So you've got these two opposing forces.

We intend to be very disciplined around our agreements and our pricing so that the net effect of that -- my guess is still a little bit of quarterly decline.

I still think there's a little more negative than positive.

But at this point without all the rest of the data, as Sam pointed out, it's tough to really predict it very accurately.

I also said that, just looking at my notes, that on a worldwide basis, we saw, or are estimating Q2 unit volume increase was about an 11% upside, but that was offset by about a 13% ASP decline for the market overall.

Okay.

Thanks so much.

And Ray, just from a big picture point of view.

Do you think cardio devices can escape major ASP pressure going forward?

Given the fact that teaching hospitals have been targeted by [Med-Pak], lot of cardio procedures done there.

Commercial insurance has been the sugar daddy for the whole medical device industry.

There may be changes afoot.

Or is tax reform really your biggest worry from a healthcare reform standpoint?

Thanks so much.

Thanks.

No, I think it's all above [in a wave or sight].

The earlier question was what am I most worried about?

Obviously, there's a longer of list of things.

I am not of the opinion that that gets to us as early.

I think there's bigger issues with insurance.

I think there's continuing issues despite the contribution of the pharma groups.

So it's a question of where are you in that order?

And what are you going to do to counter the effect of that as legislation comes through over several years?

And I think our view is we're down the line somewhat.

At least as best as we can understand at this stage, with not a lot directed at us.

We're trying to, obviously, get our responses and group together as [adamant] as others.

Then I think counter to that is the ability of us to do a better job of proving what we actually do.

It's this old story that you hear of unintended consequences, and we're not doing perhaps a good enough job of explaining what happens if you reduce the prices?

What changes in the model?

What support is there in the operating room?

What's the effect on our R&D programs and future development of patient quality of life and benefits?

So hardly obligation here for us is not to sit around and wait for the government to explain what the world looks like, but rather for us to explain what our world looks like.

The difference for us is -- I think we have a little more time than some of the other groups.

Certainly, I would say our friends in the insurance area and pharma.

So, do you avoid it?

No.

Is it a good thing what they are doing?

Yes, I believe it is.

But we have to make sure that it's the patients that's kept first in line here.

That's the person who is paying for the government programs in the endgame.

Thanks so much, Ray.

Great.

Thank you.

And we have a question from the line of Matthew Dodds with Citigroup.

Please go ahead.

Great, thanks.

Ray, since you've only got 5 minutes, I won't ask about hip and knee pricing on this call.

Good to know.

(Laughter)

There's one thing I want to check on with you about your comments toward the end of the first hundred days.

When you talk about the negotiations -- the cross-selling -- years ago when a lot of these stent companies and CRM companies combined, there was a lot of talk then about bundling and using that as leverage.

And I guess my sense is that it really hasn't caught on.

I'm wondering, from your perspective, from the outside now, how much of that is going on in cardiology between even things like stents and the interventional products that you have?

And then lumping on CRM, before we even get into endosurgery or neurostim, how much opportunity is there in your estimation?

Thanks, Matt.

In part, it goes back to the previous question.

The world we live in today and the world going forward suggests a different model.

So, was it successful in the past?

And is there a history here of making that work?

Well, I would probably think the answer would be a solid no.

But we are in a changing world of cost effectiveness, transparency, of pricing and services, the economics, and healthcare economics and so on.

And I think what -- secondly, by the way, I'm not convinced that historically the companies that tried it had balanced product offerings on across the line.

If you look at the number of number one and number two share positions we have in the US particularly, it would suggest to you that you can't be in a position where one half your product line is a fourth market share player and the other one is first because that's not going to work.

Or you're going to have declining price or the one that's fourth because you're forcing the bundled buy.

But where you have number one and number two market share positions, efficiency of call point and a changing world that we're going to be living in now or in the future.

I think that suggests there is a model there that works.

I think it only works for us with no disrespect to our other players.

And I think the early data that I've looked at -- I won't disclose what it says because I think the data sample is too small.

But I will tell you the early work I've done on this here, both prior as a Director and more recently in meetings here, would suggest that we have the capability not only to do that, but in fact of incremental sales beyond what you would do separately with the product lines.

Thanks, Ray.

And then one quick follow-up on neuromodulation.

The evidence trial.

How long are we talking before we will get data on that?

I assume that's a pretty long trial.

Mike, do you want to answer that one?

Yes.

So the -- we're going to enroll 128 patients across the four countries.

We expect that the enrollment for this could be a little tough because we're going to randomize the patients between a spinal cord stimulation trial -- or device, or a reoperation for reconstructive spinal surgery.

And it's going as to be a little tough to get the patients to go randomized to that.

But we expect that we'll be able to do this within an 18 month window.

If we start at the point right around the beginning of the third quarter, 18 months from there, we'll be looking at some pretty good data.

Now, we will have some interim looks at this because we're not -- this isn't going to be data that we submit to the FDA.

It's going to be data as evidence to the marketplace.

So we'll get some interim looks at this, and I think the first interim look is right around the six month window.

We won't have to have all of the patients enrolled to see some of this evidence.

But it will be not only the effectiveness of spinal cord stimulation, but the cost effectiveness of using a rechargeable system over a non-rechargeable system.

I think that that again goes to some of the comments that Ray was making earlier about the dynamic of a changing healthcare economy.

Rechargeable systems are going to have greater adoption due to the cost effectiveness choices that insurance companies and the federal government will start to make.

And that puts us in a very good position versus our competition.

Thank you.

Thank you.

And we have a question then from the line of Joanne Wuensch with BMO Capital Markets.

Please go ahead.

Thank you very much for taking my question.

You've talked a lot about the DES pricing environment in the US and worldwide.

Could you please comment on what it looks like for ICD and pacemakers?

Yes, Fred, do you want to make some comments on that?

Yes, absolutely.

So as it relates to pricing on the CRM side.

As you probably know, we have been able, and this is a historical, always done strategy.

With new products, we're able to get a price uplift.

And certainly we have been able to do that with our (inaudible) device launches.

So we have done that around the world.

And with that in mind, if you look at the whole movement of price over time, I would say it's very well within the range of our historical expectations.

There is nothing abnormal there.

And so, we get an uptick because of new products.

And then it slowly degrades over time, and you lift it up again with new products.

So that is going on as it historically has been.

And we really see no change in that pattern.

How does that compare to the broader market pricing?

I think there is no news on that side either.

There is, there is obviously a lot of pressure as it relates to hospital budgets and cost containment.

But, it's generally in the 1% to 2% range, I would say.

Joanne, it's Ray.

Let me make a comment just with respect to the mechanics.

One of the things I've asked Sam and his team to do is to get a much more refined, sophisticated IT-based system to look at price-volume mix because often the questions we get are really about pure price and market-driven price economics.

And sometimes the databases and what we're capable of answering tend to mix price and mix together.

So, as we get further down the road, we're going to be able to comment on as in the past, pure price, the implications of mix, primarily new products and volume being units of sale.

And I think that will be, frankly, more effective for the listening audience.

That's very helpful.

I'm going to assume that you've seen the total MADIT-CRT data set, and it sounds that you are quite excited about the potential for that market, probably more so now than you did prior to seeing that.

Is that the right read?

Well, Joanne, let me just clarify.

I have not seen the MADIT-CRT data set.

All I see is the MADIT-CRT executive committee working in a very energetic and very positive and upbeat fashion.

I have not seen the data set.

I'm not commenting on that at all.

But I do expect there to be positive news, and I think that this is going to be a very important, clinical trial in the history of the treatment of heart failure patients.

I have one follow-up question, and then I'll get back.

Gross margins -- you're talking about 70% to 71% in 2009.

And you have multiple programs and ways to expand that into 2010.

If we assume anywhere from 100 basis points to 150-basis point uptick in 2010, would that be about right?

Thank you.

We won't comment on 2010 or beyond.

What we're focusing on are the opportunities we have to improve margin.

Let's not forget we also have opportunities to have margin pressure with pricing and other things going on as well.

So we margin -- we manage as best we can improvement in overall operating profit margin, with a clear focus on taking full advantage of every lever we have to improve gross profit margins, but there are frequently some counterbalances.

Okay.

We've got about five more questions on the line.

And we are actually going to take those five, and then cut it off at that point.

Alright.

Thank you.

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

Please go ahead.

Good morning.

Thanks for taking the question.

Just on the drug-eluting stent side, how should we think about the US mix going forward?

And could we see further shift to PROMUS?

And in particular, how should we think about the potential impact from SPIRIT IV?

If the results are consistent with their prior studies, the bigger study which I suspect could carry some more marketing muscle?

Thanks, Tim.

I'll ask Hank to take the front part of that, and Don can pick up the back part on SPIRIT IV.

Tim, this is Hank.

Good question.

I would say that the mix shift that you have seen here over the last quarter really reflects the anticipated pullback of TAXUS following a very strong launch of TAXUS Liberte.

As you know, you go through the evaluation period.

And that launch commenced in Q4 and continued through Q1.

And so the other key factor that may be not appreciated by many is that we had a pretty major contract and a lot of incremental business gain from a major customer which yielded a very significant amount of increase in PROMUS units.

And those were the key contributors in the quarter in terms of the mix shift.

As Ray and Sam have alluded to previously, I believe that the launch of TAXUS Atom, as well as Long will work to improve the TAXUS mix in the second half.

Don, you might want to take the second part of the question.

Sure.

I think with the SPIRIT trials have shown, and I expect SPIRIT IV to be no different, is that PROMUS XIENCE outperforms TAXUS Express 2.

And that outperformance is confined to smaller vessels.

And to some extent, with periprocedural MIs to longer lesions, well we know that TAXUS Liberte also outperforms TAXUS Express in those two subgroups of small vessels and long lesions.

So it's not particularly relevant to the devices that we have on the marketplace now, in essentially every country.

And then the pattern in the SPIRIT II-III of better performance in the diabetic population is one that will have another chance to take a look at in SPIRIT IV with almost 1000 diabetics.

So I think that the findings will be interesting, but one has to look at them through the lens that it's a device that we now know we can beat on the TAXUS side with TAXUS Liberte and not with our current TAXUS Liberte product.

And just kind of tying that mix question to that earnings outlook, given your current '09 earnings, is the expectation that the Q2 US mix -- this is a low watermark for TAXUS on a going forward basis?

We haven't -- again, we haven't disclosed that level of granularity and won't.

Okay.

Because it could move up and down from one part to the next.

And then just one last one -- one quick one.

On the CRM side, it would via the rollout of LATITUDE.

Anecdotally, were there any hospital [tenders] in the past that you were excluded from due to the lack of remote patient monitoring?

And I suspect you'll be able to get your fair share of those on a going forward basis.

Just any color on that front?

Yes, Tim.

This is Fred.

As it relates to the European market, there clearly have been tenders where we were excluded because of the fact that we did not have an offering or remote monitoring site.

Since we are now rolling that out, we will have that opportunity in the future.

So this is clearly going to be a benefit in those markets.

Great, thank you.

Thanks.

We have a question from Glenn Novarro with RBC Capital Markets.

Please go ahead.

Thanks for taking my call.

Two quick questions.

One, I just want a little bit more color on the ICD performance in the quarter.

You did say that ICDs came in at the low end of guidance.

And I'm wondering, is that because you took less share than you were expecting?

And if so, who did better?

Was it St.

Jude or Medtronic in the quarter?

Or is it possible that the overall market in the US and worldwide was just smaller than you thought?

That's question one.

And then a quick question for Don, just on DES penetration.

It looks like we're starting to level out here.

We still went up here in 2Q relative to 1Q, but the gains are now smaller.

Are we going to stop at 75% penetration, or do we still have some runway left?

Thanks.

Fred, why don't you take that under the understanding that the band of guidance was a relatively narrow band.

So being at the top, middle or bottom wasn't a material fact differential as opposed to just where we positioned.

Why don't you comment further on that.

Then Don will do the next part.

Absolutely, Ray.

That would be great.

So Glenn -- so on that side.

So we believe that we have continued to take share with our new products in particular on the [TACI] franchises, CRTD and ICD.

It is hard to get your arms around the market dynamics, including de novo replacements.

As well as market share if you don't know the results from your competitors.

The major competitors being St.

Jude and Medtronic.

And that's still to come, as you know.

The other point that I would like to make, which is an important fact for the second quarter, is that you may know, and you may realize that Medtronic is having an extra week in their current quarter.

And that is in the event that happens once every six years or so, and that's happening this quarter on the Medtronics side.

And that's adding some complexity toward understanding what is the real market and what is the real market shares between the big players.

But most importantly, I would say we are absolutely confident that we continued to take share in the second quarter, and we are confident to continue to take share in the rest of the year.

And that has to do with many different strategies that we have in place, but one important factor is that on the COGNIS-TELIGEN side, we now -- and for the first time, have full inventory available in the US, as well as in all the markets that we're in.

So we believe that bodes well for us to continue to take share with COGNIS and TELIGEN for the rest of the year.

Along with about four or five other strategies that I won't go into because we don't have the time to explain it all.

But we are confident for the rest of the year with COGNIS and TELIGEN market share taking.

Great, Just one quick follow-up.

Can you give us any color as to what you think the US and worldwide ICD market did in terms of growth rates in 2Q?

Well, is that -- .

Broadly, any range you can give us would be helpful, thanks.

Yes, it's very hard to estimate that.

As you know, we get some real data always several months after the fact.

So we have got some data from April.

That shows a slight recovery in the US as it relates to de novo market for ICDs and CRT devices.

My comment is still that in the US, the market is still pretty much stable.

Slight growth, for sure not a negative.

And we think that in the second quarter, the market in the US may have been about $1.1 billion, in that range.

So it's rather flat, Glenn.

It's hard to speculate.

Outside the US, obviously, it is always a bit better, and there is some more share -- I'm sorry, some more market growth outside the US.

But also, that is hard to quantify without getting the full picture of our competitors.

Okay.

No, that was very helpful.

Thanks, Fred.

And then just on the DES penetration?

Sure, Glenn.

So penetration fell from the upper 80s to the low 60s on safety concerns, and I think as those safety concerns have been largely put to rest, we've seen this recovery to 75%.

There are some -- there are additional long-term safety issues, some new antiplatelet agents that will address the safety issue.

But whether and how fast we get back up to the 85% level will depend on some of the longer term data in acute MI drug-eluting stent use.

Some of the other expanded indications.

But one would expect that to be a slower [ascentotic] growth, not anything that will be a step function.

And that's part of the DES guidance that we're getting for 3Q, and that is a little bit more increase in DES penetration.

But I don't want to put words in anyone's mouth, but we're not seeing 77%, 78% this year, or maybe a year from now?

I think it's a little hard to predict, and some of it will depend on the -- how the longer-term safety data is received and the two-year results of trials like [Horizon's].

And then just one last thing.

BARI 2D -- does this really impact penetration at all?

I don't think so.

It's -- if pre-emptive revascularization had been proven superior for diabetics, it could have led to additional growth because those are not people currently treated.

The fact that pre-emptive revascularization didn't provide benefit leaves us operating under the same rules that we have been.

Okay, thank you.

Thanks for taking my questions.

Thank you.

I think we're going to have time for only one more question.

We have a hard stop in five minutes.

If we could just have one more question, then we'll have to close it off.

Fair enough.

That question comes from the line of Sara Michelmore with Cowen.

Please go ahead.

Wow.

Okay, snuck me in.

Thanks so much.

Let me ask the converse of a question that was asked earlier, Ray.

As I look at some of these non-core product lines, it strikes me that one option may be for you to consider divesting some product areas or business lines.

Just curious what your appetite is for that?

And if that is an option for some of these product areas?

Thanks, Sara.

Well, when I'm done sending Rick the target list for buys, I could send you the target list for divestitures, I guess.

We don't have any plan.

We went through a period of that when I was a Director here, and the Company did a great job of going through that.

We don't have any plans at this stage.

The plans we have are to strengthen those businesses as you can tell, based on the inputs that I've given so far, and the inputs I'm getting here.

Having done that process -- again, I happened to be a Director at the time.

The management here having done that process.

Theoretically, we are left with no non-core businesses, and therefore that would make that go away anyway.

Okay, and just a follow-up question on the MADIT-CRT.

I think you mentioned in your prepared remarks that you would file for an an expanded labeling claim for that.

How critical is the labeling going to be in terms of developing the incremental market?

I know Medtronic has similar plans to file an expansion on the reverse [HF] study as well.

Fred, do you want to take that one?

Yes, thanks.

I think that is going to be critical.

I think there is more and more focus and attention toward on-label use in general.

I do believe that not every CRTD system is the same.

There is a lot of differentiation as it relates to left ventricular leads and positioning or positioning capability on the left ventricular side.

So we have the benefit of having this positive outcome of the MADIT-CRT study with our systems, and we can demonstrate this benefit.

I am not so sure how others can piggyback on that that easily.

And I think we are optimistic that we will get a label for indication extension ourselves, and we'll have to see how that works out for our competitors.

Just if I could sneak in a last DES question, any update on the Labcoat Element program?

And what the time line looks like there in Europe?

Thanks.

So we've had some discussions with the European regulators about the Labcoat Liberte trials that were done, and we're weighing the advisability of launching that product versus going directly to a Labcoat on our Element stent back.

And those decisions are not final.

Okay.

Thank you so much.

Thanks, folks.

Larry's going to close it up after me, but I didn't want to point out that true to history -- that is a new record for us, which I'm sure is killing you -- of, two hours and 18 minutes.

Larry?

Thanks, Ray.

So I would like to thank everybody for joining us today and for your continued interest in Boston Scientific.

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Thank you.

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