Boston Scientific Corp (BSX) 2010 Q3 法說會逐字稿

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

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder, this call is being recorded.

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

Larry Neumann.

Please go ahead, sir.

Thank you, Lois and good afternoon, everyone.

Thank you for joining us.

With me on the call today are Ray Elliott, President and Chief Executive Officer, and Jeff Capello, Executive Vice President and Chief Financial Officer.

We issued a press release earlier today announcing our third quarter results.

Key financials are attached to the release including the reconciliation of non-GAAP financial measures used in this presentation, and we have also posted a copy of the press release as well as support schedules to our website under the investor relations tab.

The agenda for this call will include a review of the third quarter financial results as well as fourth quarter and updated full year 2010 guidance from Jeff, an update on our business performance in the quarter from Ray, followed by his perspective on the quarter overall.

We will then open it up to questions.

We will be joined during the question and answer session today by Sam Leno, Executive Vice President and Chief Operations Officer, Hank Kucheman, Executive Vice President and Group President - CRV, Mike Phalen, Senior Vice President and President of our Endoscopy business, John Pederson, Senior Vice President and President of Urology and Women's Health business, Joe Fitzgerald, Senior Vice President and President of our Endovascular Unit, Mike Onuscheck, Senior Vice President and President of Neuromodulation business, Dr.

Ken Stein, Chief Medical Officer for CRM, and Dr.

Keith Dawkins, Chief Medical Officer for the CRV Group.

In addition I'd like to welcome [Shawn Worchess], who joined as Vice President of Investor Relations.

Shawn was most recently with Varian, Inc.

and he's working with me to transitional IR responsibilities here at Boston Scientific.

We expect this transition to be completed by year-end.

Before we begin, I'd like to remind everyone of our Safe Harbor Statement.

This call contains forward-looking statements including statements regarding our expected market share and gross margins, growth projections, new product approvals, timing of product launches, acceptance, and sales, our financial position, expected net sales, earnings and tax rates for 2010, the effects of our restructuring activities, the effect of our debt prepayment and expected FDA approval.

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, clinical trial results, our programs to increase shareholder value, new product development and launches, regulatory approvals, litigation, our tax position, our competitive position, our growth strategy and the Company's overall business strategy as well as other factors described in the Company's filings with the Securities and Exchange Commission.

Any forward-looking statements speak only as of the date on which it is made and we undertake no obligation to update any forward-looking statements.

I would now like to turn the call over to Jeff, who will review the financial results for the quarter.

Thanks, Larry.

Let me start by providing you with a detailed review of the operating results from the quarter.

Consolidated revenue for the third quarter was $1.916 billion, versus our guidance range of $1.850 billion to $1.925 billion, and represents a 5% decline on both a reported and constant currency basis from the third quarter of last year.

Compared to the headwind of $51 million assumed in our third quarter guidance range, foreign exchange had only a $4 million negative impact on our third quarter sales results, which positively affected our reported revenue by $47 million.

We estimate the defib ship hold and product removal actions lowered our revenue growth rate by approximately 140 basis points or $28 million in the quarter compared to our guidance estimate of $44 million due to continued strong execution of our stop ship recovery plan.

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

Worldwide DES came in at 365 million, at the high end of our guidance range of $340 million to $365 million, but down 12% on a reported basis and 11% on a constant currency basis from the third quarter 2009.

On a worldwide DES revenue, includes $111 million for TAXUS and TAXUS Element, $195 million for PROMUS, and $59 million for PROMUS Element.

Our worldwide TAXUS, PROMUS, PROMUS element split for the quarter was 30, 54, 16.

We continue to sustain our worldwide DES leadership during the third quarter, with an estimated Global market share of 37% which we estimate to be eight percentage points higher than our nearest competitor, and four percentage points lower than our share in Q3 2009, primarily impacted by the results of the COMPARE study which were released in September of last year and the introduction of new stents principally in Japan.

US DES revenue was $199 million, at the high end of our guidance range of $185 million to $200 million, and 11% lower than the third quarter last year driven primarily by TAXUS share loss and a decline in the overall market driven by pricing pressures.

This includes $68 million of TAXUS and $131 million of PROMUS revenue and represents a 34/66 mix of TAXUS and PROMUS in the US compared to a 48/52 mix in Q3 of 2009.

We estimate that our US DES share was 45% for the quarter with 15 share points of TAXUS and 30 share points of PROMUS.

This represents a reduction in total share of four points compared to the third quarter last year.

The decline in marketing share year-over-year is consistent with our expectations given the results of the COMPARE study.

On a sequential basis, our market share of 45% was down one point from the second quarter this year indicating that our share has further stabilized.

We continue to maintain drug eluting stent market share leadership in a competitive US market with 16 more market share points than our nearest competitor.

Based on our estimates of the US market for the third quarter we believe Abbot's share was approximately 29%, while J&J and Medtronic achieved approximately 14% and 12% respectively.

International DES sales of $166 million were at the high end of our guidance range of $155 million to $165 million and represents a decrease from prior year of 13% on both a reported basis and constant currency basis.

This includes $43 million in TAXUS, $64 million in PROMUS, and $59 million in PROMUS Element sales and represents a 26, 39, 35 mix of TAXUS, PROMUS, PROMUS Element.

The international contribution from PROMUS Element includes $43 million in EMEA and $16 million in the Americas and Asia-Pac combined.

We estimate that Boston Scientific's DES market share in EMEA for the quarter was 31%, which is down three points compared to the third quarter of 2009.

TAXUS market share was approximately 8% with revenue of $18 million and PROMUS market share was approximately 3% with revenue of $6 million.

PROMUS Element market share was approximately 20% for the quarter with revenue of $43 million with an exit share closer to 24% despite not yet being available in all major markets and regions.

Together this represents a TAXUS, Promus, PROMUS element mix in EMEA of 27, 9, 64.

We continue to be very pleased with the market acceptance of PROMUS Element, which is running ahead of plan to the products market leading alloy and stent design which pre-approves ease-of-use.

In addition, recently introduced TAXUS Element exited the quarter with 3% market share in EMEA.

We expect that our unique ability to deliver two different drugs via multiple stent platforms will allow us to protect and expand our position in the market.

Through the success of PROMUS Element and the TAXUS platform, we have driven 90% of our DES product mix in EMEA back to self-manufactured margins.

Our DES share in Japan was 35%, down 12% from the third quarter of 2009, and three points sequentially with revenue of $48 million driven by the number of accounts participating in the Abbot RESET trial and a challenging pricing environment.

TAXUS market share was approximately 5% with revenue of $7 million and PROMUS market share was approximately 30% with revenue of $41 million.

Together, this represents a TAXUS/PROMUS mix in Japan of 15/85.

During the quarter, we estimate Abbot share at 42%, Medtronic at 8% and J&J at 15%.

The RESET trial completed enrollment during the quarter, which now provides us with an opportunity to leverage our commercial strength and two drug platform to reenter these accounts as we look to regain some share.

We estimate our Asia Pacific DES share remains steady at about 17% during the third quarter, split 5% TAXUS with $8 million in revenue, 4% PROMUS and $6 million in revenue and 8% PROMUS Element with $12 million in revenue or a TAXUS/PROMUS, PROMUS element mix of 31/24/45.

DES sales in our Americas international region were $25 million, representing approximately 54% share with 21% or $10 million in TAXUS revenue, 22% or $10 million in PROMUS revenue and 10% or $5 million in PROMUS Element revenue.

This represents a 40, 42, 18 mix of TAXUS, PROMUS/PROMUS Element.

With global DES market share of 37%, we maintain eight full percentage points of share advantage over our nearest competitor.

Our strong commercial team is focused on the only two drug platform in the industry, and when you couple that with a continued rollout of PROMUS Element and TAXUS Element stents, we expect to increase our market share leadership going forward.

I would like to provide now a little bit more detail on the drug eluting stent market dynamics during the quarter.

We estimate that the worldwide DES market in Q3 at approximately $992 million which is down 1% on both a reported and constant currency basis versus Q3 2009.

Our estimated worldwide market revenue in the quarter includes a worldwide unit volume increase of approximately 10%, driven by an increase in both PCI volume and a three percentage point increase in penetration, offset by worldwide market decline in average selling prices of approximately 10%.

The US DES market is estimated to be about $437 million for the quarter, representing a decrease of approximately 3% from the third quarter of last year.

This consists of a unit volume increase of approximately 4%, which includes a slight decrease in PCI volume and an increase in penetration.

This unit volume increase was offset by an approximately 7% decline in ASPs.

During the quarter, we saw our US DES ASP reduction slightly greater than the aggregate market declines, with TAXUS and PROMUS both down about 8% compared to the third quarter of 2009.

US PCI volume in the quarter was approximately 250,000 procedures, down 1% compared to the third quarter of 2009.

We estimate that the US DES penetration of 78% was up three percentage points over the third quarter of 2009.

Combined with the stented procedure rates and stents per procedure, we estimate that the total market for US stents in Q3 was approximately 335,000 units including the 262,000 units of DES.

The international DES market is estimated to be $554 million for the quarter, representing an increase of approximately 2% from the third quarter of last year.

This consists of a unit volume increase of approximately 14%, which includes a 9% increase in PCI volume and a four percentage point increase in penetration.

This unit volume increase was largely offset by a decline in ASPs.

Procedures were strong in the quarter with approximately 575,000 PCI procedures, including 328,000 procedures in EMEA, 56,000 procedures in Japan, 129,000 procedures in Asia Pacific, and 62,000 procedures in the Americas.

We estimate that international DES penetration of 61% was up four percentage points over the third quarter of 2009, including 57% in EMEA, 73% in Japan, 75% in Asia Pacific, and 38% in the Americas.

Worldwide, Q3 CRM revenue of $550 million represents a reported decrease of 10% and a constant currency decrease of 8% versus the $608 million reported in the third quarter of 2009.

For the third quarter, we estimate that the defib ship hold and product removal actions reduced our US CRM revenue by $28 million.

This compares favorably with our previous estimate of $44 million lost sales for the quarter.

Our commercial organization, lead by a very strong sales team, continued to do an excellent job executing recovery plan.

We were very pleased with the results for the third quarter.

US CRM revenue of $362 million represents a 10% decrease for the prior year principally impacted by the defib ship hold.

International CRM sales of $188 million in the quarter represent a reported decrease of 8% from the prior year and were down 4% in constant currency.

Excluding the impact of a large contract sale for Japan in the third quarter of 2009, international CRM sales were down 1% on a constant currency basis.

Worldwide defibrillator sales of $406 million were near the high end of our guidance range of $385 million to $410 million.

This represents a reported decrease of 9% from the third quarter of 2009 and a constant currency decrease of 7%.

Defib sales in the US were $280 million, also near the high end of our guidance range of $265 million to $285 million representing an 11% decrease from last year.

International defib sales of $126 million were at the high end of our guidance range of $120 million to $125 million, representing a 3% reported decrease from last year, up 1% in constant currency.

The growth in the international defib area continues to be driven by strong market acceptance of our COGNIS and TELIGEN devices and our new 4-SITE leads as we continue to roll out these products in other areas of the world.

Our non-DES and non-serum worldwide revenue of [$1.001] billion were flat compared to the third quarter of last year both on an as reported and constant currency basis.

On a worldwide basis, our Endoscopy business grew 4% constant currency terms.

Growth in the US was 2% in the quarter, despite downward pressure from a slowdown in elective procedures.

Internationally, Endoscopy sales grew 6%, with broad based strength across all geographic regions, driven by new product introductions and strong sales execution.

Our Urology Women's Health business grew 6% in constant currency terms; however growth in Q3 2010 reflects a net benefit of approximately 100 basis points due to the 2009 Prolieve recall and the market withdrawal of our biopsy product last year.

Excluding Prolieve and biopsy, US urology sales grew in the mid single digits, largely due to an increase in procedures and strong sales execution, while our Women's health business was basically flat, due to slowdown in elective procedures and competitive new product trialing.

Internationally, both urology and Women's Health experienced strong growth driven by new product introductions, increased sales investments, and the penetration of new therapies into markets outside the United States, resulting in an overall increase of 8% compared to Q3 2009.

Excluding the impact of Prolieve and biopsy, international sales grew in the double digits.

Our worldwide neuromodulation business grew 9% year-over-year in Q3 2010 as implant and trial procedures volume increased noticeably.

As we mentioned last quarter, growth in the second half of the year generally picks up as patients meet their out of pocket deductibles for the year and increase healthcare utilization response.

Our growth in the quarter was also supported by the successful launch of four new products in our SCS leads portfolio.

Although off a small base, international growth was 29% compared to Q3 2009 as we begin to really expand our presence outside the United States.

In constant currency terms, our worldwide peripheral interventions business was up 2% in Q3, including international growth of 5% on the strength of new product introductions.

Neurovascular was down 8%, largely due to the adverse impact of a sales returns reserve recorded in connection with the field action initiated at the end of this quarter, and the delayed launch of the target coil, partially offset by growth in all other product franchises.

Non-stent interventional cardiology was down 5%, and Electrophysiology was down 6%.

We have seen a lag in some of these businesses in recent quarters as a result of procedural softness, increased pricing pressures and competitive product launches.

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

Reported gross profit margin for the quarter was 67.5%.

Adjusted gross profit margin for the quarter excluding restructuring related charges was 68.1%, which was 150 basis points lower than the third quarter of 2009, but at the high end of our previously issued guidance range, due primarily to the lower than expected impact of the defib ship hold and product removal actions in the quarter.

The primary contributors to the 150 basis point reduction from last year include the shift in DES mix from TAXUS to PROMUS during the quarter, lower DES share, and pricing pressures in both the US and Japan, the impact of the defib ship hold and product removal actions, partially offset by the increase in PROMUS Element sales in Europe.

Our reported SG&A expense in the third quarter was $634 million.

Adjusted SG&A expenses, excluding restructuring related items were $633 million or 33.1% of sales.

During the quarter, our SG&A as a percent of sales was favorably impacted by restructuring savings, the timing of certain expenditures and incremental revenue from a faster defib stop ship recovery.

That said we do expect to see an increase in the level of spending over the remainder of the year, given both the delay of certain expenditures in the third quarter and a decision to make incremental investments in top line growth opportunities in both customer facing and market development related positions, including specific initiatives in the emerging markets, all of which are aimed at improving our growth outlook.

Both reported and adjusted research and development expenses were $230 million for the quarter or 12% of sales.

The reduction during the quarter is related to the timing of some of our restructuring efforts and the related reinvestment programs as well as a delay in some of our clinical trials.

As we continue to execute our portfolio realignment we expect future run rates to support our plans to invest up to approximately $1 billion in R&D on an annual basis.

Royalty expense was $39 million or 2.1% of sales for the quarter, which is down from $51 million or 2.5% of sales in Q3 2009.

The reduction in royalties was due to strong PROMUS and PROMUS Element sales, combined with royalty structure, which provides for lower royalty rates once volume milestones have been achieved.

We reported GAAP pretax operating income of $251 million for the quarter.

On an adjusted basis, excluding intangible asset impairment charge, restructuring charges and amortization expense, adjusted operating income for the quarter was $403 million and 21% of sales, down 80 basis points from Q3 2009.

The decrease versus Q3 2009 is primarily related to gross margin deterioration, somewhat offset by favorability in SG&A, R&D and royalty expense.

I'd like to highlight the GAAP to adjusted operating profit reconciling items in a little bit more detail for you.

We recorded a $5 million pretax or 4 million after-tax non-cash impairment charge in connection with the writedown of certain intangible assets.

We recorded $18 million pretax or $14 million after-tax of restructuring related charges in the quarter which are primarily related to product transfer expenses and certain other costs in connection with our previously announced planned network optimization program.

Total amortization expense was $129 million pre-tax or $109 million after-tax, which is $3 million higher than third quarter 2009.

Amortization expense is expected to increase slightly in third quarter 2010, as we begin to amortize certain intangible assets related to our previously announced acquisition of Asthmatx.

The cumulative effect of all these items was $152 million pretax and $127 million after-tax.

Interest expense was $91 million in the third quarter, which was the same as Q3 2009.

Our average interest expense rate in the third quarter was 5.5% which is the same as Q3 2009.

Other net income or expense was $3 million of income in the third quarter compared to $4 million of expense in Q3 2009.

For the third quarter of 2010, other net included $4 million of interest income driven primarily to the collection of interest on past due receivables in Spain.

Interest income was only $1 million in Q3 2009.

In addition, Q3 2010 currency transaction gains and losses were favorable by $3 million and miscellaneous expense was $2 million lower compared to Q3 2009.

Our reported GAAP tax rate for the third quarter was negative 16% and on an adjusted basis, our tax rate was 6%.

Our adjusted tax rate for the third quarter reflected a $32 million benefit from discrete tax items.

The discrete benefit was primarily attributable to the release of tax reserves, resulting from a favorable court decision in the third party case, for which we have similar facts.

Excluding the discrete benefit, we had an operational tax rate in the third quarter of approximately 16%.

This rate reflects the revised expectations for a full year operational tax rate as well as a true-up to the prior quarter results but excludes US R&D tax credit as it has not yet been reenacted for 2010.

We currently expect our full year operational tax rate to be approximately 18% inclusive of the US R&D tax credit or 1% lower than our previous guidance of 19%.

This decrease from our prior guidance is due to revised expectations of our geographic mix of earnings.

The R&D tax credit equates to 240 basis points on our operational effective tax rate for the full year.

We reported GAAP EPS for the third quarter of $0.12 per share, compared to a loss of $0.06 per share in the third quarter of last year.

GAAP results for the third quarter included the previously discussed intangible asset impairment, amortization and restructuring charges as well as the discrete tax items.

Our adjusted EPS in the third quarter which excludes these items was $0.19 and was above the high end of our guidance range of $0.10 to $0.13 per share driven by favorable operating expenses due to operating discipline and timing of events as well as the impact of the positive discrete tax items in the tax rate improvement.

Our adjusted EPS for the third quarter was in line with our adjusted EPS of $0.19 in the third quarter of 2009.

As a reminder, the third quarter of 2009 adjusted EPS excluded $0.07 per share of amortization, a $0.01 per share of restructuring related charges and $0.17 per share of litigation related charges.

Stock comp was $30 million and all per share calculations were computed using 1.5 billion shares outstanding.

DSO was 63 days, a two day improvement from the third quarter of 2009 driven by stronger cash collections in the US, EMEA and Asia Pacific.

Days inventory on hand were 137 days, down one day from Q3 2009, as we continue to work on reducing our inventory levels despite the required investments to support our new product introductions.

Reported operating cash flow in the quarter was on out flow of $126 million compared to an in flow of $484 million in Q3 2009.

Q3 2010 cash flow included a prepayment of the remaining $725 million obligation due to J&J on January 3, 2011 and $32 million of restructuring payments.

Q3 2009 cash flow included $2 million of legal settlement payments and $15 million of restructuring payments.

Excluding these items, Q3 2010 operating cash flow was $631 million or $130 million higher than Q3 2009 primarily due to a tax refund.

Capital expenditures were $79 million in the quarter which was $12 million lower than Q3 2009.

Reported free cash flow was an out flow of $205 million in the quarter compared to in flows of $393 million in Q3 2009.

At the end of the third quarter we had about $600 million of cash on hand, $6 billion of total debt and net debt of $5.4 billion.

The increase in net debt is primarily due to the prepayment of the J&J obligation, partially offset by our strong operating cash flow over the past 12 months.

In connection with the $725 million prepayment to J&J, we cancelled the related letter of credit on our revolving credit facility which will save us approximately $17 million in fees in 2010.

We now have full access to our $2 billion revolving credit facility to support operational needs.

We currently have more than $2.9 billion of available liquidity including cash on hand and our available credit facility.

We expect to use a portion of our credit facility together with existing cash on hand and cash from operations in 2011 to repay our $250 million notes due January 2011 and our $600 million of notes due June 2011.

At the end of Q3 2010, our debt to EBITDA credit facility covenant ratio was 2.6 times, well below the maximum permitted level of 3.85 times representing $738 million of EBITDA safety margins.

As we announced in February, we have initiated a restructuring plan, that among other things, will combine our CV and CRM groups into a new CRV group, eliminate the international and endo surgery headquarters organizations, reorganization our clinical and R&D organizations and streamline our corporate staff functions, and restructure our international operations to reduce our administrative costs and invest in commercial expansion opportunities including significant investments in emerging markets.

The execution of these restructuring initiatives over the next 18 months will result in gross reduction of our operating expenses by an estimated $200 million $250 million.

We will reinvest a portion of these savings into customer facing and development related activities to help drive top line growth in the future.

We are on schedule with our planned restructuring at this point.

Let me now turn to guidance for the fourth quarter, as well as revised guidance for the full year.

From a US defib share perspective and based on current market dynamics, we continue to expect to hold share in the second half of the year, exiting the year at approximately 26% share subject to the actual defib ship hold impact in Q4.

Given the impact in the first three quarters of 2010, we now estimate that the defib ship hold will have a negative impact of approximately $190 million in the full year, compared to last quarter's estimate of $225 million with $72 million in Q1, $65 million in Q2, and $28 million in Q3 as well as $28 million in Q4.

Turning to sales guidance for the fourth quarter of 2010, reported consolidated revenues are expected to be in a range of $1.925 billion to $2 billion, which is down 4% to down 7% from the $2.079 billion recorded in the fourth quarter 2009.

If current foreign exchange rates hold constant in the fourth quarter, the tail wind from FX should be approximately $11 million or less than 1% relative to Q4 2009.

On a constant currency basis, Q4 consolidated sales should be in a range of down 4% to down 8%.

For DES, we are targeting worldwide revenue to be in a range of $355 million to $385 million with US revenue of $180 million to $195 million and OUS revenue of $175 million to $190 million.

For our defibrillator business, we expect revenue of $400 million to $425 million worldwide with $265 million to $285 million in the US and $135 million to $140 million OUS.

For the fourth quarter, adjusted EPS, excluding charges related to acquisitions, restructuring and amortization expense are expected to be in a range of $0.15 to $0.18 per share.

This includes an operational effective tax rate for the quarter on adjusted earnings of approximately 10%, reflecting assumed approval of the R&D tax credit in Q4.

The Company expects EPS on a GAAP basis in the fourth quarter of 2010 to be in a range of $0.05 to $0.09 per share.

Included in our GAAP EPS estimate is approximately $0.01 to $0.02 per share of restructuring-related costs and $0.08 per share of amortization expense.

For the full year, the Company now expects sales will be between $7.73 billion and $7.8 billion, versus our previous guidance of $7.6 to $7.9 billion.

If current foreign exchange rates hold constant, we expect the FX impact to be minimal, therefore, our revised guidance on both the reported and constant currency basis should be in a range of down 5% to down 6% for the full year.

To help you in adjusting your models for the full year, we expect gross margins to be within the range of 67% to 68%, reflecting gross margin improvement in the second half, due to a full period of defibrillator revenue.

We expect annual SG&A to be in a range of 32.5% to 33.5% of sales, R&D to be roughly 12.6% of sales, royalties of approximately 2.5% of sales and interest and other expense of approximately $400 million.

Adjusted EPS for the full year is now expected to be in a range of $0.63 to $0.66 per share versus our previous estimate of $0.54 to $0.62 per share.

On a GAAP basis, the Company expects a loss for the full year in the range of $0.81 to $0.77 per share.

Included in our GAAP loss per share estimate is a charge of $1.20 per share related to the Q1 goodwill impairment, a charge of $0.03 per share related to intangible asset impairments, acquisition related income of $0.14 per share, a charge of $0.07 to $0.08 per share related to restructuring related costs, a net benefit of $0.01 per share related to discrete tax items and charge of $0.28 per share related to amortization expense.

Assuming the extension of the R&D tax credit for the full year during Q4, we now expect our operational tax rate to be approximately 10% for the fourth quarter and approximately 18% for the full year.

Including the favorable and unfavorable discrete tax benefits and timing items recognized in the first three quarters, our full year adjusted tax rate is now expected to be approximately 13% for the year.

We have a number of tax authority examinations that we expect will conclude in the fourth quarter.

The final resolution of these exams may result in additional discrete tax items during that period that are difficult to forecast but may impact our full year adjusted rate.

That's it for guidance.

Now let me turn it over to Ray for an overview of the businesses in the quarter as well as his overall thoughts.

Ray?

Great.

Thanks, Jeff.

Let me begin with a more qualitative review of our businesses and then as usual, I'll share some brief thoughts on likes, dislikes and two hot topics for the quarter overall.

During the quarter, we continued the integration of our CRM and CV businesses into our newly formed Cardiology Rhythm and Vascular Group.

The CRV group is an example of Boston Scientific anticipating changes in the delivery of healthcare and we are leading the industry in responding to those changes.

CRV positions Boston Scientific as the Company intensely focused on the care continuum for cardiovascular patients.

this initiative has been well received by our customers and has already produced wins in many key markets, including the Southwest, the West and the Midwest, and we currently have over 100 contracts in place with customers that recognize the unique value of our broad portfolio.

The CRV model allows us to explore novel go to market strategies that are effective in generating sales for new value propositions, however we are not done, and we too recognize that continued commercial innovation is important in this very dynamic time for healthcare in the US.

We are making substantial investments in new technologies to build on our market leading positions across the cardiovascular service line.

We have begun to introduce some of the nearly 30 new CRV products we expect to launch in the US by the end of 2011 alone.

Looking at CRM, we estimate our worldwide defib market share was down three percentage points compared to the third quarter of 2009, driven by the ship hold and product removal actions we initiated late in the first quarter.

In the US, we came in near the top end of our guidance with our third quarter share estimated at 26%, however these estimates are based entirely on our own models and do not reflect reporting of any of our competitors.

Our technologies continue to prove their importance in the marketplace.

COGNIS and TELIGEN are still the smallest thinnest high energy devices in the world and are being extremely well received.

We remain committed to advancing our technologies and strengthening our CRM franchise.

Worldwide, we continue to bring innovative new products to the market and they are being well received.

We recently launched our Acuity break away lead delivery system in the US with encouraging early results, including an increase in price.

Internationally, we have had a successful launch of our 4-SITE defibrillator system in Europe.

We continue to see strong defib results in Japan with COGNIS and TELIGEN and expect continued strength from the recent launches of our 4-SITE defib system.

In the first half of 2011, we plan to launch our next generation line of defibrillators in the US and Europe, creating greater choices for our customers including new features designed to improve functionality, diagnostic capability and ease-of-use.

We plan to rollout our 4-SITE system in the US in the first half of 2011.

Additionally, we expect to launch our new wireless pacemaker platform built on the same platform as our existing high voltage devices in Europe in the second half of 2011 and the US in late 2011 or early 2012, depending upon final FDA requirements.

This new platform is intended to be the first in a series of low voltage radio launches over the next few years and represents our first new major technology introduction in this area in many years.

We recently received an expanded indication for Boston Scientific CRTD, based on the landmark MADIT CRT trial for high risk NYHA Class I and II patients with left bundle branch block morphology.

The opportunity to promote the use of our products in this patient population is unique to Boston Scientific, as the only Company with CRTDs approved the FDA for use in all NYHA classes of heart failure.

Our worldwide EP business was down 6% constant currency versus a year ago, due principally to product availability constraints with our Chilli II catheter line.

We are working to alleviate the product supply issues.

The expansion and development of BSE's global EP sales force and increasing market share of laser-based products are expected to be the drivers of growth in our EP business for the future.

We continue to see increased adoption of Blazer Prime in both the US and Europe, Blazer Prime is an improved version of the market leading Blazer Ablation Catheter and is designed to deliver enhanced performance, responsiveness, and durability.

We began the launch of the Blazer DX20 in Europe earlier this year, and feedback from physicians has been very similar to the positive responses we have received from US doctors.

We still anticipate the Blazer Open Irrigated Ablation Catheter approval in Europe as well as start of US clinical trials in the fourth quarter.

Turning now to cardiovascular, worldwide DES revenue of $365 million was at the top end of our guidance range and already included $59 million in revenue for PROMUS Element.

Outside the US, share continues to move from PROMUS to PROMUS Element in geographies where the Element product has been launched.

With the expected launch of PROMUS Element in the US and Japan in mid 2012, we will improve our DES gross margin performance and add some $0.10 of EPS to the bottom line on our annual basis.

Our worldwide DES market share of 37% was slightly down from last quarter, and was of course down some four points versus the third quarter of 2009.

While our mix continued to shift from TAXUS to PROMUS on a year to year basis, that shift has continued to slow since the first quarter.

The DES market was $992 million due to an increase in penetration rates from 63% to 66% and a 6% increase in PCIs, offset by weak ASPs compared to the year ago.

US penetration rates have been stable the last three quarters at 78%.

During the quarter, US DES pricing declined by a little less than 7% versus prior year, and a slight improvement over previous trends.

In the US, DES revenue of $199 million was at the top end of our guidance range, with share at 45% and mix having stabilized in the last few quarters as we continue to benefit from our two drug DES strategy.

We continue to expect to launch TAXUS Element in the US in mid 2011 and to launch PROMUS Element in mid 2012.

In EMEA, more than 90% of our revenue was in self manufactured product including more than 70% with our newest Element platform.

Late in the third quarter, we received PROMUS Element CE mark indication approval for use in patients with diabetes and those experiencing an acute myocardial infarction.

These additional approvals will contribute the positive momentum behind PROMUS Element in CE-mark countries.

We continue to be the European DES market share leader at 31%, including an estimated 20% share for PROMUS Element which has gained share in every quarter since its launch last year while facing the newest competitive technology entering the market.

We have launched PROMUS Element in much of EMEA and are leveraging the Platinum QCA clinical program results that were presented at TCT.

Looking forward, we plan to aggressively promote PROMUS Element as tenders arise in the fourth quarter and into next year, and are hopeful that the Platinum primary end point data to be presented at ACC next April will add to our market share story.

In Japan, while we lost market share through April and May, it appears our DES market share has stabilized compared to the second quarter at 35%.

The stabilization and pricing that we saw at the end of the second quarter has also contributed during the third quarter.

The Abbot RESET trial concluded earlier in the third quarter and we expect this to open more of the Japanese market for PROMUS Element into the fourth quarter.

We intend to leverage our two drug platform with expectations to gain share by the end of the year.

We continue to expect the lunch of TAXUS Element in Japan in late 2011, the early 2012 and PROMUS Element in mid 2012.

In late July, we began patient enrollment in the Evolve clinical trial, designed to assess the safety and performance of our fourth generation Synergy Coronary Stent, featuring a bioabsorbable polymer and a Everolimus drug formulation to create a thin uniform coating on the abluminal or outer surface of a platinum chromium alloy stent.

We are pleased with the trial that is currently enrolling ahead of schedule, demonstrating our commitment and the market's enthusiasm for this next generation stent platform.

We are pleased with our DES pipeline, which was also well represented of TCT.

Our Element platform had a strong presence, highlighted by the Platinum QCA and Perseus study results, Platinum QCA showed great clinical angiographic and particularly stent apposition results out to nine months for PROMUS Element, demonstrating our ability to transfer the leading drug polymer combination to our new Platinum chromium stent platform.

The Perseus diabetes subset, once again highlighted Paclitaxel's proven consistent performance across all patients regardless of diabetic status.

That consistent performance has now been demonstrated on the new Element platform.

Also in TCT, the TAXUS Atlas clinical program underscored long term TAXUS Liberte results, demonstrating significant TLR reductions in small vessels and MI reductions in long lesions out to four years.

TAXUS atlas also demonstrated low overall event rates out to five years in work horse lesions.

The Syntax three year data presented at TCT again demonstrated the favorable outcomes of PCI with TAXUS stents compared with coronary artery bypass graph surgery in the most complex patients, Those with left main disease.

Boston Scientific is proud to have funded the Syntax trial which has resulted in the upgrading of PCI for the treatment of left main disease in both ACCHA and the EEFC revascularization guidelines.

Finally, we are pleased that our PROMUS stent performed so well after two years in the cOmpare All Comers trial as well as the Spirit 4 trial.

Additionally TAXUS Liberte and PROMUS performed consistently in a challenging diabetic population.

Turning to our other CV product lines, our worldwide non-stent IC core business was down 5% in constant currency from the third quarter of 2009.

This decline is attributed mostly to PTCA balloon price erosion; however, we maintained our US worldwide PTCA balloon leadership positions with 57% and 35% respectively.

The launch of the NC Quantum APEX post-dilatation balloon catheter continues to receive outstanding reviews from our customers in the US, Europe and other CE mark countries.

We believe our new balloon products should result in year-end balloon market share gains in the mid single digits.

The phased launch of our Kinetix Guidewire in the US, Europe and Japan is ongoing and the enthusiasm for this revolutionary new technology has been very strong.

In our peripheral interventions business, we continue to be excited about our number one worldwide market position.

Our ability to produce 2% constant revenue growth compared to the third quarter of 2009 is encouraging.

We are particularly pleased with our international growth of 5% during the quarter.

We will monitor the procedural and ASP trends from the US and European markets and are confident in our ability to leverage new product launches into growth in both US and international markets.

We continue to build on our global position with successful launches of our new technologies worldwide.

Our international stent franchise is clearly gaining momentum with new product launches, and we're adding incremental share as a result of our new stent approvals earlier in the year.

We also solidified our number one position in balloon expandable stents in the US.

We launched the Sterling SL balloon in both the US and Europe during the second quarter, filling a gap in our PTA portfolio, and bolstering our overall PTA balloon growth.

In the interventional oncology product segment, we launched our Renegade high flow kits last quarter, helping stabilize our interventional oncology franchise.

Lastly, we began a limited launch of Journey 0.014 BTK Guidewire in September, and announced the global launch just last week.

We are making excellent progress with our major new product initiatives.

In particular our next generation SFA stent, NOVA and our next generation PTA balloons are scheduled for launch in 2011.

We expect these to be foundational to our PI growth story in 2011 and will provide status updates as appropriate during coming calls.

In a highly competitive environment, our Neurovascular business recorded softer results this quarter and declined 8% in constant currency, compared to the third quarter of last year, while maintaining its global leadership in every franchise.

Sales were negatively impacted by a sales return reserve recorded in connection with the field action initiated at the end of the quarter with respect to some selective lots of our Matrix product.

The probability of patient injury is remote, the financial implications de minimus, and although there may be a back quarters related to mix we expect little disruption to service with more than eight months of good inventory available.

During the quarter, we continued the launch of our Neuroform EZ adjunctive stent in both Europe and the US and continue to receive positive feedback from physicians.

In the third quarter, total Neuroform stent system sales in the US and Europe were up 34% compared to the third quarter of last year, and 24% versus the second quarter of this year.

We are looking forward to expanding our Neuroform EZ offering into other regions in the coming months.

Our Guidewire business experienced softer results this quarter and was up only 3% compared to last year, and this was largely the result of a continued back order situation experienced at the end of the second quarter, with our market leading Synchro wires.

Production ramp up will be completed shortly and we expect to be out of back order by the end of the fourth quarter.

Our catheter business, excluding Flow Directed and Guide Catheters grew 2%, driven by strong sales of our Excelsior XL10 microcatheter and our Neuro Renegade high flow catheter used in conjunction with Neurostorm EZ stent delivery systems.

Our ICAD, intracranial atherosclerotic disease, business posted another quarter of solid sales with 6% worldwide growth driven by solid sales in the US and continued strong growth in Brazil, Korea and China.

The NIH-sponsored Wingspan stent system and Gateway PTA balloon catheter Sampras trial continues to effectively enroll patients ahead of schedule.

Under significant pressure from our multiple competitive coil and stent launches, our detachable coil business was, as expected, down 11% compared to the third quarter of last year, however we continue to maintain coil market share leadership.

I'm very pleased to announce that just yesterday, we received FDA approval for our new Target coil.

This approval is in addition to our recently received CE mark and Health Canada approvals.

We will begin first human use in early November, followed by a phased launch of this exciting new product.

Our Endoscopy business continued to have solid growth in the third quarter, posting 4% worldwide growth, with 2% growth in the US and 6% growth internationally.

The Endo business again saw steady growth in its metal stent franchise, recording a 5% increase worldwide.

This performance is lead by biliary and esophageal stent product lines with continued market acceptance of the WallFlex product offering.

Worldwide growth of 4% was also recorded in our biliary device franchise, supported by our growth in access products.

The hemostasis franchise experienced significant growth of 12% on the continued adoption and utilization of the Resolution Clip technology.

During the quarter, the Endo business launched new products in support of our biliary, internal feeding and tissue acquisition franchises.

We plan to commercialize additional devices in the biliary franchise during the fourth quarter.

As previously announced on September 20, we signed a definitive merger agreement to acquire Asthmatx, Inc.

The Asthmatx business will become part of the Endoscopy business, the Asthmatx technology strengthens our current offering of pulmonary devices and will contribute to the overall growth and diversification of our Endoscopy division.

This acquisition represents an important step in the execution of our strategy to realign Boston Scientific's portfolio.

The deal will close upon approvals from the necessary regulatory authorities, and satisfaction of customary closing conditions.

This process is expected to be completed in the fourth quarter, I'll comment further on the Asthmatx transaction shortly.

Urology and Women's Health delivered another good quarter with constant currency growth of 6%, including a one percentage point benefit from the Prolieve recall and the market withdrawal of our biopsy products last year.

Our international business continued to gain momentum, growing double digits in both Japan and EMEA.

Our urology business expanded its leadership position and delivered worldwide growth of 8%.

Our Women's Health business was essentially flat in the third quarter mainly due to softness in elective procedures.

Procedural volumes in the US have been negatively impacted as a result of high unemployment rate and decrease in the number offer unemployed covered under Cobra benefits.

Additionally, competitive launch activity in both slings and pelvic floor repair lowered our growth as hospitals initiated the normal product evaluations.

Internationally, we enjoyed 24% growth in Women's Health driven by new product introductions, increased sales investments and penetration into new markets.

In the fourth quarter of 2010, we will expand the global rollout of our recently approved next generation Genesis HTA system for the treatment of abnormal uterine bleeding.

We believe the significant enhanced user interface and ease-of-use of the Genesis system will enable the business to grow its share of the $400 million worldwide abnormal uterine bleeding market.

In our neuromodulation business, the third quarter marked the launch of two new widely spaced SCS percutaneous leads.

Between the two new leads splitters launched last quarter and the two new widely spaced leads launched this quarter, we now offer our customers more lead spacing options than any other Company in the SCS space.

We're experiencing fast adoption of these new leads and splitters, and are already seeing them helping us gain market share within competitive customer accounts.

Permanent procedure volumes grew 11% in the quarter, due in part to the impact of our new product launches capturing market share and the market itself catching up as procedures delayed in the first and second quarter are realized in the third and fourth quarters of the year.

Looking forward, our focus, as always, will be on continued excellent sales execution and making the most of our differentiated product technology and now newly expanded lead portfolio.

We're also excited about our Vantage deep brain stimulation trial in Europe for Parkinson's Disease.

First patient enrollment is expected within the quarter, and we look forward to entering this new area of stimulation for Boston Scientific with our Precise deep brain stimulation system.

I'll finish with some overall perspective on the quarter, what we liked, what we didn't like and two hot topics.

Let me start with what we liked.

Number one, we liked our adjusted EPS of $0.19.

It far exceeded the high end of our guidance range, and we were very pleased with that result.

And particularly pleased with our expense discipline.

Although the timing of some expenses did play a role, we controlled spending very well throughout the organization, and it was a major factor in turning in such a strong number.

We also got some help from our gross margins which were better than expected, and some help from the release of tax reserves as well as ongoing sustainable improvements to our ETR.

We particularly like the $0.12 of GAAP earnings, and the nearly $300 million favorable improvement to prior year third quarter GAAP net profit results.

We liked our leading US DES market share of 45%.

It was further evidence of the remarkable durability and consistency of our DES franchise, which continued to hold the top position worldwide as well.

We also like the ongoing strong performance of PROMUS Element in EMEA, which continued to take share, PROMUS Element gained share in EMEA every quarter since it was launch last year while competing against the launches of competitors newest stent technology.

We liked that PROMUS Element received an expanded indication in CE mark countries for the treatment of diabetic and heart attack patients.

We also liked the Platinum QCA Clinical Trial Results, presented at TCT supporting the performance of PROMUS Element and the successful transfer of the Everolimus drug and polymer combination for highly effective platinum chromium platform.

Number three, we are very pleased to receive an expanded indication for CRTDs, based on the landmark MADIT CRT trial for high risk New York Heart Association class one and two patients with left bundle branch block morphology.

The opportunity to promote the use of our products in this patient population is unique to Boston Scientific as the only Company with CRTD is approved for use in all NYHA classes of heart failure.

While we were all only about a month into having this indication, there has been a lot of momentum in the field with MADIT CRT, and customers have been enthusiastic about the indication and updated data from the trial.

We believe we have the ideal solution for NYHA class one and two patients because physicians intervene earlier with CRTDs to slow the progression of heart failure.

We also believe the small size and battery longevity may become more important in device selection.

Based on the patient populations approved, we believe the market impact estimates for the narrower LBBB MADIT CRT population are $150 million to $175 million in the US and $250 million to $350 million worldwide over the next few years.

We believe there's possible upside to these estimates since left bundle branch block is a strong objective discriminator that can be used to reliably identify patients who are most likely to benefit from CRTD therapy.

MADIT CRT has simplified the screening process, enabling clinicians to easily identify these patients using an ACG analysis to screen for wide QRS and LBBB.

Women received a greater benefit then men in MADIT CRT, which could lead to greater use among female patients who have historically been underrepresented in receiving CRTV therapy.

Number four.

We liked how we continued to recover from the ICD ship hold driven by the superb execution of our commercial team.

With our third quarter share estimated at 26%, we're doing better than we had originally hoped, and while our share was down year-over-year, we were encouraged by the continued positive response from our customers this quarter.

Fifth, we liked we've now resolved all issues cited in our corporate warning letter.

This represents a major milestone in our quality journey, and also completes our journey from remediation to innovation, allowing us to focus our full attention and resources on developing new products for our customers and their patients.

Our current quality systems may prove to be a substantial competitive advantage in the coming years.

Let me switch now to what we didn't like.

We didn't like our lack of growth, and we didn't like the ongoing pricing pressure we are seeing in virtually all our key markets.

Pricing pressure has been a persistent problem recently, and is exacerbated this quarter by reimbursement decisions in a number of countries that lead to greater pressure on prices.

Number two, we didn't like the effect of the weak economy on elective procedures.

Volumes were down again this quarter and there's no doubt the economy played a role.

We are just completing a major internal study of elective versus non-elective served market procedural change.

Number three, we didn't like our non-DES interventional cardiology PI and EP businesses performed lower expectations.

We have initiated corrective actions but at this point they are painfully slow and coming.

Let me switch to hot topics.

I'll close with a couple of hot topics.

Hot topic number one is our committment to emerging markets.

Emerging markets, particularly China and India, are driving global growth and offer considerable opportunities for Boston Scientific.

We are well positioned to take advantage of these opportunities in a number of ways.

For example, by increasing the size of global markets and reaching to patients, by increasing market share to fuel profitable growth and by gaining access to global talent, technology and resources.

To take advantage of these opportunities, we have implemented an emerging markets initiative as part of our corporate strategy.

Our emerging market initiative has four key areas of focus, commercial, business development, manufacturing, and productivity.

Each area provides us with significant unique opportunities to expand and accelerate profitable growth, while at the same time, improving the scope and quality of global patient care.

We are excited about the potential that emerging markets present, and are investing some $30 million to $40 million in planning and people to execute our initiatives.

In recent weeks, we have had more than 30 BSC staff on the ground in India working on our plan.

During the quarter, India sales increased 34% to prior year.

We look forward to discussing emerging markets with you in more detail at our Investor Day next month.

Hot topic number two is our plan to acquire Asthmatx and its FDA approved bronchial thermal plastic technology, the first device-based asthma treatment approved by the FDA.

This acquisition is right in line with the type of acquisition I previously described, as critical to our strategic plan.

The deal is the right size, the right product, and the right market, all at the right time.

The Asthmatx business will report into our Endoscopy business which already calls on pulmonologists and has a leadership position in bronchial stent devices including stents, balloons and biopsy tools.

This acquisition expands our footprint for managing lung cancer into a large new potential market, that of severe drug refractory asthma treatment.

The unmet need is immense with more than 2 million potential patients in the US and 8 million worldwide.

The economic story is compelling, and in the pivotal trial, treated patients saw an 84% reduction in hospitalizations post-treatment and the technology, a basket catheter and RF energy, that's familiar to us and sold in other forms within Endoscopy today.

The acquisition of Asthmatx represents an important first step in realigning our portfolio to pursue growth opportunities in new areas of less invasive devices and therapies that address unmet patient needs.

We will continue to pursue additional priority growth initiatives to strengthen the Company by buying or building products we understand, to be sold through sales forces we already have, but products from these acquisitions and internal developments will be least or less invasive, cost and comparably effective, and when possible reduce or eliminate refractory drug use, and this one simple paragraph we provided a clear pathway to the delivery of our strategic plan.

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

Thank you, Ray.

At this time, Lois, we would like to open it up to questions and I'd like to remind everybody that in an effort to enable us to field as many questions as possible, we ask that you limit yourself to one question and a follow-up.

And if you have additional questions, please get back in line.

Again, I remind you that Ray and Jeff will be joined during the Q & A session by Sam and several of the business leaders, along with Dr.

Dawkins and Dr.

Stein.

Lois, please go ahead.

(Operator Instructions).

Our first question comes from the line of Mike Weinstein with JPMorgan.

Your line is now open.

Thank you.

Good evening.

Hope you guys are doing well.

Hi, Mike.

Let me start, Ray with the non-CRM non-DES businesses, and I think what I'd appreciate and I'm sure you'll talk more about this on the 19th, is the challenge of getting those businesses growing again, and right now you're facing some of those markets, slower procedure growth but in aggregate those businesses haven't been growing for the Company for quite some time, and I was wondering if you could just give us a minute or two here on what you see in the near to intermediate term pipeline or in the outlook for those markets that might actually return you to position the growth that might regardless of whatever happens in CRM and DES driving acceleration for the Company.

Thanks.

Yes, Mike.

I think it's two answers and I'm going to let some of our folks jump in if you want additional color but I would argue that it's really two things.

It's new products which we have substantial number in the pipeline although we've been slow at getting some of those out in terms of our own target dates and its targeted acquisition similar to Asthmatx and that's true if I look at PI, non-core, certainly if I look at Women's Health and Urology, there's a number of opportunities there, but the fundamental basis for that is to offset somewhat softened elective procedures with new products and targeted acquisitions so I'll ask and I'll do by name just to bring up not target acquisitions obviously, but stay with new products but bring up a few new products, Jill if you want to give a little talk on PI for just not too long here, we'll keep it brief.

Sure.

Thanks, Ray.

Mike, in the PI franchise we've had several new product launches, I recall minor product launches in 2010.

We have approximately five moderate or heavy product launches in 2011, a new line of PTA balloons, our SFA stent balloons in the US markets mid to next year.

Those will really help us drive growth in the PI franchise.

In the EP space, we plan as we said in the script to launch our open irrigated catheter outside the United States and to begin a clinical trial in the United States.

That is a long awaited project that is essentially complete and just need to push some things across the go line from a regulatory standpoint and in our neuro business, as you know, the launch of our Target detachable coil was delayed this year.

As Ray mentioned we have 5-10K approval.

Recently I believe yesterday and will begin a limited lease and getting into full launch by the end of Q1 2011, so each of those three businesses have suffered from a lack of new products and we are pretty satisfied with the line up that we have in the next 15 months.

I'll ask John to do the same on Urology and Women's Health and then Mike on Endoscopy.

Yes just remember in the Urology Women's Health business we are growing at 6% constant currency and we look forward to continued rollout of our Genesis HTA technology.

This technology addresses the $400 million abnormal uterine bleeding market of which we have about 9% to 10%.

The Genesis HTA technology represents a five year investment and completely changing the ease-of-user interaction with the system and we believe this represents a significant opportunity for us to gain share over the next 18 to 24 months.

Okay and Mike?

Sure.

Similar to both Joe and John, the Endoscopy division, obviously we're looking forward to the Asthmatx opportunity.

We think that's a big market compelling and everything that was mentioned on the call fits our strategic plan beautifully, but we're also going to be introducing the number of new products in areas of our product portfolio that we do not compete, and the Endoscopy business enjoys about 50% worldwide share of the device business and greater than 70% share in the US so we're going to be entering into some segments that we do not have technology and we expect to take significant share from the competitors, so we really like our portfolio line up going into 2011.

And then lastly, Michael, I think I covered yours but if you want to chip in at the end of it, please do so.

This is Mike Onuscheck.

So the neuromod business obviously we just released four new products, so we're excited about actually opening up our portfolio which we've been held back a bit on, because of quality issues that we were trying to resolve here.

All of that is behind us, and we've got a pipeline that is fairly impressive and we're really excited about getting out there and starting the clinical trial and deep brain stimulation with the Precise system and getting into some new indications to enable this business to stand on its own two feet and drive valuation for Boston Scientific.

And then lastly, Mike before we go to the next caller, the other thing you will all see on the 19th is a very strong description of how we're shifting R&D spending pretty dramatically, and I'd commented on this publicly before, where the things we believe in for the future will only be invested about 6% of total R&D spending and we have a planned shift which is taking place as we speak.

That's going to move that to ultimately to about $250 million to $300 million a year in growth initiatives so if you combine ongoing shift of R&D to growth initiatives, new product line up we have right now which is in excess of 50 new products, corporately 30 of them in CRV, and then a commitment to make intelligent acquisitions, I think that does a lot to get us there.

Great, can I ask one follow-up?

Sure.

This is probably for Jeff.

I just wanted to focus on cash flows for a second and maybe just Jeff could you give us an update on your thoughts and some of the potential outstanding cash out flow items such as the government investigations and the tax reserve disputes on guidance transfer pricing?

Sure, Mike.

So if you look at the remainder this year, we have two medium size obligations.

One is the Minnesota DOJ payment that we accrued for, that's about $296 million.

We anticipate that we will pay that in the fourth quarter.

The second of the obligations is the up front payment related to the Asthmatx acquisition of about $193 million.

We anticipate that will close in the next week or two and we will fund that, so we'll need roughly $500 million of cash for both of those items.

We finished the quarter with $600 million and we expect to have a very strong cash flow quarter in the fourth quarter so we expect that cash flow to more than cover those obligations.

Then as you look into next year, there really are only two obligations.

One is the $250 million bond that's due in January 2011.

The other is a $600 million bond due in June 2011, so we expect to use the remainder of cash on hand plus the free cash flow from the business as well as potentially a piece of the revolver to retire that debt and I think that will put us in pretty good position as we look forward.

Great.

Thank you.

Thank you.

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

Your line is open.

Good afternoon, Ray.

A couple questions.

First, you talked about I think your portfolio realignment and obviously starting off in a very exciting way with Asthmatx.

Can you just give us or expand your comments, share your latest thoughts on both the coming in and going outside?

There's been a lot of speculation about what you might divest and on the coming inside, are we likely to see an accelerated flow of similar Asthmatx-like transactions?

Yes, obviously you know I won't comment on outflow obviously but on the in flow side, it's going to be how I described it.

While we're sitting here doing this we've got a lot of BSC folks working on deals, deal assessment, product technology assessment, due diligence in various forms and so on and that's going to be in the areas that we've described in the past of hypertension, obesity, diabetes, structured heart, in a couple of different segments of structured heart just to name a few.

There's actually 12 initiatives and we'll take you through this in as great of detail as we possibly can on November 19th, and they are going to follow that.

I hate repeating my paragraphs because I'm driving everybody here crazy with it I'm sure, but it's going to follow that pattern of that paragraph I described at the end of my formal comments in terms of staying with stuff we know.

We need to leverage existing sales forces because that's how we're going to get leverage on the top and leverage in earnings.

We're pretty good at doing things less invasively.

We'll put a lot more effort into cost effectiveness and comparative effectiveness and we have a real interesting intensity as you look at those target areas around the ability to reduce or perhaps even in some cases eliminate refractory drug use.

If you think of those in combination and marry that into device solutions, much of which we hope will at times at least be outpatient, not necessarily all inpatient, it gives you a pretty good look at the areas we're going into, and then the other things that Jeff and I have commented on before is of course emerging markets and OUS distribution expansion.

We are not in as many places and not as big in many places as we should be.

If we execute all that really well that's what's in the strat plan, if we execute that all really well this will be a very very different Company than it is today and as you can tell we're starting the process today.

Exactly.

If I could follow-up on the DES side, shares clearly stabilizing in DES as you said, making a lot of progress internationally.

Seems like a lot of pipeline products.

I'm assuming your expectation is for building on that share going to the next six to 12 months we'll hear more later but can you, how big a risk do you think is the price pressure that you're talking about, down 8% ASPs?

Can you talk to us a little bit about your assumptions and how concerned you are that price pressure accelerates, sort of offsetting possibly the benefits of the share gains?

Yes, I'll let Hank jump in at the end of this as well but I think again, I'll go to the strat plan.

We view continuing DES price decline as inevitable, not necessarily at the rates it's at today as you have more players in place, although the qualifier I'd put on that, Rick and as you know, we've done a good pipeline.

We're going to show you more about that.

We're hugely excited about Synergy and how it plays out and the qualifier I'll put on before Hank jumps in is we may not see as many competitors in the US as perhaps we've anticipated in our strategic plan because of the regulatory dollars and technical challenges that some of the companies are facing and in some cases, that's a couple of real big companies that are very capable, so I don't want to see lower prices.

I think we will but this is the kind of business that if you got enough share in it, it surely is profitable.

Hank, did you want to add comments?

I would agree with that obviously.

Rick, as you know, the worldwide market is roughly about $4 billion a day and as we project out into the future, if you factor in ASP decline which we think will be present and at prevailing rates, let's say, for the most part, but if you offset that with what we predict to be volume increases and penetration, we are basically forecasting a flat market and with the pipeline that we have lined up here over the next several years, obviously our plans are to increase and solidify our current worldwide share positions within that market.

Thank you very much.

Okay.

Thank you.

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

Your line is now open.

Good afternoon.

Thanks for taking the call.

First, let me start on the pacemaker market.

The growth rate there seems to be softening.

Can you talk a little bit about what's going on in that market?

Thanks.

Yes, I'll let Ken Stein and Hank jump in but I think our view of that market at this point in time is it's a pretty flat marketplace and in our specific case, we haven't had substantial new technology in years and years and years, so I think that it's one of those views, that we're already in it.

There aren't a lot of people in it by large numbers.

We've got new technology coming including wireless and some of the size and design and capabilities that you saw on the high voltage, and I think our view is, is it a great fast growing marketplace in the broad context?

No.

Is it an opportunity for us to take share and very profitable share with new technology?

I would say yes, absolutely if we deliver and execute on the plan.

Ken, did you want to make a few comments?

Yes, Larry.

I would say on the following, I think the pacemaker market is a mature market.

We aren't expecting any novel changes in indication so the growth that you see in the market would be primarily driven by demographic changes as Ray said we have some new technology.

We have a plan for an RS telemetry pacemaker that's on track.

We do expect to launch that in the next year, but fundamentally, I don't expect any growth in this other than what you get just from a general reagent population.

And then on the ICD side, if I add back the $28 million for the ship hold in the third quarter, it gives you about $308 million down about 2% year-over-year.

What does that say about the market?

Am I looking at that wrong?

Was there other reasons why you would have expected to be down 2%?

Thanks.

Yes, I haven't done the numbers that way but I'll take your word on the math, Larry.

I think you got to look at a couple of different things.

First of all we think that US market is pretty flat to even slightly down, I'm talking about dollar market now, not unit market and in our specific case, as you pointed out, you add back the ship hold, we've got slightly higher price pressure than we've seen in the past although not different from what we've been seeing for a few months so I font want to be seen as being perceived as incremental, it's not.

And then keep in mind we took substantial losses at our own discretion because of our decision around the HCP ethics issues and number of people we let go so we have reduced our own share willingly and knowingly by making those decisions and we're happy with that.

Would I like to be growing, sure, but we aren't going to change the decisions we've made.

Thank you.

Okay.

Our next question comes from the line of David Lewis with Morgan Stanley.

Your line is now open.

Good afternoon.

Hi David.

Jeff, real quick modeling question for the fourth quarter.

The R&D guidance for the year implies a pretty substantial step up above first quarter levels.

Is there something we're missing, conservatism or specific spending plans in the fourth quarter that are going to flow through the P&L?

Well David, I think you'll see a couple things.

One, part of the underrun in the third quarter was due to the timing of certain programs being closed down and a bit of a time gap between other programs being started up and there were clinical trials that started a little bit slower than we thought and of course we assume the Asthmatx acquisition will close in the next week or two, and we'll have R&D associated with that so there will be a step up in the R&D sequentially from the third and fourth quarter that will get us close to where the guidance currently sits.

Ray you've talked a lot about the procedural pressure as have all of your peers.

Do you have a sense of on a corporate basis what do you think the impact from procedure weakness has been in Boston and which particular areas do you think about more economically affected than others?

I don't have that yet but actually, David that's why we initiated the internal study that we started several weeks ago and we'll be getting data points back, I forget what the target date is now, but I think it's coming up in October for when we get a first look at that and we're subdividing it by product type, we're subdividing by elective versus non-elective so I don't have a dollar comment to make to you.

I would say that PI and neuromod seem to be most affected by that, and of course when the government put through legislation for extension of unemployment benefits, they did not extend the Cobra coverage portion of that so we saw sort of this inability to recover quickly from that as well, so I think I'll make the commitment now under the assumption we can get all of the work done but by the time we do our next report to you we'll either report that out on November 19th if we can get it together in time for the investor or certainly at our next earnings call we'll give you a glimpse into the actual work we've done here on the study and see what the answers are.

Ray, just related on pricing and I'll jump back in queue, is it safe to assume you feel pricing sequentially was relatively the same across the Corporation or was there a sequential weakness as a total Corporation?

No, I would say the answer is the same and I think what happened is we try to get out information on price as a communication and people love you or hate you for that, but I think we got out there a long time ago now, saying here is what we're seeing, it hasn't changed from what we saw some months ago.

It has not gotten worse, but I think what's happening is as more companies come out and confirm that, it makes it sound worse than it is when in reality for us, it's a confirmation of what we already saw.

Great.

Very clear.

Thank you very much.

Okay.

Thank you.

Our next question comes from the line of Glenn Novarro with RBC Capital Markets.

Your line is now open.

Thanks.

A couple just follow-up questions on ICDs.

One, Ray, you guys were the first to say ICD pricing was getting worse and I believe that was either on the Q1 or Q2 call.

Can you just remind me, I think you said US and globally, ICD pricing was down more in the 3% to 5% versus 2% to 3%.

Is that still accurate question one.

Two, sounds like the sales force on the ICD side is stable.

Any plans to increase that sales force?

And then last question is when you look back to the Guidant days, you had the big recalls all hit in 2005.

Should we be assuming that starting next year we see the beginning of a replacement cycle for you?

Thanks.

Let me take those one at a time.

No change.

You're pretty close on the pricing.

This marketplace for ICD has had a long history in that 2% to 3% range and you're right, quarter one, quarter two we've been saying we see that going to 3% to 4%, not 3% to 4%, but 3% to 5%, and we haven't seen that worsening or different from when we first said that, so we don't see any degeneration in it.

We have a substantial number of sales force openings in Europe, particularly where we will expand the sales force.

We have some related to the steps we took on HCP ethics and various other things or people being unhappy with putting CRV together, or unhappy with the ship hold.

The things we've talked about in the past, there's nothing new there.

There's no extended turnover and we plan to at a minimum fill those back up and in the case of Europe probably do some expansion.

Remind me, give me the third one again?

The last one was about a replacement cycle.

Oh, replacement cycle sorry.

Yes, I think from our viewpoint, as you look at those really difficult times in the Guidant days when those situations did occur and you recognize the fact that replacement cycle now is highly dedicated to those who put in the de novo, I don't see any change in that.

I think that's the history of the marketplace so we look at it from a dollar point of view in saying are we stunned a little by that as we go through this period?

Yes, because you're not going to get those that came from the recall.

Do we end up with a new replacement cycle now post-recall?

The answer is yes to the extent that this cycle fills in from a replacement point of view, battery point of view and other things, but the other thing we look at, if there's any downside risk to it I think that it's far offset upside by MADIT CRT and the opportunity to market those products from a higher price, so from a dollar point of view, might we be heading into a bit better replacement I think so but if not I'll take the $5,000 or $6,000 or $7,000 of markup dollar value to offset it through MADIT.

Okay, great.

Thanks guys.

Thank you.

Our next question comes from the line of David Roman with Goldman Sachs.

Your line is now open.

Good evening, everyone.

Thank you for taking the questions.

Jeff, in your prepared remarks on neuromodulation you talked a little bit about increased utilization associated with people using up their deductible for the end of the year.

I think on last quarter's call you talked about reimbursement pressure and increased scrutiny from payers in that therapeutic category but we did see a very nice bounce back in that business for you up against what were actually tougher comps in Q3 in the United States.

Could you maybe talk about whether you're seeing change on the payer front there and what the positive impact of new products was in that business?

Go ahead.

Do you want to answer that first part?

Yes, so as we look at kind of how the quarter transpired, we were very pleased with what happened from a demand perspective.

In fact, if you look at the transition between the months, we actually finished September even stronger from a trialing perspective, so clearly, I think historically maybe Michael Onuscheck will comment as well.

Historically it's not unusual to see a pattern where the back half of the year is people's deductibles and the like expire that there's a pick up in the business and seeing that in a pretty strong way.

Michael, if you want to -- obviously we don't give line item sales information on new products, but if you want to give some commentary of a qualitative nature on the new products and a comment on regulatory as well if you like?

Sure.

Well I think the first part goes to the regulatory pathway.

We actually got to perfect all of this product a little earlier than what we anticipated in our plan.

The devices put us nicely up against both St.

Jude and Medtronic in terms of competitive portfolio.

We now have the largest percutaneous lead portfolio in the marketplace, and allows us to go directly and compete with those folks.

When we look at how the break down comes in, about 47% of those customers who have used this product were our customers.

That means that 53% of them were either splitting business with us and the competitor or were direct competitive customers, so we believe that this was a really smart move on our part to get these products into the marketplace, and it's given us a great deal of tail wind going into the fourth quarter.

That is very helpful on that, and then Ray, maybe you could talk a little bit more about the CRV strategy.

You specifically noted 100 contracts that you've won as a result of this new approach to selling.

One of your competitors is certainly pursuing something similar although doesn't appear to have had the same degree of success that you've had to date.

Can you maybe just talk about what you think you're doing differently and what the response has been on the other side from the customer perspective, and working with you on sort of a more coordinated effort across therapeutic categories?

Yes, I'm going to, Hank and I just did that for over 5,000 people at the Minneapolis Convention Center so I did the corporate plan, he did CRV value proposition, and I'll let him talk to that because I think it's a great story and the only thing I'll preface it with before Hank takes over, is I've told people many many times when I joined the Company, I ran our products across the top of a piece of legal paper in the CV, CRM, PI et cetera areas and I ran our name and our competitors down the right hand side and I started putting check marks in, and one of the reasons that Hank and I arrived at the strategy is we simply have more check marks of stuff that has number one and number two positions worldwide than anybody else, but Hank, why don't you jump in and talk successes recently, why that's happening, how we might compare a bit, value proposition just for a minute or so here.

David, I think it boils down to basically breadth and quality of our cardiovascular service, offering coupled with execution.

Ray mentioned kind of the number one and number two share position point.

If you put yourself in the shoes of a cardiovascular administrator in a healthcare system or an IEM, they want to make sure that in terms of physician choice, they have physician preference items, so if you look along and across the breadth of our entire line, we enjoy a very strong either number one or number two position in most of the product franchises that we offer, and then at the end of the day you don't have those share positions.

You don't earn those share positions unless you have physician trust, so that I think is point number one.

Point number two, if you look at the execution side, and I know I'm biased, but I think we have a very very strong sales execution and marketing team, commercial team and I think when you couple the strength of the breadth of our offering with the potential to be a "one stop shop" type concept for primary vendor on type of relationship, plus the execution strength of our distribution channel, I think that's why we are seeing the success we are seeing today.

I can't speculate on what our competition is doing and their success or lack of but I can and feel very strongly about the execution success of our commercial team.

Let me just add quickly to that because it's in the script anyway.

Our hit ratio if you will, we won't disclose the names of places but our hit ratio is about 4 to 1 right now so every time we go after this value proposition we win four, lose one and that's a hit rate.

We're excited about it.

The other part I would add is coming in somewhat over a year ago as an outsider, the biggest one of the biggest mistakes I honestly believe this Corporation made was not immediately integrating Guidant into the organization and putting together CRV three or four years ago because I think the powerhouse capability it has as Hank pointed out, on cardiovascular service line and continuum of care for the patient and in the world we're going into of consolidated hospitals, physicians as employees, profit-sharing and game sharing I think we line up so nicely into servicing that it's terrific, but we're doing the guided integration now, we're doing it well but we should have done it three to four years ago.

Okay.

Appreciate all of the detail.

Thank you.

Yes.

Thank you.

Our next question comes from the line of Kristen Stewart with Deutsche Bank.

The line is now open.

Hi.

Thanks for taking the question.

Just as a follow-up to that one, when you're going in, the value proposition that you're offering is it just simply a matter of price across the whole portfolio, are you unbundling the service components, how are the conversations evolving in terms of price versus service and what not?

Hank, do you want to do that?

Well since I'm sure we have a lot of competition on the line I'm not going to get too specific on how we address that.

But it's just not a product bundle.

Think of it as also a service, educational, therapeutic, educational coupled with full line of cardiovascular products that we're bringing to a healthcare system in working with them in a collaborative way to help them address some of their operating margin pressure with the services and products that we are able to bring to them.

I think too, Kristen, one of the things you have to remember too is this has been tried occasionally in the past during different periods in the medical device world over the last 25 or 30 years.

The reason it hasn't worked among other things is that a lot of the companies had some star products but they had some dog products.

They were in number one, number two shares and some five and six shares and they kept trying to drag the five and six shares into institutions along with the ones and twos and it didn't work because physicians said, I'm not going to buy into that theory.

As Hank pointed out, and as we've said many times if you look at the number of one and two share positions we have worldwide breadth of offering, all of a sudden you're bringing in a lot of stars combined together with us, as Hank pointed out, a combination of services and additional value propositions.

It's a very different approach than at least I've ever seen in the past.

And just to clarify on the commentary you're making earlier about ICD ASPs, are those pure selling price or does that also include the mix component of switching up to CRTD, because I know in DES, it's pure price.

I want to make sure we're talking pure price here.

I'm so glad you asked that question because my favorite report at my prior employer, which I insist on Mr.

Leno putting together for me, was very very sophisticated and well defined price, pure price, volume, pure volume, and mix and unfortunately, Mr.

Capello has had abuse for a year, although he has delivered on the report in more recent times, and we now have exactly that and I really believe at least in some cases what you're hearing out there is volume and then people that are combining price and mix because the systems are not sufficiently sophisticated to separate.

So yours just again is pure price?

Pure price.

Perfect and just last real quick one.

For PROMUS Element just in terms of the trial I know it's going to be presented in April, do you have to have with the FDA, I think it's like a minimum of a thousand patients with two year data.

Is that a requirement and when will you meet that kind of timeline?

I think the answer is no but I'll let Dr.

Dawkins answer that.

No it isn't, but I don't think we'll go into details for what we have to do with the FDA.

So you don't have to have that requirement of the us to?

The answer is no but he's unwilling to give you more I'm sitting here with him so I can watch his facial expression.

You aren't going to get anything more out of him, trust me.

Okay, I tried.

Have a good night.

Thank you.

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

Your line is now open.

Thank you very much for taking my question.

Specifically, in the last quarter, neuromodulation sales were weaker, and at that stage we were thinking you may be selling the business and therefore it might be a tougher sale versus your competitors.

This quarter it seems to have bounced back.

Some new products might seem to be there.

Is that the right read or should we read something else into that sequential bounce?

Well I'll front it a little bit and then let Michael answer the question obviously, because he's very close to the marketplace but I think as Jeff commented, there's some Cobra-elective fee-related things early in the year in the movement to the second part.

In terms of divestitures, while I wouldn't comment obviously on any division, the rumor that was out there does, I'm sure and Michael can comment is does affect the viewpoint of physicians and it doesn't help you.

Whether it's true or not is a different subject, but the fact matters the existence of the rumor can help deter, because keep in mind unlike a stent or some of the other products we sell and similar to ICD, this is where we're with patients for a lifetime, so therefore the stability where you're going and who you're with and all that stuff is meaningful.

Michael, do you want to comment on the marketplace and the improvement in it and what's going on?

The thing that these patients always forget, and you got to remember the patient population that we're serving is not a financially stable population, they always believe that they are going to escape their co-pay throughout the year and they aren't going to experience a large out of pocket cost.

The reality is that this is a chronic disease, it's managed by Pharmaceuticals and at some point they meet their co-pay deductible, and they make the decision.

Well if I've already gone this far, I might as well finish out the year, and that's why we always see this very steep tail end at the back half of the year.

We're experiencing that again.

We predicted that before.

That doesn't account for what we saw in the second quarter, which was the softness and I think Ray, you pretty eloquently described.

Any time there's a rumor in the marketplace, especially in an active implantable business where the Company, the physician and patient have a long term relationship, the physician wants to know who they are going to be working with.

The reality of our market is we've just told the marketplace we're going to be here.

It's irrelevant.

We'll support the patients and we're going to continue to do the things we've done since the day we've started this industry and we'll deliver world class service with world class products and with the introduction of these new things, people have confidence they will continue to innovate as well, so that's why we think we've seen this uptick and we're not surprised by it.

We're happy with where we finished though and we think it will continue.

Thank you very much.

Thank you.

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

Your line is now open.

Thanks so much.

Good evening.

Ray?

You sounded more optimistic tonight with regards to the trajectory of the ICD market based on MADIT CRT.

Could you, has your thinking changed, where do you see US and ex-US market growth over the next couple years and then I have a follow-up question.

Yes, I think it's two things because I don't know if we're necessarily more optimistic and it was asked in an earlier question.

We sort of had this strange period of time we're connected to the old Guidant recalls so you get into the whole de novo versus replacement scenario.

We are increasingly excited about MADIT CRT potential.

It's actually been played down a bit lately as people sort of say well it's not to have that much effect.

We actually see it quite differently, and I think we accounted for that in the script as having substantial potential, even though the indication is a little bit narrower than we originally expected, the millions of dollars of potential still exist there.

We had some very unique data points that we have control of, I guess you could say, and the research related to cost competitiveness and comparative effectiveness that we have not fully utilized yet and of course we comment on the women portion of it so there is some substantial opportunities to make that into a better place for all of us so I think all you're hearing is the reality of us beginning the process now of being able to actually market that, having the indication, having the on label, starting to take a look at what our target markets are and how we do it.

The history we can't change.

The recalls and the timing of them and replacement versus de novo.

Last part would be I think most people believe there would be a little more crossover in 2011 between the de novo value contribution to the market growth versus replacement.

In other words de novo has been negative, replacement has been pretty high.

When does that turnaround.

I don't know that anybody has seen that yet.

I don't think they have, but I think on a dollar basis MADIT can help that and certainly on a patient penetration basis.

Okay, so flat US for a couple years, flattish and high single digits ex-US is that something you could kind of endorse?

Yes, I think we concur with you.

Okay, and the second question I have pertains to stents and one of the things we grappled with is what's the role long term of biodegradable stents and given the importance of the stent, the drug eluting stent market to you and your position today and your increasingly self-made position in it, so how view bioerodable stents as a potentially disruptive force and how is Boston Scientific positioned in that regard?

Thank you.

Yes, I'll ask, we just went through an exercise.

We went through a huge Synergy exercise review of several hours and one of the questions we've asked, Keith Dawkins answered in the past is on the left side here is Abbot DVA, here is us on the right side.

What ares pros and cons and where are we positioned relevant to that, maybe Keith you could share a bit of that with them.

Sure, Bruce.

We have an internal as you know bioerodable stent program but our present thinking is that completely bioerodable stents will be a niche play.

As you know, there's a very limited matrix at the moment, two sizes.

They take two to three years to disperse, so no major effect on DAP's requirement.

They can't be post-dilated.

We've gone a long way with metallic stents, 20 years of metallic stents so the handling of metallic stents in complex anatomy appears superior.

We have no randomized data for BVS, and we don't really have experience in the field with what you might call work horse products, or work horse lesions, so we are very excited about our Synergy stent and our investigating that in the Evolve trial.

That's recruiting very well, two doses of everolimus, the PROMUS dose and half of the PROMUS dose, and this has a very low abluminal bioerodable polymer load and is on what we feel is the most deliverable platform, the Element platform, so we think in terms of work horse lesions that our approach is appropriate and that fully bioerodable stent will remain a niche.

Ray, just one quick follow-up.

Your asthma purchase was interesting to us.

Could you just give us a brief overview of where the reimbursement status for that is right now and is it in-patient?

I presume it's outpatient and is the reimbursement status established and sufficient?

Thanks so much.

Let me add a quick economics point to the prior question and then I'll ask Mike Phalen to answer your second question.

The other thing we don't know and we aren't capable of predicting competitor pricing out five years but it's fair to assume we've got a pretty good idea of what DES stent pricing may look like in a global US basis five years from now, and if we take a look at the cost of producing a stent today and the cost of producing a BVS stent and we take a look at how you might want to price that in order to get a reasonable return on your invested capital and return on your R&D program, I think one of the reasons in addition to the good clinical points Keith made is we struggle with this being the niche where we feel it may have to be priced to have a sensible return on it so that would be an additional point and Mike would you make some comments on Asthmatx?

Sure.

First of all I think we really liked when we did our due diligence on Asthmatx their overall quoting coverage and payment strategy we found it to be right on the money and we offered a little bit of Boston Scientific perspective on it as well.

One of the things they have going for them is two major societies, the American Thoracic Society and the American College of Chest Physicians are both endorsing and have already submitted for a category 1 CPT code and once that CPT code gets established that will then help us in the coverage decisions by mapping to a new tech APC code and an ICD9 code.

So we really feel pretty good about the strategy.

It's really coupled by a very robust data set and in this particular patient population just presents with tremendous cost to the system, so we like to compare the effectiveness angle and I think the overall coding coverage and payment strategy is on track for an estimated some time late 2011 to 2012.

Thanks so much.

Thank you.

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

Your line is now open.

Thank you.

Jeff, a couple questions for you.

The royalty with Abbot you discussed earlier, potentially changing on milestones, can you say that you've already hit some of those milestones and it's coming down, and any color on sort of how long that could last?

So the royalty is not with Abbot.

The royalty is with Novartis on the everolimus drug, so I just want to be clear on that and yes and for the balance of the year, we'll enjoy a slightly lower royalty rate by virtue of the fact that we've hit these lower tiers, at which point you start the New Year at kind of back at kind of the base level, so kind of two things have happened.

One is the mix between TAXUS and PROMUS has changed and we sold more PROMUS Element than we anticipated which is good news.

Both of those drive up the amount of Novartis royalty we pay and create additional volume that allow us to hit these tiers where the actual rate goes down.

And then one more question.

On the tax rate and the reserves, the tax rate has been running, it looks like at about 10% pro forma for three or four years now.

I'm just wondering at what point does it get back to kind of a more normal med tech rate?

Is this something that can continue to go on or is this kind of the end of the road and some of these decisions I guess coming up with the IRS could change the rate to a more normal rate.

Yes, I think not unlike a lot of other sophisticated organizations from a tax perspective, you're going to have challenges to the positions you've taken.

We're no different than some of our competitors are within the sector and outside the sector, so and I think the IRS is taking a fresh look at a lot of the different tax structures so we have a $1.3 billion reserve on our balance sheet, so as we, what's happening now though is we are now reaching the point where a lot of those years for which we have reserves established are now coming through review with the IRS, which is why you're seeing acceleration of items come through the rate.

Having said that, we're very comfortable with our tax structure.

We're very comfortable with our reserve levels.

We've had obviously, extensive reviews both internally and with external advisors but we will see an acceleration of the conclusion of these discussions with the IRS and that could provide some upside or downside through the rate.

What we attempt to do is show you what the true operational ongoing rate is and try to identify these one off items because these are one off items that will not affect the rate going forward, but there really is no guarantee to say that we will not have next quarter for example, some other discrete one-time items and the best we can do is just isolate those for you and explain to you what they are and give you guidance in terms of what the ongoing rate could be.

Thank you, Jeff.

You're welcome.

Thank you.

Our next question comes from the line of Tim Lee with Piper Jaffrey.

Your line is now open.

Hi.

Good afternoon and thanks for taking the question.

Just wanted to follow-up on some of the questions earlier regarding pricing.

Ray, you cited pricing pressure as your number one dislike but what changed the pricing dynamics in these markets and in particular the US DES market?

Oh, I think some of the dynamics there changing are leverage of hospitals as there's consolidation, as there's more competitors coming into the marketplace in some product categories, not necessarily just DES obviously.

I think in outside the US it's reimbursement governmental changes.

I think it's changes in where ultimately where PCIs are going to be done so there's a combative pressure of inside/outside and increasing number of PCIs done on the outpatient marketplace and then the biggest, I don't know if it's the biggest factor but the thing that's most obvious to me that has really kind of shocked me is the rapid pace with which physicians are becoming employees of hospitals or have singular contracts and the potential through the government of making compensation alignment and decision alignment between hospitals and physicians, that I don't think has been in the past, I think when you put all of that together it's negative to price.

If I flip it around the other way and I won't repeat all Hank's comments, I think though, a lot of the things that are going on although negative on a pure price basis, play into our hands around cardiovascular service line, value proposition, our ability to get to less invasive, our ability to shift gears, and service outpatient populations as we look at new strategies, so you know if it's pure price, is it negative for the industry for a while?

I would say yes.

Do I see it as negative for us in terms of overall strategy, I would say no, because I think we have counter punches that are perhaps I think more effective in that environment than some other people.

Got it.

Very helpful, thank you and then just one last one on the DES side.

You mentioned Synergy as the next generation everolimus platform but is there a next generation Paclitaxel program in development as well?

It's Keith Dawkins here.

We're going to launch as you know, in the US, TAXUS Element and PROMUS Element and we at that point will make a decision around what we do next with Paclitaxel, TAXUS Element and PROMUS Element both being launched outside of the US.

But from a work horse platform should we think about that as everolimus and maybe the Paclitaxel becomes a niche, maybe diabetic program?

Should we think of it as that standpoint going forward?

Yes.

We're doing, we're setting up trials now to look specifically at the diabetic question.

As you know, the results of Paclitaxel and diabetes are impressive.

We had a CE mark first in that area specifically for diabetes.

We will at the back end of this year or quarter one next year have a head to head comparison of everolimus and Paclitaxel in diabetics in the trial in India, and obviously for the first time, with the Element platform we'll be able to compare the same platform with the results in diabetics and non-diabetics for Paclitaxel and everolimus so we will be able to make a direct comparison to the Platinum trials in diabetic patients using the same stent platform.

That's never been done before, the stent platforms are nearly always different when making that comparison, so the diabetic area is important for us and obviously it's an epidemic and it's increasing dramatically worldwide.

Thank you.

Lois, we've got time for one additional question and then we'll wrap it up.

Okay, your last question will come from the line of Sara Michelmore with Cowen.

Great.

Thank you.

Thanks for taking the question.

Just a quick one on DES and a big picture question for Ray.

Ray, you kind of talked around it, but where are we in terms of the gross margin trajectory for the DES franchise and prior to the PROMUS transition in 2012 in the US and Japan, what are the key dynamics that we should be thinking about in terms of that business on the profitability standpoint?

Oh, did you say gross margin or growth?

Growth margin.

Oh, growth I thought you said gross so I was going to get a little definition.

I mean, there's a bunch of different things, starting with P&L work and optimization and cost reduction and all that kind of work that DES doesn't get a free ride anymore than anything else.

We strive to get a 5% basis out of it each year is one answer, but the major driver is our ability to take the Element platform and internalize it into Irish production and take share in all of the marketplaces we're in while bringing it to the US and Japan and the latter point alone, for getting everything else, is about $200 million annual run rate, starting in the middle of 2012 and we continue to be on schedule for that.

There's a lot of other tweaks and efforts and scrap reductions and less returns and longer shelf life and a whole pile of other programs that hit that COGS line and therefore help GP, but the big killer is bringing TAXUS and PROMUS Element to the US and to Japan on schedule with on target cost structure in Ireland.

I mean, that's the killer.

And then in the interim 18 months or so, should we think about you doing your best to offset some margin decreases or what's kind of the situation in between?

Yes, I think if you look at real unit growth in DES as Hank and others have commented, the unit growth continues to be attractive with penetration PCI rates.

Pricing continues to be negative and we continue to work on our cost and distribution structure taking market share.

It's great having Element, because obviously we can take that platform and distinguish ourselves and then as I mentioned, I'm not so sure I don't know if it's really answers your question of the next 18 months but I'm not so convinced as maybe I was when I first joined but we're going to be bombarded with US DES competition, because as I look at the regulatory programs now, and some of the technical problems some of our competitors may be having, I don't know if that's as big an issue as I thought it was, so I think for the next 18 we're fine and I think the Company is excited about Synergy and I think the $200 million is very very real so I get good comfort.

I don't lose any sleep at night about DES at this point.

And then just a big picture question for you, and I assume you're going to address some of this on the 19th, but you've been in the saddle, I guess, a year plus at this point and how do you feel in terms of your visibility or your confidence in the Company's ability to really drive some improvements in sales momentum and see the rewards of some of these operating margins?

Just give us a gut check in terms of where you think you are in that process, thanks.

Well, I feel good other than the saddle sores.

Its been an interesting ride for the first year, but I don't see anything different.

I was a lot more concerned when I joined the Company and didn't sense the focus on sales and I don't mean this every individual.

I just mean a broad sense.

I was very disturbed by the lack of integration in Guidant, and for the life of me I couldn't figure out what the corporate strategic plan is.

We now have all those things in hand, underway and in motion, great Management team.

We've put together a strategic plan.

We know the places we need to be in.

It's still a turnaround and we lost a few months here and there of time.

I would have liked to have been where we are today three, four, five months ago but ship holds and things like that happen in this business if you're in it long enough, so I feel very good and very confident in the ability of the Company to do this.

I think we'll have a very unique story, but its been a bit of a tough ride but that's the way things go sometimes.

And are you going to be able to communicate some 2011 targets when we see you in November or it's still premature for that?

Thanks.

Unless you can figure out how to get our Board to approve them before that which is impossible, it would be impossible for us to communicate because we would be communicating something publicly that our Board has neither approved nor reviewed, so the technical ability to do that is essentially zero.

Thanks so much.

Thanks folks.

Thanks.

I'd like to thank everybody for joining us this evening.

Before you disconnect, Lois will give you instructions for the replay.

Thank you.

Thank you, ladies and gentlemen.

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