Boston Scientific Corp (BSX) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Boston Scientific Q3 2011 earnings conference call.

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

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

Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Sean Wirtjes.

Please go ahead.

Thank you, Greg.

Good morning, everyone.

Thanks for joining us.

With me on the call today are Hank Kucheman, Chief Executive Officer; Mike Mahoney, President; and Jeff Capello, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our third-quarter 2011 results which included key financials and reconciliations of the non-GAAP financial measures used in the release.

We've posted a copy of that press release as well as reconciliations of the non-GAAP financial measures used in today's conference call and other supporting schedules to the Investor Relations section of our website under the heading Financial Information.

The agenda for this morning's call includes opening comments from Hank and some brief introductory remarks from Mike, followed by a review of third-quarter financial results and business performance, as well as updated Q4 and full-year 2011 guidance from Jeff.

Hank will then complete our prepared remarks with an update on our business progress and his perspectives on the quarter overall before we open the call up to questions.

During today's question-and-answer session, Hank and Jeff will be joined by other members of our executive committee, concluding our Chief Operations Officer, most of our business and regional presidents and the Chief Medical officers for our CRV group and CRM.

Before we begin, I would like to remind everyone that this call contains forward-looking statements within the meaning of federal securities laws which may be identified by words like anticipate, expect, project, believe, plan, estimate, intend and similar words.

These forward-looking statements include, among other things, statements regarding our market share, markets for our products, new product approvals, launches and performance, clinical trials, our cost reduction and growth initiatives, our investments in emerging markets, the timing and volume of share repurchases, the strength of our balance sheet, capital structure and cash flows, our future financial performance, including sales, margins and earnings for the fourth quarter and full year, and our future tax rates and expenses.

Actual results may differ materially from those discussed or implied in these forward-looking statements.

Factors that may cause such differences include, among other things, future economic, competitive, reimbursement and regulatory conditions, clinical trial results, product approvals, intellectual property rights, litigation, financial market conditions, future business decisions made by us and our competitors, and the other factors described in the risk factors section of our most recent 10-K, as updated in the 10-Qs we have filed or will file hereafter.

These statements speak only as of the date hereof and we disclaim any intention or obligation to update them.

At this point, I will now turn it over to Hank for some opening comments.

Hank?

Good morning and thank you, Sean.

Thank you, everybody, for joining us.

Before we turn the call over to Jeff, I would like to share with you several of my perspectives, perspectives that have been shaped by a 21-plus year career with Boston Scientific, a Company that has a demonstrated track record of delivering differentiated technology solutions that address unmet clinical needs, advanced clinical science, and most importantly, have either improved or save lives of millions of people around the world.

Despite continued pressure on global healthcare costs, the opportunity in this industry continues to be significant.

Economic realities dictate that companies like Boston Scientific not only continue to develop technology that improves healthcare, but do so in ways that contribute to reducing the overall episode of treatment costs, the frequency and/or need for patient re-intervention, or even potentially the co-pays a patient incurs from their insurance carrier.

Innovative technologies that address true unmet clinical needs and/or successfully address these emerging economic criteria will be valued, not only by healthcare systems, but payers as well.

In other words, these are the technologies that will be truly differentiated.

This spells opportunity for revenue growth, and we as a Company are focused on capitalizing on this opportunity.

There are also millions of people worldwide who have limited or no access to healthcare.

Emerging markets, like India, China, Brazil, are rapidly expanding their respective healthcare infrastructures to address unmet healthcare needs within their countries.

This also spells opportunity, a major opportunity that we as a Company are acutely focused on vis-a-vis our POWER strategy.

As it pertains to our POWER strategy, this is a strategy that was led by Ray Elliott, but formulated by the entire executive management team, and based upon both customer and employee input from around the globe.

POWER is a cogent strategy, and one that I and the entire executive management team, including Mike Mahoney, remain committed to successfully executing in the future.

Will there be enhancements to POWER over the course of time?

Sure.

Will there continue to be opportunities that we look for to improve and accelerate our growth outlook?

Absolutely.

But the key to realizing the promise of POWER lies in our ability to execute, execute the imperatives we are already pursuing, in a constant, consistent and effective manner.

More on this front later.

Finally, a few brief comments on how Mike and I intend to team up.

As you know, Mike and I previously worked together at the Global Health Exchange, when Mike was President and CEO and I was a member of the GHX Board of Directors.

We share the same philosophy about people, the importance of team execution, results orientation and technology innovation that meet the needs of the customers we serve.

In short, we have a track record of working effectively together and will continue this legacy of collaboration moving forward.

Since Mike is only 72 hours into his tenure as President at this point, he will not be participating in today's Q&A.

However, I would like to invite him to make some brief introductory remarks at this point.

Mike?

Thank you very much, Hank, and good morning, everyone.

It's really great to be here and to join this talented team and to begin what I anticipate will be a very long career at Boston Scientific.

I am excited about working with Hank and leading our Endoscopy and CRM businesses, while supporting a number of our critical functions.

I started just this past Monday, on October 17 and I could not have imagined a warmer welcome during my first three days.

I have had the opportunity to meet with Hank and several other members of our team in order to learn more about the Company and the exciting opportunities in front of us.

I look forward to spending quality time getting up to speed with many more new colleagues.

In even just these first few days, I have confirmed that I have made the right decision in joining this Company.

I have incredible respect for what Boston Scientific represents today and the anticipation of what it will represent in the future.

The execution of the POWER strategy is underway, and I expect it to continue to provide us a dynamic and durable road map for a strong and a profitable future.

I have tremendous confidence in this Company, in the senior leadership team and our 25,000 employees around the world.

As you can tell, I am very eager to get out and meet with customers, employees, visit our major facilities and work with Hank and the leadership team to continue delivering on the Company's core mission, and that is to improve the quality of patient care.

I have made a very long-term commitment to Boston Scientific, I am excited about this opportunity, and I intend to make the most of it.

Now I would like to turn the call over to our Chief Financial Officer, Jeff Capello.

Thanks, Mike.

Let me begin by providing some overall perspective on the quarter, before getting into the details.

Despite very challenging global economic and end-market conditions that adversely impacted revenue, we generated adjusted earnings per share of $0.15, above both our guidance range of $0.11 to $0.14, and the Street consensus of $0.14, driven by continued strong attention to cost control.

In addition to exceeding expectations on earnings, we also had another strong quarter in generating operating cash flow, which allowed us to begin returning cash to shareholders by buying back 30 million shares, or approximately 2% of the Company.

Despite the challenging environment, our POWER strategy is beginning to gain traction and we remain confident in our ability to derive shareholder value.

Let me now move to the detailed review of the quarter to discuss the operating results and highlight the progress being made.

Consolidated revenue for the third quarter was $1,874,000,000, representing a decrease of 2% on a reported basis and a decrease of 3% in constant currency terms compared to the third quarter last year, excluding the negative impact of the Neurovascular divestiture.

The actual benefit of favorable foreign exchange was in line with the $64 million assumed in our third-quarter guidance range.

At this point, I will move on to address our sales results and business highlights for all of our businesses.

Worldwide DES revenues came in at $375 million, including a $6 million positive impact from the partial reversal of a sales returns reserve relating to the US launch of ION.

This represents a reported increase of 3% and a constant currency decrease of 1% compared to the third quarter of 2010.

Our worldwide DES revenue included $114 million for TAXUS and TAXUS settlement, $152 million for PROMUS and $110 million for PROMUS Element.

We once again held clear worldwide DES market share leadership during the third quarter, with an estimated global market share of 36%, which we estimate to be a full 800 basis points higher than our nearest competitor.

These figures exclude the positive impact of the ION reserve in the US.

With the continued strong customer adoption of our Element platform, including PROMUS Element internationally, as well as TAXUS Element/ION in the US, J&J's impending exit from the DES business, and the expected launches of PROMUS Element in the US and Japan, we are very focused on growing our market share leadership going forward.

Including the positive impact of the ION reserve, US DES revenue was $191 million.

This represents a decline of 4% compared to the third quarter of last year.

While ION continues to perform very well in the US, our revenue shortfall compared to guidance was driven by some softness we saw in PCI volumes in the quarter, as well as conscious pricing decisions on our part.

Within the quarter, we believe some of the PCI softness was due to a combination of several factors, including economic pressures and RAC audits.

Given the nature of the third quarter with a high concentration of vacation periods, it is too early to say whether this softness will persist.

US DES revenue includes $13 million of TAXUS, $71 million of ION and $107 million of PROMUS.

Excluding the impact of the ION reserve, we estimate that our US DES share was 49% for the quarter, with 2 share points of TAXUS, 19 share points of ION and 28 share points of PROMUS.

We estimate that our industry-leading US DES share increased 300 basis points compared to third quarter of last year off the strong launch of ION.

We continue to maintain drug-eluting stent market share leadership in a competitive US market with an estimated 1400 basis points more market share than our nearest competitor.

On a sequential basis, we estimate our share decreased 100 basis points, as share gains from Cordis' exit were offset by conscious decisions involving certain accounts where pricing declined to unattractive levels due to very aggressive competitor activity.

Based on our estimates of the US market for the third quarter, we believe that Abbott's share was approximately 35%, while Medtronic and J&J achieved approximately 13% and 3%, respectively.

International DES sales of $184 million represented a reported increase of 11% and an increase of 3% on a constant currency basis, as the rollout of our Element platform continues to do very well.

This includes $29 million in TAXUS, $45 million in PROMUS and $110 million in PROMUS Element sales.

During the third quarter, we increased our estimated DES market share in EMEA by 100 basis points sequentially to approximately 33%, as our PROMUS Element and TAXUS element stents continued to be adopted in various countries and due to the beginning benefits of Cordis' exit from the market.

We expect this to continue to play out in 2012 and 2013 as tenders come up for renewal.

TAXUS market share was approximately 5%, with revenue of $12 million, and PROMUS Element share was 28%, with revenue of $64 million.

We estimate Abbott's share at 25%, Medtronic at 20%, and J&J share at 9% during the quarter.

We continue to be very pleased with the market acceptance of the platinum chromium Element platform in EMEA.

Our DES share in Japan was an estimated 33%, slightly down sequentially, with revenue of $48 million.

We held share better than expected in the quarter, with share losses due to local competitor stent launch essentially offset by share recapture from another competitor.

TAXUS market share in Q3 was approximately 4%, with revenue of $6 million, and PROMUS market share was approximately 29%, with revenue of $42 million.

We estimate Abbott's share at 33%, Medtronic at 6%, and J&J at 2% for the quarter.

We continue to anticipate gaining approval for PROMUS Element in Japan in mid-2012.

We estimate our Inter-Continental DES share increased 100 basis points to 22% during the third quarter, with the shares split 4% TAXUS, with $11 million in revenue, 1% PROMUS, with $3 million in revenue, and 17% PROMUS Element, with $46 million in revenue.

We are starting to see some contribution from the launch of our Element DES platform in emerging markets, primarily India and Brazil, and we expect us to accelerate in 2012 as we gain additional important pricing approvals in India and expand the recent launch of PROMUS Element in China.

With an estimated combined DES market in China and India of nearly $700 million, growing at around 20%, coupled with our investments in sales reps, dealers and infrastructure, we believe we are now poised to drive our single-digit marketshare up significantly in these key critical end markets.

Now I will provide some detail on the drug-eluting stent market dynamics during the quarter.

We estimate the worldwide DES market in Q3 at approximately $1,039,000,000, which is flat on a reported basis and down 3% on a constant currency basis versus Q3 2010.

The estimated worldwide market in the quarter includes a worldwide unit volume increase of approximately 10%, driven by a 10% increase in PCI volume and a 2 percentage point increase in penetration, offset by a market decline in average selling prices in the low double digits.

The US DES market is estimated to be about $381 million for the quarter, representing a decrease of approximately 12% from the third quarter of last year.

This consists of a 5% unit volume decrease, which includes a modest decrease in PCI volume, a slight decline in penetration levels and a high single-digit ASP decline.

US PCI volume in the quarter was approximately 245,000 procedures, down 3% compared to the third quarter of 2010.

We estimate that the US DES penetration of 77% was down 1 percentage point compared to the third quarter of 2010.

Combined with stent procedure rates and stents per procedure, we estimate that the total market for the US stents in Q3 2011 was approximately 323,000 units, including 248,000 units of DES.

We estimate the international DES market at $658 million for the quarter, up about 10% on a reported basis and about 3% on a constant currency basis compared to the third quarter of last year.

This consists of a unit volume increase of approximately 18%, which includes a 16% increase in PCI volume and a 3 percentage point increase in penetration.

These unit volume and penetration increases were largely offset by a low double-digit decline in ASPs.

Procedures were very strong in the quarter, with approximately 664,000 PCI procedures, including 350,000 procedures in EMEA, 54,000 in Japan, as well as 261,000 procedures in Inter-Continental.

We estimate that the international DES penetration of 65% was up 300 basis points over the third quarter of 2010, including 60% EMEA, 75% Japan, and 71% in Inter-Continental.

Worldwide CRM revenue was $503 million in the third quarter, representing a reported decrease of 9% and a constant currency decrease of 12% compared to the third quarter of 2010.

We estimate that our worldwide CRM share was down about 40 basis points sequentially at just under 19%.

Worldwide defibrillator sales were $360 million.

This represents a reported decrease of 11% and a constant currency decrease of 14% from the third quarter of 2010.

In the US, CRM revenue of $296 million represents an 18% decrease from the prior year.

Our US defib sales were $225 million.

This represents a 20% decrease from last year, due primarily to continued market declines and replacement headwinds.

Compared to Q2, the US defib market appears to have weakened further in July and August, as the summer vacation months proved to be particularly slow.

Although September and early October have shown some encouraging signs of improvement, we continue to monitor the market closely and visibility remains very limited.

As a result, we expect to need at least another quarter or two before we can say with any certainty whether the market has stabilized.

We believe that our de novo share has remained stable over the last several quarters and are optimistic that our share outlook will improve further following the planned launch of our PUNCTUA, ENERGEN and INCEPTA defibrillators in the US late this year or early next year, depending on final FDA requirements.

These next-generation products will include versions with our Foresight DF-4 lead systems, built off our highly-dependable Reliance platform.

International CRM sales of $206 million were up 10% on a reported basis and flat in constant currency compared to the prior quarter.

International [pacer] revenue was up 6% in constant currency, off strong double-digit growth in Japan and Inter-Continental.

We continue to be very pleased with our growing relationship with Fukuda Denshi in Japan as they continue to ramp up the distribution of Boston Scientific CRM products.

International defib sales of $135 million represented a 7% reported increase from last year, and down 2% in constant currency.

We continue to see very positive responses to our Foresight DF-4 lead system in international markets.

On the low-voltage side, we expect to launch our INGENIO family of pacemakers and cardiac resynchronization therapy pacemakers in the first half of next year in the US and Europe.

INGENIO was built on the same platform as our existing high-voltage devices, representing our first new major technology introductions in this category in many years, and is expected to be the foundation for a series of low-voltage rated launches.

These launches include systems with remote patient management capabilities, as well as an MRI-compatible pacemaker system with both single- and dual-chamber devices.

We expect our MRI-compatible pacemaker system, which will not have many of the existing competitive product compromises, to be available in Europe next year.

Our worldwide Peripheral Interventions business was up 4% in constant currency in Q3 despite a slowdown in the US procedures.

Our international PI business grew 10% on the strength of six recent new product launches.

We were very pleased to see growth trends again in all three PI franchises on a worldwide basis in the third quarter and have made very good progress with our PI pipeline over the last quarter.

In PI stents, growth was driven by the EPIC Self-Expanding Stent internationally and the carotid wall stent in Japan.

We currently expect to launch the EPIC stent in the US in late 2012 or early 2013.

Our core PI franchise, which includes PTA and Vascular Access, saw good market share growth in the quarter, driven primarily by the recent Mustang 0.035 and the Coyote 0.014 PTA balloons and dilatation catheter launches.

Lastly, our Interventional Oncology franchise continues very strong double-digit worldwide growth in the third quarter.

Recently launched products include the Renegade Fathom Microcatheter and the guidewire system and Interlock 0.035 coils for peripheral embolization.

They both continue to be very well-received by our customers.

We expect to have a number of new PI products launched in the fourth quarter and throughout 2012 that we believe will further drive future growth in this business, which is now running at an annual rate of over $700 million a year in sales.

Worldwide non-stent Interventional Cardiology was down 7% in constant currency.

Consistent with prior periods, this decline was largely attributable to the procedural softness, some share declines in IBIS, and continued price erosion in PTCA balloons.

We maintained our US and worldwide PTCA balloon leadership positions in the third quarter, with 52% and 29% share, respectively, and expect to see some improvement in IBIS results due to new product launches beginning in 2012.

Worldwide Electrophysiology was down 2% in constant currency, primarily as a result of softness in the Blazer small-tip and large-tip business.

Our reentry into the cooled ablation category with the Chilli catheter in the US continues to proceed ahead of plan.

European shipments are expected to resume next quarter.

Sales of recently-released laser open-irrigated catheter in Europe have begun to ramp up as we move into full market release.

This movement to full launch is a significant step in the execution of our global A-fib strategy and one of our six internally approved A-fib-focused projects.

On a worldwide basis, our Endoscopy business continued to have solid growth, with sales up 6% in constant currency in the third quarter.

Growth in the US was 4% despite a challenging environment.

Internationally, Endoscopy sales grew 8%, with strength across all geographic regions, driven by new product introductions, expanded indications and the expansion of our single-use products.

The metal stent franchise again had strong results, recording a 7% increase internationally.

This performance was led by our WallFlex Biliary RX fully-covered stent, which earlier in the year obtained CE Mark for the treatment of benign biliary structures, as well as continued strong adoption of our WallFlex Duodenal Stent in Japan.

Worldwide growth of 8% was also reported in our biliary device franchise, supported by continued growth in the Advanix Biliary Plastic Stent for the treatment of biliary strictures, and the recent launch of the Expect endoscopic ultrasound aspiration needle, which is used for tissue acquisition in diagnosis of (inaudible) disease in organs adjacent to the GI track.

The hemostasis franchise delivered strong double-digit growth of 16% on the continued adoption and utilization of our Resolution clip technology for GI bleeding.

Our Urology/Women's Health business was flat on a worldwide basis, but was up 6% internationally on constant currency.

The Urology business maintained its leadership position and delivered 3% worldwide growth, driven by a 9% increase in our international core stone management business.

The Women's Health business declined 8% on a worldwide basis, as the persistently high US unemployment rate and increasing employee insurance deductibles and cost-sharing continue to put pressure on elective procedures.

In addition, the recent FDA public health notice update on the use of urogynecologic surgical mesh for pelvic organ prolapse negatively impacted procedural volumes in the pelvic floor market.

Our international Women's Health business continues to experience good growth, and was up 10%, driven by new product introductions, increased sales investments and the penetration of new therapies.

The rollout of our next-generation Genesys HTA System for the treatment of abnormal uterine bleeding had another very strong quarter, delivering double-digit growth and expanding our market share.

We continue to believe that the significantly enhanced user interface and ease of use of operation will enable the business to grow its share of the $400 million market.

Our worldwide Neuromodulation business grew 6% on a constant currency basis.

Revenue growth was driven primarily by the continued uptick of products introduced over the past 12 months, such as our new splitters, wide leads, charger belt and Clik anchor.

We believe that the combination of our differentiated product portfolio and strong commercial execution strategies allowed us to continue to increase our market share in the quarter, and we expect this trend to continue in the future.

Now let me move on to gross margins.

Reported gross profit margin for the quarter was 63.7%.

Excluding restructuring-related charges, adjusted gross profit margin for the quarter was 64.2%, or 390 basis points lower than Q3 2010.

The divested Neurovascular business negatively impacted gross margins by approximately 140 basis points in the quarter.

FX and lower unit volumes in CRM reduced margins by 90 basis points and 60 basis points, respectively.

In addition, we recorded a $21 million inventory reserve in Q3 related to the planned mid-2012 launch of PROMUS Element in the US and Japan, which negatively impacted margins by 110 basis points.

Additional inventory reserves, as well as a sales returns reserve, may be required, and may negatively impact margins, depending on when this launch commences.

Looking forward, we expect adjusted gross margins to be in the range of 65% to 66% in Q4, exclusive of any further potential reserves for PROMUS Element.

Our reported SG&A expense in the third quarter was $629 million.

Adjusted SG&A expenses excluding restructuring-related items were $628 million, or 33.5% of sales.

This compares to $633 million in the third quarter of 2010.

The decrease was primarily due to the divestiture of Neurovascular and the benefit of expense discipline and the recent restructuring activities, partially offset by negative FX, higher spending on strategic growth initiatives, primarily in emerging markets, and costs relating to recently acquired businesses.

We expect our SG&A spend as a percentage of sales to be in a range of 33% to 34% in the fourth quarter as we continue to invest in growth initiatives, such as emerging markets.

Both reported and adjusted research and development expenses were $229 million in the third quarter, or 12.2% of sales.

This compares to $230 million in the third quarter of 2010.

R&D spending was essentially flat, as lower expenses due to the divestiture of the Neurovascular business were offset by costs related to recently-acquired businesses and FX.

We expect R&D spending to be between 12% and 13% of sales in Q4.

Royalty expense was $36 million, or 1.9% of sales, in the third quarter, compared to $39 million in Q3 a year ago.

We expect Q4 royalty expense to be relatively flat compared to the third quarter.

We reported GAAP pretax operating income of $174 million for the third quarter.

On an adjusted basis, excluding intangible asset impairment charges, acquisitions, divestiture and restructuring-related charges and amortization expense, operating income for the quarter was $310 million, or 16.5% of sales, down 450 basis points from the third of quarter 2010.

As a percentage of sales, the decrease in adjusted operating income is due to lower gross margins and slightly higher operating expenses as a percentage of sales.

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

We recorded intangible asset impairment charges of $9 million pretax, or $7 million after-tax, related to lower projected cash flows associated with certain acquired technologies.

We recorded acquisition-related charges of $8 million pretax, or $7 million after tax.

We recorded divestiture-related net credits of $7 million pretax or $5 million after-tax.

We recorded $29 million pretax or $19 million after-tax to restructuring-related charges in the quarter related to severance, product transfer expenses and certain other costs in connection with the 2011 restructuring program we announced in July, as well as our previously announced Plant Network Optimization and Alignment for Growth programs.

Total amortization expense was $97 million pretax, or $78 million after-tax.

The net cumulative effect of all of these items was $136 million pretax, and $81 million, or $0.05 per share, after-tax.

Looking forward, we expect pretax amortization expense in Q4 to be in line with Q3.

Let me now move on to other income expense.

Interest expense was $62 million in the third quarter, which was $29 million lower than the third quarter of 2010.

The lower interest expense is primarily due to $1.85 billion of debt repayment during the last 12 months and a lower average interest rate as a result of fixed to floating rate swaps executed on some of our public debt in the first quarter.

Our average interest expense rate in Q3 2011 was 5.3%, or about 20 basis points lower than Q3 2010.

Our tax rate for the third quarter on a reported GAAP basis was a negative 28%.

Excluding the tax effect of the GAAP to adjusted operating profit reconciling items that I just stepped through, as well as discrete tax items in the quarter pertaining to past acquisitions, our effective tax rate on an adjusted basis was 9.7% of tax expense as a percentage of pretax income.

Our adjusted tax rate for the third quarter was lower than our previously forecasted Q3 rate of around 21%, primarily due to a $25 million benefit from discrete tax items relating to our operating businesses.

These discrete benefits included the release of tax reserves resulting from the completion of tax authority examinations , the expiration of a statute of limitations for assessing tax in certain jurisdictions, and the finalization of our 2011 US federal tax return.

Excluding these discrete tax benefits, we had an operational tax rate for the third quarter of approximately 20%.

This rate reflects our anticipated full-year operational tax rate of approximately 17%, increased by certain timing items.

Due to the impact of timing items in the first three quarters, our year-to-date operational tax rate is slightly below 17%.

We expect our operational tax rate to be around 20% in Q4 as these timing items continue to reverse and move our full-year operational rate toward 17%.

We reported GAAP EPS for the third quarter of $0.09 per share compared to $0.12 per share in the third quarter of last year.

GAAP results for Q3 this year included the previously discussed intangible asset impairment charges, acquisition restructuring related charges, divestiture related net credits, amortization expense and discrete tax benefits.

Our adjusted EPS in the third quarter, which excludes these items, is $0.15.

Adjusted EPS for the third quarter of 2010 was $0.19.

As a reminder, adjusted EPS for the third quarter of 2010 excluded $0.07 per share of amortization, and a penny per share of restructuring related charges, as well as a penny of discrete tax benefits.

Stock comp was $31 million, and all per-share calculations were computed using approximately 1.5 billion shares outstanding.

DSO of 61 days was down two days compared to the third quarter of 2010, as strong collections in the US more than offset continued weakness in EMEA.

Days inventory on hand was 131 days, which was five days better than prior year.

The benefit of inventory reductions attributable to the Neurovascular divestiture and finished goods reduction programs was partially offset by higher inventory to support new product releases.

We continue to work on reducing our inventory levels despite the required investments to support our new product introductions and Plant Network Optimization initiative.

Reported operating cash flow in the quarter was $366 million compared to a $126 million outflow in Q3 2010.

Q3 2011 cash flow included $25 million in restructuring payments.

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

Excluding these items, Q3 '11 operating cash flow was $391 million, or $185 million lower than the Q3 2010, primarily due to lower net tax refunds and lower operating income, partially offset by a benefit from the termination of our $850 million fixed floating rate interest rate swaps on our public bonds.

$74 million of the swap termination benefit will be amortized over the remaining life of the bonds, or about eight years, effectively reducing our rate on the bonds from 6% to 4.95%.

CapEx was $69 million in the quarter, which was $10 million lower than the third quarter of last year.

Reported free cash flow was $297 million in the quarter compared to an outflow of $205 million in Q3 2010.

As a result of our recent deleveraging efforts, including the prepayment of $1.25 billion of debt in the first half of 2011, strong financial results and robust cash flows, we continued our positive credit rating momentum.

During the quarter, Fitch raised our credit rating to investment grade of BBB- for the stable outlook, and S&P affirmed our investment grade rating of BBB- with a stable outlook.

This follows Moody's action to raise our outlook to positive from stable in June.

These actions put us one step away from reaching an investment grade credit rating with all three credit rating agencies.

In July 2011, we announced a new $1 billion share repurchase program and the re-approval of the approximately 37 million shares remaining on our existing share repurchase program.

The share repurchase program reflects our confidence in the strength of the Company's long-term business prospects, earnings growth potential and our ability to generate strong cash flow.

In Q3 2011, we repurchase 30 million shares or around 2% of our outstanding shares for approximately $192 million.

Given our current share price coupled with our strong cash flow and enhanced financial flexibility, the number of shares we expect to repurchase in Q4 should be at least in the neighborhood of the number we bought back in Q3.

We remain confident that we can balance our priorities of investment and growth in returning immediate capital to shareholders, all while improving our investment grade metrics on the strength of solid cash flow.

In July we announced our 2011 restructuring program, which was designed to strengthen our operational effectiveness and efficiencies, increase our competitiveness and support new investments.

During the third quarter, we initiated the first phase of certain activities under the new program, including relocating some of the administrative and functional activities and finalizing arrangements with select preferred vendors.

We recorded $15 million in charges in Q3 in connection with these activities, and expect to incur an additional $10 million in charges during the fourth quarter as we progress these and other activities into the program.

As previously communicated, we expect this program to be substantially completed by the end of 2013 and reduce our annual operating expenses by approximately $225 million to $275 million as we exit 2013, which is consistent with our plan to realize $100 million to $200 million in near-term savings, as outlined at our Investor Day last November.

We expect some of these savings to be reinvested in targeted areas necessary for future growth, including our Priority Growth initiatives and the commercial side of our emerging markets initiative.

Let me now briefly provide some perspective on our outlook and walk you through our revised guidance for the fourth quarter and full year.

Looking at the fourth quarter, we continue to face headwinds and limited visibility in several of our markets, most notably CRM, and we plan to continue to invest in emerging markets and other targeted areas.

However, we also expect some operating favorability from continued expense discipline.

Having considered those factors, we expect Q4 consolidated revenues to be in a range of $1.85 billion to $1.95 billion, which is down 3% to down 8% from the $2,002,000,000 recorded in the fourth quarter of 2010.

If correct foreign exchange rates hold constant through the fourth quarter, the tailwind from FX should be approximately $18 million, or 90 basis points, relative to the fourth quarter last year.

On a constant currency basis, excluding the impact of the Neurovascular divestiture, consolidated fourth-quarter sales should be in a range of down 1% to down 6%.

For DES, we are targeting worldwide revenue to be in the range of $370 million to $390 million, with US revenue of $180 million to $190 million and O-US revenue of $190 million to $200 million.

Our defibrillator business, we expect revenue of $360 million to $390 million worldwide, with 240 -- excuse me, with $220 million to $240 million in the US and $140 million to $150 million outside the US.

For the fourth quarter, adjusted EPS, excluding charges related to acquisitions and divestitures, with structuring and amortization expense are expected to be in a range of $0.13 to $0.16 per share.

GAAP EPS for the fourth quarter is expected to be in a range of $0.05 to $0.11 per share.

Included in our GAAP EPS estimate is up to $0.01 per share of acquisition-related charges, up to $0.01 per share of divestiture-related net credits, $0.01 to $0.02 per share of restructuring-related charges and $0.05 per share of amortization expense.

For the full year, the Company now estimates sales will be between $7.675 billion and $7.725 billion (Sic-see press release).

Assuming that current foreign exchange rates hold constant, we expect full-year tailwind from FX to be approximately $132 million.

On a constant currency basis, and excluding the impact of the (inaudible) and the Neurovascular divestiture, consolidated 2011 sales should be in a range of down 3% to down 4%.

Adjusted EPS for the full year is now expected to be in a range of $0.67 to $0.70 per share, which now includes approximately $0.14 of one-time year-to-date benefits.

On a GAAP basis, the Company expects full-year EPS in a range of $0.27 to $0.33 per share.

This GAAP EPS estimate includes a credit of $0.35 to $0.36 per share related to the net gain on the Neurovascular divestiture, charges of $0.45 per share related to the Q1 goodwill impairment, and $0.01 per share related to the Q2 and Q3 intangible asset impairments, up to $0.01 per share of acquisition-related net charges, $0.06 to $0.07 per share of restructuring, a penny per share of discrete tax benefits, and amortization expense of $0.23 per share.

That is it for guidance.

Now let me turn it back to Hank for his overall perspectives on the quarter.

Thanks, Jeff.

Let me start with an overall perspective in summary of recent progress with respect to the POWER strategy.

As you are aware, the elements of POWER are focused on three key areas.

In the near term, focus is on gross profit and operating profit, margin expansion, strong cash flow generation, share buyback, further enhancing our credit profile, aligning our product portfolio [funding mix] to Priority Growth initiatives, and executing on cost reduction opportunities relating to the optimization of our people, systems and infrastructure.

Examples of recent progress in these areas include margin expansion.

The US launch of ION continues to exceed our expectations and has improved our gross margin profile, although offset somewhat by ASP pressure.

It is successfully setting the stage, despite competitive reaction, for a much larger margin benefit following our anticipated PROMUS Element launch in the US by mid-next year.

Cash flow credit profile.

We continue to deliver strong cash flow.

We have no debt maturities until 2014, which provides us with the flexibility and capacity to strike a balance between investments within our 12 Priority Growth areas, returning cash to shareholders through share buybacks and other internal investments to fund growth initiatives in emerging markets and other key geographies, while continuing to enhance our investment-grade credit profile.

Realigning our product portfolio.

Investment in our Priority Growth areas is proceeding well.

By year end, we expect to have doubled the amount of R&D spend versus last year in these areas and are on track to increase this amount even further next year.

Our cost reduction programs are also progressing well and producing tangible results.

CRV integration, essentially the integration of Guidant into legacy Boston Scientific, as now largely complete, and the related savings are well ahead of plan.

We have experienced near flawless execution with our Plant Network Optimization project, and are on track to achieve our goal of $100 million in annual gross profit savings beginning in 2012.

Project transformation.

Our effort to drive $200 million in annual productivity and efficiency within R&D is also progressing well.

We now have more than 30 full-time people working in tandem with our program management teams, which will help ensure the success of this project.

And finally, as we announced last quarter, we have moved into the execution phase of our 2011 restructuring program, which is targeted at achieving over $200 million in gross expense reductions exiting 2013.

Concurrently, the second fundamental area of focus is to expand the BSC footprint in emerging markets, specifically and especially in China, India and Brazil.

We have made meaningful progress over the last quarter, with strong double-digit growth in each of these countries.

Components of this progress include a number of key growth products, particularly PROMUS Element, have been launched and are doing well or are expected to be launched by year end.

Our commercial footprint is growing rapidly, with salesforce hiring, dealer expansion and training plans for 2011 on track.

We have hired over 200 new employees in China and India so far this year, with most of them in customer-facing roles.

In Brazil, we are executing a comprehensive market development plan and are educating our sales people on best practices in working with economic buyers.

We have created a clinical hub in China, which we plan to replicate in India and Brazil, to focus on local and country clinical trial activity with the aim of driving rapid regulatory approvals and obtaining important local data to better understand and market our products.

We have also begun executing our five-year $150 million plan to develop a local manufacturing operation and world-class position training center in China, which we believe will enable us to access more of that market.

In sum, the BSC Emerging Markets team is making measurable progress in all of our targeted markets.

Do we have more wood to chop?

Absolutely, for sure.

But we are gaining ground with a sense of urgency and let's get it done right mindset.

The key takeaway here is that we are only just beginning to see the benefits of our recent investments.

Third, and in terms of our priority growth initiatives, we continue to make progress with the six acquisitions made this past year, as well as a number of internal projects within these targeted areas.

Including in endoscopic pulmonary intervention, we are progressing well with the integration and commercial efforts of Asthmatx.

During the quarter, we fully integrated Asthmatx into our sales and distribution channel and launched the Alair Bronchial Thermoplasty System in two additional European countries, with additional sites in Europe scheduled for fourth quarter.

In the US, we are actively engaging national and regional payers to obtain consistent coverage in payment for BT.

In peripheral vascular, we expect the TRUEPATH intraluminal CTO device to begin a limited market release late this year in both the US and international markets.

And our off-road reentry CTO device remains on track for an international launch by year end, with US trial enrollment expected to begin in the first half of 2012.

In Structural Heart, specifically the Lotus Valve, based on our assessment of regulatory requirements, we expect to conduct a small feasibility study later this quarter called REPRISE I prior to the initiation of the CE Mark trial called REPRISE II.

We do not believe this will change our planned EU launch timing of the Lotus Valve in the second half of 2013 for EMEA.

In addition, the integration of Atritech has gone well to date.

We have focused a lot of effort over the last quarter in increasing our European clinical training, our infrastructure, our reimbursement expertise and sales focus.

Although the WATCHMAN, the Left Atrial Appendage Closure device, continues to grow its case volume outside the US, we are looking to accelerate this pace in the months ahead.

We remain on plan for US enrollment in the PREVAIL trial, which we expect to be used together with PROTECT AF trial data, to support future FDA approval.

In AMT, or Autonomic Modulation Therapy, we are now enrolling patients in the European NECTAR-HF trial, which will evaluate our unique approach in vagal nerve stimulation to improve heart function in patients who are not candidates for heart failure device therapy.

In Deep Brain Stimulation, the integration of Intelect's operations is now complete, and the development work on the GUIDE DBS system continues at a steady pace.

In Hypertension, we are focused on developing two unique technology approaches for the interventional medical device management of patients with drug refractory hypertension using renal denervation and expect to commence the first [demand] trial in 2012.

The bottom line here in one word is progress.

Let me finish with some overall perspective on the quarter, using Ray's legacy of what we liked and what we didn't like for takeaways.

I will start with what we like.

First and foremost, we like the fact that Mike Mahoney is now an official member of the BSC team and now can begin to actively engage with the people, the businesses and the functions he will have direct accountability for over the course of the next 12 months.

We also like how everyone involved, Boston Scientific, Mike and his former employer, were able to discuss and resolve Mike's post-employment obligations in a very constructive and professional manner.

Although Mike has been in his new role for just three days, he has hit the deck running hard.

And for those of you who know Mike, no surprise here.

This is just vintage Mahoney DNA.

Mike, again, welcome to the team.

Moving on to like number two, we like the continued improvement in our balance sheet strength and capital structure and the ability it has given us to aggressively buy back stock, as Jeff outlined previously.

Number three, we like the good growth in Endoscopy, PI, and the Neuromodulation businesses.

Each of these businesses continued to benefit from the strength of new products in the quarter.

Like number four, we like the recent positive developments in our DES franchise.

We are very pleased with the progress being made in the [TUXEDO] trial, which compares the outcomes of the TAXUS Element and ION with ION's prime in a diabetic population.

Enrollment has been rapid; already more than 160 patients have been randomized, and we look forward to the presentation of the one-year TVF primary endpoint data at a future major meeting.

We also like the prospects for our SYNERGY stent, the next planned BSC drug-eluting stent offering beyond PROMUS Element.

As the worldwide leader in DES technology, we expect to continue to advance our position within this space.

The 291-patient first human use EVOLVE trial of the SYNERGY stent is scheduled to be presented by the trial PI, Dr.

Ian Meredith, as a late-breaking trial at TCT on Friday, November 11.

This study forms the basis of the clinical data for the SYNERGY CE Mark submission, and we anticipate CE Mark approval as early as late 2012.

We expect the US IDE SYNERGY trial, called EVOLVE II, to be a global trial comparing SYNERGY with PROMUS Element, commencing as early as mid-2012.

We anticipate that we may also formally investigate a randomized, short DAPT, or dual-antiplatelet therapy, regimen as part of that trial.

The key takeaway here is that the economic burden, PCI with drug-eluting stents, resides in the cost of dual-antiplatelet therapy, or DAPT, and not in the cost of the stent per se.

This leads us to conclude that the low drug and polymer load of the SYNERGY stent should be ideally suited to a short DAPT treatment protocol, and we look forward to potentially investigating this in EVOLVE II.

SYNERGY is just one example of an innovative technology that we believe addresses both an unmet clinical need and a merging economic criteria.

As a platform, it has potential to be differentiated in value, not only by patients, but healthcare systems and payers alike, and as such, potentially sold at a premium, thus helping to address current DES ASP price pressure declines.

We are excited by this opportunity, particularly as SYNERGY has the potential to be the first bioerodable polymer stent commercialized in the US.

Like number five is that although we still have litigation challenges, we believe our exposure is far less problematic now than it ever has been for some time.

Our focus is on improving internal litigation management, monitoring our business practices to reduce future risk, and ensuring compliance in all we do, and that is paying dividends.

Simply put, our litigation risk exposure has been reduced dramatically.

So let me move on to dislikes.

The first is the continued decline in the US defib market.

During the third quarter, we saw further softening in implant volumes in the US.

And although we have seen some possible improvements here in recent weeks, this still is an area of focus for us.

As discussed in previous calls, this is a complex and multifactorial issue.

There are a number of issues in play here, including the reaction to the JAMA article, media articles, DOJ investigations, local inquiries into appropriateness of use, and the alignment of electrophysiologists with hospitals and hospital systems, where the EP is now an employee and not an operating partner.

These trends go beyond the impact of a couple of unfavorable studies or media stories.

That said, we continue to expect the worldwide CRM market to return to modest growth in the low single digits within the next couple years.

The good news here is that we estimate our D&O share remains stable sequentially, and we are also planning for FDA approval of our next-generation ENERGEN, PUNCTUA and INCEPTA models late this year or early next year, which will be a key to our 2012 CRM performance.

Number two in our dislikes is the continued weakness in elective procedures, which is consistent with what we have reported previously.

We continue to see this across nearly all of our businesses, and are closely monitoring procedural volumes with internal data and external market surveys, with an eye towards potential recovery times.

We are optimistic that a modest recovery will emerge as built-up demand for elective procedures begins to unwind.

We have carefully assessed how these trends may impact our Priority Growth initiatives and are confident that we are focused on new products, therapies and patient populations that not only are less impacted by these trends, but may be helped mitigate by their effect.

Dislike number three continues to be the strong, ongoing pricing pressure we are seeing in many of our key markets.

Price pressure has been an issue and we expect it to continue to impact our margins and continue to be one of our biggest challenges.

What can set us apart in this area is our ability to offer highly-differentiated products, like SYNERGY and the Alair Bronchial Thermoplasty System, that clearly demonstrate advantages through clinical data that bring value to physicians, patients and payers.

And finally, dislike number four is that it appears that one of our competitors is undertaking an orchestrated negative marketing campaign in an attempt to discredit the Element platform ahead of the US launch of PROMUS Element.

And contrary to what is being depicted, here are three key facts relating to axial length change, or ALC.

First, ALC is less common than many other well-recognized PCI-related complications, including failure to cross, stent damage and stent dislodgment.

Second, ALC is a low-frequency phenomenon and has been described in the literature with Endeavor, Resolute Integrity, Micro-Driver, XIENCE, BioMatrix, as well as Element.

And third, the recognition of ALC is clearly enhanced with the Element platform by the high radiopacity of its platinum chromium alloy, which, by the way, we believe to be in the patient's best interest because a physician is more likely to see when this rare event happens and then can treat it appropriately.

To paraphrase what one thought leader recently said to me, to persist with this competitive marketing campaign is just plain wrong and ill-conceived.

We agree.

Keep in perspective that there is a reason why the Element platform is the number one DES platform in Europe and many other geographies.

In my view, this campaign is simply a reflection of commercial anxiety and the appreciation that Element is a great platform, combining true performance, safety and efficacy.

They appear to be worried based upon the success of PROMUS Element internationally and the recent US ION launch.

And if this is anything to go by, they should be.

Enough said.

In closing, we believe we have shown measurable progress in continuing the execution of our POWER business strategy, with a near-term goal of improving our profitability through $650 million to $750 million in potential cost reduction and gross margin improvement opportunities, executing our share buyback program, while concurrently investing for future growth through our emerging markets and priority growth initiatives.

We remain committed to POWER and are focused on continuing our progress in the quarters ahead.

That's it for my comments, and I will now turn it over to Sean.

Thanks, Hank.

Greg, let's open it up to questions now.

In order to enable us to take as many questions as possible in the time we have left, please limit yourself to one question and related follow-up.

Greg, please go ahead.

Thank you.

(Operator Instructions) Glenn Novarro.

Hi.

Good morning, guys.

Thanks for taking my question.

Hank, thanks for the commentary on axial length.

The international sales, though, did come in below our expectations.

So do you think this issue is having an impact on sales overseas?

I am also wondering how the business is doing in Japan with the new competitor.

And then I just have one more follow-up on PROMUS Element.

Thanks.

I don't think -- my view is that ALC has not adversely impacted the stent performance that you are seeing in the international markets today.

There has been a lot of noise about it, for all of the reasons that I think you appreciate.

But from what I have seen, it hasn't been an area of overly consistent impact in terms of what we are doing.

And in Japan, I think Jeff hit it well.

The rollout of one of the competitors was slower than we anticipated.

We benefited from that.

We also benefited from taking share from one of our other competitors there.

So it basically worked out pretty well to our advantage in that country.

Do you want to add anything to that?

Yes, Glenn, I would say that we continue to be very pleased with the strength of that platform.

If you look in Europe, we finished the third quarter with 32% of the market, and we picked up 100 basis points sequentially from the second to the third quarter.

And I would underscore the point that we are just beginning to get access to some of the tenders with Cordis' planned exit.

So we did very well in Europe.

And in the international markets, as I said in the script, we are just beginning to get pricing approvals in key end markets in India; we are ramping up the sales force and the dealer network in China.

We just got PROMUS Element approved.

So if anything, there is more confidence in the platform, not less confidence going forward.

And then my follow-up is, Hank, you said approval of PROMUS Element in the US mid-2012.

On the 2Q call in July, the commentary was if not sooner than that.

So, I know it is just wording, but do you still expect a sooner than mid-'12 approval and do these axial length issues, you think, have any impact on the FDA process?

Thanks.

I expect PROMUS Element to be approved by mid-2012, number one.

And two, I am not going to comment on kind of the FDA process.

But as a part of the FDA process -- and I think you know this -- when you go through a PMA, there is a very extensive review of all of the data, including adverse events data.

And we have been very complete, very transparent, and I promise you the FDA is very well-informed about this issue.

Okay, thank you very much.

Rick Wise.

Hey, good morning, and welcome, Mike.

Let me focus on ICDs.

And I will just ask one (inaudible) question, if you could take it, Hank.

You talked about September/October showing some encouraging signs of recovery.

Maybe you can be a little more granular about what you saw or any kind of quantification.

And maybe if you could address replacement headwinds, maybe quantifying the rough mix of de novo versus replacement.

And that is obviously not going to go away anytime soon, given the math.

Is that going to be a longer-term concern as you -- as even the market stabilizes?

Thanks.

Yes, Rick, I will give some qualitative comments and then ask Jeff to hit some of your quantitative points.

But, you know, if I look at what is going on in the market -- and I don't me to oversimplify this -- but I tend to look at it in three As.

It is all about the appropriateness of use, it is all about the audits, and it's all about alignment.

And you weave into that the seasonality factor and vacations.

There is a lot going on.

And one of the things I want to make sure that all of us don't lose sight of is that we truly believe -- and this has been demonstrated, I think, in recent publications -- that there are about 20,000 Americans that die every year due to the failure to refer for appropriate ICD or CRT use in our society.

So, there is an underpenetration that the pendulum has swung, given all of the dynamics that we are dealing with.

But having said that, as we exited the quarter, we did begin to see a pickup.

Now, can we call that today?

No.

As Jeff said in his prepared comments, we are going to need to wait another quarter or two.

We need to see where, obviously, Medtronic comes out.

But we are going to need a little bit more time to make a more definitive call on that.

Now, Jeff, you can provide more of the quantitative aspects.

Yes, I guess what I am comfortable sharing at this point is clearly in July and August, the unit volume was down, down more than we anticipated.

From the best we can tell at this point, the combination of the vacation period coupled with the change in employment incentives relative to the physicians, we believe had an impact on volumes.

But as you look at September, particularly the end of September, the volumes increased.

And as we look at kind of our results for the first 10, 12 days in October, they stepped up again, which gives us some confidence that things are starting to come back a little.

But it is too early to tell.

And we need to see what Medtronic reports.

We saw what St.

Jude said yesterday.

So we need to kind of see where that goes.

Relative to replacement, we are not going to get into a lot of details on the splits between replacement.

I think people know that we have more of a headwind replacement-wise than the competition does, and that is driven by some historical recall activity plus battery longevity.

We feel we have got an advantage from a longevity standpoint.

So, those are kind of the dynamics.

As I said last quarter and say again this quarter, it is going to take a couple of quarters to play out.

I think the whole competition is saying that.

But I would echo Hank's comments.

The demographics and the patient pool will be there.

We are confident of that.

We just have to get through the next couple of quarters and see where we bottom out here.

Thanks.

Mike Weinstein.

Thank you.

Good morning.

Can you hear me okay?

Yes, sir.

All right.

Perfect.

Jeff, as a starting point, I want to maybe take a step back and look at the progress the Company has made on the several restructuring and cost improvement initiatives.

It is hard to see it in this quarter, with where EBIT margins played out.

And that is obviously -- a lot of that is a function of what is going on in the ICD market as well as the stent market.

Can you give us a sense of how you are seeing it playing out internally, and whether we should be seeing more at this point?

Or is it just getting muted by the underlying fundamentals in your end markets?

Yes, it's a fair question, Mike.

I would say if we back up to the Investor Day, where we laid out $650 million to $750 million of short-term opportunities -- and let me just revisit those for people to remind them.

$200 million was PROMUS Element.

That is a full-year benefit of PROMUS Element coming in, assuming we just convert all of our PROMUS to PROMUS Element.

$200 million were these value improvement programs within our manufacturing area.

$100 million to $200 million was SG&A future restructuring of kind of corporate functions.

$200 million was project transformation, which was realigning the R&D function.

$100 million was plant network optimization, which is taking down plants from 17 to 12.

And then we had a negative $150 million in there for the med-tech tax.

Let me step through each of those.

PROMUS Element hasn't happened yet.

That's clearly tailwind behind, headed ahead of us.

I think as Hank had said, we feel very confident that it's going to happen at or before mid-point next year.

If that happens at mid-point, call that half that benefit, so that is future opportunity for us.

The VIP program is standard.

It is kind of what we do every day, so those will come through.

The $100 million to $200 million of SG&A, we just announced that program last quarter.

You really haven't seen any benefit this quarter and I don't think you are going to see much benefit next quarter.

However, 2012 and 2013, you are going to see a benefit, and we will get a good size of that in 2012.

So that is ahead of us.

Then you've got project transformation, same thing as the restructuring program.

We just announced that, so that is the benefit ahead of us.

And then the Plant Network Optimization, the $100 million, we closed the final plant, which is the largest by far, at the end of December.

So that benefit comes in '12.

And then we've got the med-tech tax.

So it's a roundabout way and a long way of kind of saying that almost all of the $650 million to $750 million, we haven't seen any of it yet.

And it's designed to come in in '12 and '13.

Now, obviously, I think the next question is, well, isn't the CRM market worse than you thought?

Absolutely, it is worse than we thought a year ago, so that is a headwind, clearly.

However, Cordis' exit from the market -- and we estimated that to be in the low $200 million of DES revenue that will be up for grabs -- is still up for grabs.

And we haven't seen much of that.

We think the majority of that is going to come outside the US, and that will start to free up next year.

And then we've got a share repurchase program.

The Investor Day didn't contemplate buying back any shares, and we bought back 30 million in the third quarter.

We are going to buy more in the fourth quarter.

And we don't have any material obligations next year, so you can expect us to be pretty active from a share repurchase program perspective, as well as business development.

So when I step back and look at the whole picture, revenue is a little softer.

That is undeniable.

That is correct.

We've got more headwind.

But we have got ample amounts of programs that we have as well as new things that have come to kind of position us pretty well.

And we're in the middle of the '12 plan, so we will be rolling it up and we will be able to share that with the Street, consistent with last year in kind of the February timeframe.

Okay.

I want to make sure we don't have a repeat of what happened, I think, between last November and early this year, which was I think that management was looking at a 2010 base that was different than the Street.

So in talking about the $0.67 to $0.70 that you are now guiding to for adjusted EPS for 2011, just to be clear, that includes $0.14 of one-time items.

So the real earnings base that we should be looking at to compare as we go to 2012 is $0.53 to $0.56.

Is that correct?

That's correct, Mike.

Frankly, that is not far off where we were in the Investor Day.

So the base is not terribly dissimilar, from that perspective, nor is the $650 million to $750 million ahead of us.

And then so if we think about going from 2011 to 2012, without getting, obviously, to the point where you'd start to give guidance, weighing into the factors is not only, on the negative side, what is playing out in the end markets, but the positive of the cost program and the share buyback?

(multiple speakers) big picture?

Yes, I think if your question is -- obviously, I am not -- we are not prepared to give guidance; we haven't finished all the work yet.

I would come back to your first question, that same answer would hold true.

I mean, certainly the market is more challenging.

That is undeniable.

But with the Cordis exit, the share repurchase, combined with very good progress on the $650 million to $750 million, we feel pretty good.

I think if you look at the $650 million to $750 million on the base of our operating income and compare that to the competitors, I don't think anybody has the number of initiatives we have lined up the next couple years.

Okay.

Thank you, Jeff.

David Lewis.

Hey, this is actually James in for David.

First, just a question on DES.

So it sounds like broader pricing trends there, down in the high single digits, are pretty consistent with what we have heard from you in the past.

But at the same time, you made the decision in some cases to withdraw from certain accounts due to price.

First, could you explain why you have made that determination to pull out from those accounts, given it looks like broader trends are pretty consistent?

Second, what extent do you think that is going to be a temporary dynamic driven by J&J's withdrawal?

This is Hank, James.

I don't think J&J's withdrawal had much to do with the pricing dynamic we are seeing in the marketplace.

Yes, they are doing some things to reduce their inventories, et cetera.

But as it relates to the overall general ASP declines, you are right.

We see them constantly in the high single digits, number one.

Number two, I am not going to get into competitive pricing strategies here in a public forum, but I will say there are certain cases -- and you have to look at each contractual situation separately, and you have to look at what the impact of that would be in the aggregate as well as local markets -- and then you make calls, based upon what you think is best for the business.

And in a couple of situations, we decided not to play, and I think for the right reasons.

Okay.

And second, on R&D spend, you have talked about a hard cap for R&D at $1 billion.

But in point of fact on this year, you're actually on track to spend somewhat less than $900 million.

Where do you see 2011 as falling kind of versus your long-term spending run rate?

And should we expect some reinvestment there as some of your acquisitions and internal development programs ramp up?

Yes, so if you look at our guidance base, we expect a slight uptick in the fourth quarter in R&D, but not enough to kind of get us up to perhaps the run rate.

I think the answer to that is going to depend on kind of our operating plan reviews that are upcoming.

The $1 billion was meant to be a cap.

We want to kind of limit it to $1 billion.

But as we move forward, if we can be more efficient and keep the units of R&D rolling around at the same pace and be more efficient on the cost side, we will look to do that.

So I guess I would kind of answer it in two ways.

One, the $1 billion is a cap.

But two, as we move forward, you'll probably see a little bit more R&D, not less than what you saw this year.

That is kind of what I guess I would be most comfortable saying at this point.

James, let me add to that.

The way I look at it is for $1 billion, we are getting a certain amount of productivity out of R&D today.

If we are successful with Project Transformation, we can amp up that productivity by roughly 20%, which is what we are trying to do.

And concurrent with that, what we are trying to do is to take the mix in terms of where we spend those R&D dollars and get more of that mix over the next two to three years, focused on the Priority Growth areas that we have covered with you previously.

And we are on track to do that.

All right, perfect.

Thank you.

Kristen Stewart.

Hi, thanks for taking the question.

Just wanted to focus back on the gross margin.

I think you had mentioned that the PROMUS Element, I guess reversal or whatnot, or I guess the inventory reserve, that was $20 million.

Is that correct?

That's correct, Kristen.

And it was a 110 basis point impact?

That's correct.

Okay.

You also mentioned in the remarks on the DES sales that you had a positive reserve for ION.

Did that have a positive impact on gross margins?

It did.

To the extent -- but we also had to supply the inventory, so it is more or less -- it is a slight mix benefit, it is not a big deal for the quarter.

Okay.

And so I guess can you also reconcile the fact that you're taking an inventory reserve now, but that launch is not expected until mid-2012.

So it seems like there is a pretty wide gap, and it either suggest that you expect timing a little bit sooner rather than later.

Or is it just a reserve adjustment, given your new expectations for maybe that line of business between now and the middle part of next year?

The way to think about it is given we source PROMUS from Abbott and we have a long lead time associated with procuring that, and the relationship ends at the midpoint of next year, we have been relatively conservative relative to procuring inventories.

So as we think about kind of a mid-next-year launch, we have got to look forward kind of 12 months to see whether we can use all the inventory we have in-house or that we are committed to buy.

And as we did that calculation this quarter, we determined that there were $20 million worth of inventory that we do not anticipate being able to use.

It is as simple as that.

To the extent that the time comes in on that kind of July 1 kind of timing, we would obviously have inventory -- an additional inventory we wouldn't be able to use, and we would probably have additional E&O charges, and that is what I was trying to spell out for people.

Okay.

So unlike in Europe, where you continue to sell PROMUS Element beyond the supply date, you would not do that, obviously, in the US?

I think you meant PROMUS, but yes.

PROMUS, yes, sorry.

Yes, I mean the benefits of us rolling out PROMUS Element quickly far -- in terms of incremental share and opportunity -- far outweigh any inventory charges.

Okay.

Perfect.

And then can you just give an update on CRM pricing in the quarter?

Sorry if I missed it.

From your perspective, was it pretty comparable with where it had been tracking or did it get worse as volumes also deteriorated?

I think what we have been seeing in the US pricing, we have said kind of the 3% to 5% range; we are probably kind of on the higher end of that at this point.

And I think, frankly, outside the US, particularly in Europe, I think pricing has gotten a little worse.

And I think that is driven by the macro factors that are in play across Europe.

Volumes are pretty strong, particularly on the tachy side, but the pricing is a little bit more of a headwind than it was before.

Okay.

And the new products, are those somewhat delayed?

I thought those were supposed to be more 2012 and out; sounds like more into 2013.

Well -- we have on the INGENIO side, we have CE Mark approval for INGENIO.

And we are conducting a limited market evaluation as we speak.

And we are aiming to move into a full launch in Europe in the first half of '12.

We anticipate that we will be launching that platform in the US also in the first half of '12.

And on the Progeny front, we are still targeting, as we said earlier in the script, late this year in the US or early '12 in the US.

So that wasn't a change to prior guidance then?

No, that's -- I think it is consistent with what we've said in previous quarters.

Perfect.

Thank you.

Larry Biegelsen.

Good morning.

Thanks for taking the question.

Jeff, 17% tax rate this year.

What should we assume going forward?

You know, I think we've said historically in the 18% to 20% range.

I think based on where we are earning kind of our dollars and what we are seeing, I am more comfortable at the lower end of that range.

So I would say like an 18% probably is a good rate to use for the next couple years.

And then we saw very dramatic decrease in heart failure hospitalizations through 2008 in the paper published in JAMA on Tuesday.

Do you think that is contributing to the decline in the ICD market?

And then lastly, do you guys have a view on 7-French leads?

Thanks.

Dr.

Stein, this is Hank.

Could you comment on the first part of the question and then I will take the second?

Yes, sure.

Thanks, Hank.

Larry, I think that the data that are published -- it's actually in this JAMA article that just came out -- showing a substantial reduction in heart failure hospitalizations in the US.

I think, first of all, I think everyone has to recognize that that is testament to the great success of the med-tech endeavor over the past decade in the US, and particularly successes both on treatment of acute coronary syndromes, drug-eluting stents, et cetera, as well as, frankly, the effect of technologies like CRT on reducing heart failure hospitalizations.

I think it is probably too early to make any conclusion that that reduction in hospitalizations is at all linked to a reduction in volume of procedures.

And in fact, the proof that we have got, for instance, from trials like MADIT-CRT, that early intervention with CRT in patients with heart failure, before they reach the stage of needing a hospitalization, improves outcomes and reduces hospitalizations may actually be the sort of thing that, as Hank mentioned, in the new economic environment, in a world where we are looking to improve outcomes, increase efficiency in the system really ought to drive more (technical difficulty) for technologies like CRT.

And the last part of my question, Ken?

Hank, did you went to take the 7-French leads or did you want me to take that?

You can take it and I am going to add on.

All right.

I'll let you pile on.

I think -- as everyone knows, right, there has been a lot of noise recently, in particular about one of our competitor's 8-French, 7-French leads, and specifically Riata/Durata.

You know, I want to sort want to preface what I'm going to say.

As Mike Mahoney said, our mission is to improve the quality of patient care.

And we don't take any particular joy or pleasure in looking at patient safety issues, even if they are affecting our competitors.

I think the key thing to bear in mind as you look at this particular issue is, much as with previous lead issues, it is not a function of the diameter of the lead per se; it is a function of design and construction of the lead.

We have seen the data from Ireland.

They are obviously concerning.

We're starting to hear an increasing volume of anecdotes from the field.

I am certain we are going to see more data on this from independent investigations.

Having said that, I am not going to speculate on the ultimate dimensions of any potential safety issues with one of our competitors.

The only thing that I will say is we are extremely comfortable and actually proud of our own approach to quality of patient safety, both from a standpoint of product design, but also from a standpoint of a commitment to being honest, to being clear and to being prompt in communicating issues with patients and physicians.

And I just want to highlight, the proven record of dependability and reliability of our own ICD leads, our RELIANCE ICD dual-coil, active-fix lead, which is our most popular lead, has a 99% reliability out seven years of follow-up.

That is confirmed not only in our own data, but in independent physician publications, data that shows that use of Boston Scientific leads decreases the risk of lead failure compared to implant with the leads by our competitors.

So I will leave it over with Hank to say that we are comfortable and proud about the reliability of our own leads.

Larry, I don't think I can add any color commentary to that.

I think Ken did a thorough job.

The point I was going to make was the point that he made about how we feel about our RELIANCE platform, so --

Thank you, gentlemen.

Tao Levy.

Hi, good morning.

I was just wondering if maybe you could comment a little bit on the international performance in the quarter.

It seemed like EMEA growth-wise did a little bit better, obviously, a lot better than in the US.

Maybe you could talk about some of the trends that you are seeing in that market, more just from a healthcare utilization standpoint.

And also maybe on the Inter-Continental side as well.

And I didn't hear you guys talk too much about M&A, and I am just wondering where that fell in terms of use of cash.

You obviously talked about share buybacks, but that would be helpful too.

Thanks.

So, Tao, it's Jeff.

Relative to growth, let's go through the regions.

Europe had a pretty good quarter, frankly.

And despite austerity measures, some pressure on procedures, we talked about -- Kristen asked about pricing -- I think pricing was a little bit more difficult in Europe for CRM -- we still had a pretty good quarter.

And we are just beginning to see the benefits of, let's say, the Atritech acquisition that is going fairly well there.

New technology, the Progeny launch just came out.

DES, PROMUS Element, we keep picking up share.

So net-net in a choppy, challenging environment, Europe performed pretty well.

As you move further east, the emerging markets had a very strong quarter and we are very pleased with the progress.

As Hank had said, we have put in now over 200 reps in the last nine months alone and trained them, got the right reps.

We have doubled or tripled our dealer network, including adding some very strong management resources in key areas.

And we also got some very important product approvals and pricing approvals, both within regions and large customers in India and China.

So we are kind of right where we want to be relative to the emerging markets.

And just to remind people, that is a $700 million market growing 20% that we have less than -- we have a handful of share points.

So that is a big opportunity for us.

So we really like kind of where we are positioned and we are really starting to get some traction.

And on your M&A question, the short answer is, absolutely, we are focused on M&A.

And we have an active BD process that we are managing, and that is all I will say for now.

But it is a very important part of what we want to execute with POWER.

Great, thank you.

Bruce Nudell.

Good morning.

Thanks for taking the question.

Hank, you know, it sounds as though in the US market for ICDs that about half was volume and half was price at the current time.

Just looking forward, even if units kind of stabilize where you get a constant percentage of the incidence population, why shouldn't price devolve to what we are seeing in stents today?

And just your comment on that.

So we have like minus 5% to minus 10% continual price pressure.

Well, I can't predict the future on that, Bruce.

But I do think the dynamic between the electrical side of the house and the plumbing side of the house is much different.

The platforms that we see coming out I think with Progeny are going to be fairly important platforms for us.

And I think we are going to have some features that will really differentiate us.

So is the price pressure going to continue to be there?

Yes, but I think it is going to be in the neighborhood of kind of the mid-single digit.

I do not see it jumping up to high single digits, long story short.

But let's say units stabilize and grow at, let's say, 1% or so.

Does that just condemn the US market to minus 4%?

Do you have a perspective on that, Jeff?

It could potentially, Bruce.

However, outside the US, I think the market is doing better than that.

We have always said -- if you back up a year ago, we said kind of a flattish market.

Then early this year, we said kind of down, kind of low single digit; now we're kind of mid-single digits, if you will.

It is going to take a couple of quarters to kind of play out to see where we land.

But that could mean that the US market is flattish to slightly down, and we're just going to have to operate in that market.

The one thing I just want to be clear on -- I think you said kind of 50-50 in terms of the market being down, units, price.

It is more two thirds units, a third price, just to kind of be clear on that.

That's right.

Okay, that's great.

And I just was feeding off of what Hank said about minus 5% in price recently, and that is where I got that.

Now, just looking at -- I went to the Premier meeting, and I was actually taken aback by their assertion that hospitals lose money on Medicare-funded med-tech cases.

I don't exactly believe their math.

But to me, it was either they took the trouble to fabricate something or they honestly believe it.

What's your comment on the extent to which med-tech cases are being targeted?

And then how bad is that likely to be over the next five years?

I can't speculate on whatever data, obviously, Bruce, that you saw this conference.

But let me try to answer your question this way.

What we brought in and had a session, Jeff and I did, along with some other people, was probably the top 15 CEOs of cardiovascular service lines in the US here recently.

And what some of my takeaways were -- and Jeff, I'll let you summarize what your key takeaways were -- is that they are all, in one way, shape or another, trying to figure out what (inaudible) means, one.

Two, they are all fixated on value-based pricing.

That leads you to three, and they are very much fixated on, okay, how can I lower my overall episode of care costs and avoid patient reintervention because of how the dynamics of value-based pricing will work out.

And interestingly in that, they were not fixated just on us price.

They are fixated on a solution, sharing risk, technology that brings demonstrated clinical differentiation as well as economic differentiation.

And it wasn't just they want to play the ASP price card.

So they are beginning to look at things like how can manufacturers like us help them with some of the challenges that they have with supply chain?

Are we willing to share risk with them in terms of some of the dynamics they are going to be dealing with in terms of heart failure readmission, et cetera?

So I don't think it's a simple answer to the question.

I do know that they are very fixated on how they are going to be effective in the value-based pricing world, and they are very open to working with manufacturers who are proactive in their thinking in terms of how we might help them deal with that environment.

Thanks so much.

I would agree with that, Hank.

And as you listen to some of these customers kind of talk about what their key initiatives are, a lot of them are around productivity -- leveraging IT investments, or design the way their supply chain works from a productivity perspective to ring costs into the system, we are focused on exactly the same things.

And there is no reason why we can't work together to drive costs out and each mutually benefit.

So I would agree with Hank.

I think there are lots of opportunities and we had a really good meeting.

The other thing I just want to make sure people are aware of, and we talked about this when we did the Investor Day, is when we did the five year plan kind of that fed into the Investor Day, we assumed that the pricing environment would stay fairly challenging.

So, Bruce, your question is a good one, but to a certain extent we haven't assumed that negative pricing goes away.

We have assumed that it kind of continues, so we have that planned in as we go forward.

Whether we have enough planned in or not, we will have to kind of see.

Thanks for your time.

Greg, at this point we are going to take one more question today.

Charles Chon.

Great, thank you.

I would like to go back to the gross margins for the quarter.

So all the one-off items here that impacted gross margin, it seems that we had more or less an idea that these items would hit during the quarter, such as neurovascular, the impact there, FX.

Inventory reserves for PROMUS Element, that is probably something that was planned, and yet the guidance coming into the third quarter for gross margin would be 65% to 66%.

So as we look at the gross margin guidance for the fourth quarter and you have seen gross margins go back to 65%, 66%, just by coming in below 64% in this quarter.

As we think about this gross margin guidance for the fourth quarter, what are the knowns and unknowns that we should be thinking about to understand the probability of landing in your guidance range?

Well, let's talk about the third quarter and then the fourth quarter.

So we put out guidance, 65% to 66% gross margins for the third quarter.

We came in at 64.2%, I think it was.

And there's about 110 basis points or PROMUS Element impact.

We would have been at the low end of that range.

To me, that is kind of -- that all makes sense.

The PROMUS Element is kind of a quarter to quarter; it is almost a monthly if not a weekly kind of decision we go through in terms of placing purchase orders in light of kind of the relationship ending with Abbott at the end of the second quarter of next year.

So that is just kind of a decision that we kind of make as we go along and we kind of recalibrate where we are, and we reach conclusions on the amount of inventory we want to carry, commit to, and what we think we will need and when we think we will get approval.

All of those are variables that move.

So that was not planned relative to the guidance.

So if you adjust for that, then our margins were a little lower.

We had FX kind of move against us a little bit from a margin perspective.

And we also had lower volume.

Anytime you have lower volume, you are going to have lower gross margins; that is just what happens.

So as we look into next quarter, we are pretty comfortable that -- as I said at the beginning, to the extent that that PROMUS Element approval moves in more, then we are going to have to look at kind of our inventory position and our commitments.

So that may weigh a little on the 65% to 66% gross margin.

But we are pretty comfortable with that margin estimate for the fourth quarter.

Okay, so would it be fair to think that gross margins in the third quarter here, they are kind of a low water mark for Boston Scientific?

You're looking for guidance for 2012.

Perhaps (laughter).

I would point you back to Mike's question, which was a good one at the beginning.

If you look at -- split it another way, if you look at the initiatives we have that are going to impact gross margins, clearly the PROMUS Element mid-year next year is $200 million for the full year.

If we get half of that, $100 million.

That goes right to gross margins.

The Plant Network Optimization of $100 million, that goes right to gross margins.

The VIPs that our manufacturing group kind of works on every day, that goes to gross margins.

So we have a number of favorable tailwinds relative to gross margins, and we are hopeful to kind of push those up and you expect those to go up going forward.

Okay, great.

Thank you very much.

With that, we will conclude the call.

Thanks for joining us today.

We appreciate your interest in Boston Scientific.

Before you disconnect, Greg will give you all the pertinent details for the replay.

Thank you.

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