Boston Scientific Corp (BSX) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Boston Scientific Q2 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 call is being recorded.

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

Please go ahead.

Thank you, Linda.

Good morning, everyone, and thanks for joining us.

With me on today's call are Hank Kucheman, Chief Executive Officer, and Jeff Capello, Executive Vice President and Chief Financial Officer.

We issued a press release earlier this morning announcing our Q2 2012 results which included key financials and reconciliations of the non-GAAP financial measures used in the release.

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

The duration of this morning's call will be approximately one hour.

Hank will begin our prepared remarks then update on our business progress and his perspectives on the quarter.

Jeff will then review our Q2 financial results and business performance as well as Q3 and updated full-year 2012 guidance.

We will then open the call up to questions.

During today's Q&A session Hank and Jeff will be joined by our President Mike Mahoney, as well as our Chief Medical Officers, Dr. Dawkins and Dr. Stein.

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, should, and similar words.

These forward-looking statements include, among other things, statements regarding our growth; market share; our products and the markets for them; product pipeline; new product approvals, launches and performance; procedural volumes and pricing trends; clinical trials, cost savings, and growth opportunities; investments in emerging markets and business development opportunities; the timing and volume of share repurchases; free cash flow and it uses; the impact of foreign exchange rates; our future financial performance including sales, margins, earnings, and losses, and other guidance for the third quarter and full year 2012; impairments of our goodwill and other assets; and future tax rates, R&D spending, and other expenses.

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

Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and 10-Q filed with the SEC.

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

At this point I will turn it over to Hank for his comments.

Hank?

Thank you, Sean, and good morning, everyone, and thanks for joining us.

Let me begin today with some comments on our second-quarter performance.

Our second-quarter revenue of $1.828 billion was down 7% on a reported basis and down 4% in constant currency, and excluding the neurovascular divestiture.

There is no doubt that this was a tough quarter from a top-line perspective.

A challenging economic and competitive environment, coupled with disappointing results in our largest businesses as well as a larger-than-expected headwind from foreign currency, lead us to come in below the end of our 2Q sales guidance range.

Despite this result, we remain focused on returning to top-line growth in the near term and building on that over time.

I will outline the reasons for why we believe that to be a case here in a minute.

On an adjusted basis our earnings performance was a positive in the quarter as we delivered adjusted EPS of $0.17, driven primarily by continued gross margin improvement and cost control.

This was above Street consensus and at the high-end of our guidance range of $0.14 to $0.17 despite the revenue shortfall in the quarter.

During the quarter we recorded an estimated $3.4 billion goodwill impairment charge relating to our EMEA reporting unit.

This charge was primarily driven by the slightly lower projected long-term growth rates due to macroeconomic factors and our performance in the European market.

To be clear, we still believe our revenues in EMEA will grow in the future, just at a slightly lower rate than we had previously projected.

Jeff will cover this event in more detail later in his comments.

Operating cash flow was very strong at $407 million.

We used a portion of our cash flow to make the upfront payment for the Cameron acquisition and a portion to buy back another 18 million shares of stock in the quarter.

We believe our stock price is undervalued and we expect to continue repurchasing shares as part of our balanced capital allocation strategy in coming quarters.

From a business standpoint -- from a performance standpoint, another significant positive in 2Q was the continued, and in some cases increased, constant currency growth we saw in several of our businesses.

Our PI, endoscopy, and urology businesses delivered mid to high single-digit growth in the quarter.

Even more impressive was the performance of our Neuromod business, which grew 10% compared to 2Q last year.

And, in the emerging markets of China and India, we also grow at above-market rates with an increase of over 40% on a combined basis.

In total, seven our 12 businesses grew greater than market.

We expect to see continued above-market growth from these businesses and regions in the future, which is a key element of our expected path back to top-line growth for the Company.

Let me start off with our IC business where we face challenging conditions in 2Q, but believe there are a number of reasons why we expect to see some stabilization beginning in the second half of the year.

In the US DES when you experience some share loss largely due to trialing of competitive new products.

The greatest impact came in the month of April; however, we saw steady recovery in May and further recovery in June.

We believe we have clear line of sight to stabilizing market share back in the low 40%s in the second half of the year.

This was based on a combination of factors including the abatement of competitive product trialing, the June launch of the PROMUS Element Plus long length, which we expect provide access into previously locked out accounts, and the strong clinical results of the Platinum landmark two-year data which demonstrated superior performance for PROMUS Element over XIENCE, the first time that any stent has been shown to be superior to XIENCE in a randomized trial, coupled with improved clinical differentiated selling.

In Japan the launch of PROMUS Element has gone very well, but we expect to see a similar dynamic play out there in the second half of 2012 as customers trial competitive new products and we obtain approval for the long lengths.

From a US pricing perspective, year-over-year pricing trends continue to be somewhat improved.

We are focused on pricing discipline and have continued to walk away from some business when pricing did not make economic sense for us.

We continue to see US PCI volumes down in the low-single digits, offset by robust growth internationally, particularly in the emerging markets.

We believe the US weakness in PCIs is largely being driven by continued physician alignment with hospitals and the macroeconomic environment.

In the emerging markets of China and India our biggest opportunity is in DES.

We expect increasing productivity to continue to drive strong sales growth following significant investments we have made since 2011.

In addition, we recently strengthened our leadership team by hiring a new and experienced leader for China who has already sharpened our business focus and execution.

In terms of our IC pipeline, we continue to be excited about our next-generation SYNERGY stent and its potential to improve healing, reduce (inaudible) therapy duration for patients, and thus lower overall healthcare system costs.

Compelling one-year data were presented at EuroPCR and we expect CE mark before the end of the year.

Following European approval, we plan to commence an initial limited market release focused on building a broad array of clinical evidence to support the full European commercial launch, which we expect in early 2014.

The overall goal here is to develop the fact base to support the synergy premium technology and unique value proposition with robust clinical evidence and meaningful indications.

On the structural heart front we are very encouraged by the REPRISE I experience and the data presented at PCR by our principal investigator, Dr. Ian Meredith.

Feedback we have received from implanting physicians supports our belief that the Lotus valve offers a true second-generation set of features, including the valve being preloaded on the delivery system, valve function very early in the deployment process which makes precise placement a less stressful proposition, and the ability to fully recapture and reposition the device if needed.

We are also encouraged by the low post-implant transvalve gradient, the [aortic] valve area, and the promise of reduced perivalvular leakage due to our unique adaptive seal.

We expect to begin the REPRISE II trial later this year and complete patient enrollment in the first half of next year.

And we expect to use the data from that trial to support CE mark approval and European launch of the Lotus valve in the second half of 2013.

Although we now expect the cost to bring the Lotus valve to market to be higher than previously estimated, due in part to changes in the regulatory environment, we continue to believe that it represents a significant future growth opportunity for us.

For the rest of the IC business, we are following the model that we successfully used to rejuvenate our PI business, which I will speak to here in a minute, by investing in a renewed pipeline to bring a series of new products to the market.

We have just begun to see some of the new products start to contribute with the European launch of Emerge PTCA balloon catheter in second quarter.

Emerge is getting rave reviews from our customers all around performance in a product category in which BSE has lead for decades.

During the third quarter we expect to launch Emerge in the US, as well as introduce our new Convey [French] guide catheter and IVUS software upgrade.

We believe that Emerge will enable us to expand our overall market share position in plain-old balloon angioplasty or POBA.

We expect the combination of this new product pipeline and additional external opportunities, such as the recently announced collaboration with Philips Healthcare to sell Boston Scientific imaging products, to drive the non-stent IC business back towards growth.

In Peripheral Interventions we expect to grow above market in the US as we execute the full launch of the Epic Self-Expanding Vascular Stent and with the introduction of more new products in the next few quarters.

Internationally we relaunched the Innova Self-Expanding SFA Stent in Europe in 2Q and are enrolling patients in a trial to gain approval in the US and Japan.

We saw growth in every region of the world in this business in 2Q with the emerging markets, including China and India, showing the strongest growth.

In endoscopy we continue to expect our recent product launches to bolster our already strong endoscopy above-market growth profile.

During the quarter we experienced broad growth across several of our key product franchises -- our biopsy business, our (inaudible) device franchise driven by continued growth in our Expect EUS needles and Access products, our metal stent franchise led by our industry-leading WallFlex product family, and our hemostasis franchise on the continued adoption and utilization of our resolution clip for GI bleeding.

On June 11 we held our first analyst meeting primarily focused on the Endoscopy business and the bronchial thermoplastic, or BT, opportunity.

We were very pleased to showcase the Endoscopy business and provide a deeper view into why we expect BT to be a $1 billion worldwide market and a contributor of meaningful sales growth commencing next year.

The what's new here is that all of the seven largest US private payers have now covered the BT procedure for individual patients.

We believe this is a significant change from even six months ago and is an important precursor to broader coverage and reimbursement.

We also just signed up our 150th US treating center and are ahead of schedule to reach our year-end goal of 200 centers.

In Urology and Women's Health we expanded the commercial launch of our Backstop Gel which is designed to prevent stone migration during stone management procedures.

We continued to believe this business has considerable above-market growth potential and are planning to introduce several new and differentiated technologies in both our pelvic floor and urology franchises later this year to help realize that potential.

In Women's Health we also expect comps to get easier in the second half of the year due to the negative impact of last year's FDA public health notice update on mesh.

In Neuromodulation we continue to expect very healthy growth on the back of our product portfolio; that clearly differentiates us from our competition.

Looking ahead we expect to introduce several clinically relevant innovations to provide physicians and their patients greater flexibility for their management of chronic pain.

As an example of this type of meaningful innovation is the recently launched Infinion lead, the industry's first and only 16-contact percutaneous lead, which has been received enthusiastically by the physician community.

Looking forward, we believe our DBS program remains on track to be a growth contributor beginning in 2014.

Now let me move to CRM where we continue to see a sluggish global market.

In US we estimate the defib market declined around 5% in the second quarter.

From a share perspective we estimate that our total overall US defib share was down approximately 100 basis points compared to 2Q last year, with modest de novo share gains and higher defib lead sales more than offset by continued replacement headwinds.

On the US pacer front we believe we began to take share in 2Q as we ramped the launch of an Ingenio in June.

Consistent with one of our competitor's recent comments, we believe that the worldwide CRM market will continue to be sluggish in 2012 declining approximately 3% to 5% for the full year on a constant currency basis.

While we expect year-over-year comparisons will improve in the second half, we have not concluded that we have seen the bottom of the CRM market at this point.

We have worked hard to position our CRM business to succeed and grow in the future, and have built a unique and competitive portfolio of arrhythmia management products which we believe will enable us to take share over time in both defib and brady.

In the near term we also expect to benefit from easing comps due to mid-teens decline we experienced in US defib market in the second half of 2011.

In the US the launch of our INCEPTA, ENERGEN, and PUNCTUA ICDs and CRTPs continues to go well with positive customer feedback and ASP uplifts in line with our expectations.

On the pacing side we began a new era with the initial launches of the INGENIO family of pacemakers and CRTPs in both Europe and US in the latter part of the second quarter.

We are very pleased with the rollout based on the positive feedback we received from customers.

Having a wireless RPM-enabled device, along with significant new features like right rate and respiratory rate trend, has upgraded our pacer offering significantly.

In the US we have been particularly pleased with our ability to get customers on contract nearly three times faster than we anticipated along with strong ASP performance.

INGENIO is our first new brady platform in many years and we continue to believe that its potential to drive share gains and the worldwide pacer market is underappreciated.

More recently, we gained European approval for our first brady remote patient monitoring system, LATITUDE NXT.

We also expect the first implants of our new brady MRI-safe system to take place in Europe very soon.

In the US we expect to start a brady MRI trial later this year.

In addition to the recent progress in our traditional CRM business, we are very happy to have closed the Cameron transaction and have welcomed the Cameron team to Boston Scientific.

We believe that this acquisition is strategically important to our CRM business and that the S-ICD technology provides us with the opportunity to both take share an existing ICD markets but also expand the market over time for three key reasons.

First, the S-ICD -- we will establish the first new category of CRM devices since the introduction of CRT.

The S-ICD is the world's largest and only commercially available completely subcu ICD that leaves the heart and vascular untouched.

This new subcu category provides physicians and their patients with a new alternative that only BSE can offer.

Second, we expect the S-ICD to capture de novo share in the ICD market.

In clinical trials and commercial experience the S-ICD has gained broad utilization in primary and secondary prevention population and across a wide range of patient conditions and agents.

In addition to de novo share, we also expect to take share in complex ICD replacements.

A meaningful percentage of the S-ICD implants in clinical trials and commercial experience were among patients with prior transvenous systems.

Finally, we believe the S-ICD will gain preference among referring cardiologists who have indicated through our research that they would preferentially refer patients for the S-ICD.

Furthermore, referring cardiologists also indicated they would actually increase the number of ICD referrals they make as a result of the S-ICD, which could help expand the market.

Physician feedback at HRS and other recent congresses and our medical advisory board suggests that the S-ICD has potential to be the major what's next in this market as a truly differentiated technology.

And we agree.

We and our colleagues from Cameron are focused on securing FDA approval for the S-ICD in the first half of next year, although we are hopeful that it could come sooner.

In addition we continue to advance the WATCHMAN device, both commercially and clinically.

In May the HF registry data was presented at HRS showing a 77% reduction in stroke risk in patients with afib ineligible for OAT therapy.

We also completed enrollment in the confirmatory PREVAIL US trial on schedule earlier this month and continue to expect our FDA PMA submission around year-end with approval expected by the end of 2013.

Finally, in our EP business we continue to leverage our expertise in catheter and ablation technology as we execute our global afib strategy and progress on our internal afib-focused projects.

We recently received conditional approval on our IDE with the FDA for our afib clinical trial, Zero-AF, utilizing laser open irrigated catheter.

Enrollment is slated to begin in the fall.

To conclude, we were clearly disappointed by our 2Q performance in our largest businesses, particularly IC.

However, we also grew above market in seven of our 12 business units.

We continue to believe there is a clear path back to near-term sales growth and achieving our second-half objectives through share gains from new and recently introduced products and improved sales execution, as well as increased penetration in emerging markets and easing second-half comps in defib and women's health in the US.

At the same time we continue to achieve key milestones relating to our cost reduction opportunities to drive earnings growth and to generate strong cash flow.

We expect this will allow us to maintain the flexibility to balance investments in emerging markets and growth technologies along with returning capital to shareholders through share repurchases.

That is it for my comments, so now let me turn the call over to Jeff.

Jeff?

Thanks, Hank.

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

Despite challenging global economic and end-market conditions and disappointing results in certain businesses that adversely impacted revenue, we generated adjusted earnings per share of $0.17, which was at the high end of our guidance range of $0.14 to $0.17 and above Street consensus of $0.16.

This solid profitability was driven by higher gross margins due largely to the continued rollout of PROMUS Element in the United States and Japan, and continued strong attention to cost control.

In addition to our strong adjusted earnings performance, we also generated $407 million in operating cash flow and repurchased another 18 million shares in the quarter.

During the quarter we recorded a new $3.4 billion impairment charge to write-down goodwill associated with our EMEA reporting unit, reducing the goodwill from $4 billion to $600 million.

This goodwill largely relates to our purchase of guidance in 2006.

Accounting rules require us to test our goodwill balances each year for impairment.

As a result of our analysis performed in conjunction with this year's annual goodwill impairment test, we slightly lowered our revenue growth projections for EMEA reporting unit due to recent macroeconomic factors affecting the European market and our recent performance in that market.

This reduction in revenue growth assumptions for the EMEA reporting unit resulted in the estimated goodwill impairment charge in the quarter.

It is important to note, given the size of our goodwill balance in this region, even small changes to expectations can have an impact on these carrying amounts.

We still believe Europe represents a future growth opportunity for the Company given our new products and future technology offerings, coupled with the aging population and underpenetration of our therapies in that region.

The amount of goodwill impairment charge is subject to finalization and is expected to be within a range of $3.1 billion to $3.7 billion when finalized.

As a reminder, this is a non-cash charge with minimal tax consequences and has no impact on our expected cash flows or our bank covenant ratios.

We will continue to monitor all of our goodwill balances for potential impairments as required.

Consolidated revenue for the second quarter of $1.828 billion represents a decrease of 7% on a reported basis and 4% on an operational basis, excluding the impact of foreign exchange and the divested neurovascular business.

The actual headwind from foreign exchange on sales was $50 million compared to the $40 million headwind assumed in our second-quarter guidance range, and the divested neurovascular business contributed $11 million less in sales in the second quarter compared to the same quarter last year.

Now I will move to the detailed review of our business performance and operating results in the quarter.

Starting with DES, worldwide revenues came in at $318 million in the second quarter, representing a constant currency decrease of 18% compared to the second quarter of 2011.

US DS revenues were $140 million in the quarter, representing a decline of 33% compared to the second quarter last year.

This decrease was primarily due to a strong comparison to the prior-year quarter driven by the launch of ION in the second quarter of 2011, lower share due to recent competitive product launches, lower ASPs, and continued softness in PCI volumes.

We have completed our conversion from PROMUS and returned to fully self-manufactured DS margins in the US late in the quarter.

We also began the launch of PROMUS Element long lengths in early June which has already begun contributing to share recapture.

We estimate that our US DS share was down approximately 700 basis points from Q1, mainly due to the launch of competitive products and not having PROMUS Element Plus long lengths for most of the quarter.

Trialing of the competitor's product lasted longer than anticipated with April being our low watermark.

However, we have been recovering share since April with sequential improvements in May and June and we exited the quarter with an estimated share in the low 40%s.

We expect to further stabilize our share position in the second half as we complete the introduction of PROMUS Element Plus long lengths and benefit from recent contracting wins that we expect to contribute significant incremental revenue.

International DS sales of $178 million represented a decrease of 2% in constant currency compared to Q2 of last year.

In Japan, the launch of PROMUS Element has been very well received and we estimate we have grown our share there more than 300 basis points over the prior year.

We are also continuing to build momentum with our Element platform in the emerging markets including India, Brazil, and China, and expect this to accelerate through this year.

Moving to CRM, worldwide CRM revenue was $488 million in the second quarter, representing a constant currency decrease of 8% compared to Q2 last year.

In the US CRM revenue of $284 million represented a 10% decrease from the second quarter of 2011.

International CRM sales of $204 million were down 5% in constant currency compared to the prior year.

On a worldwide basis defib sales were $355 million in Q2, which was down 7% in constant currency from the second quarter of 2011.

In the US defib sales were $220 million, which was down 10% compared to Q2 last year, due primarily to the market declines experienced in the second half of last year , replacement headwinds in our business, and a lower level of bulk sales.

However, these factors were partially offset by continued and significant increase in sales of our highly reliable RELIANCE defib lead platform within the quarter.

We continued to launch our new line of defibrillators in the US.

This innovative, new tiered product offering continues to be very well received in the marketplace and we plan to continue promoting their differentiated features as we continue the launch.

Looking at the broader US market, de novo defib implant volumes looked like they continued to be relatively stable sequentially based on the data we have so far for the second quarter.

If this proves out, it would make three straight quarters of relatively stable de novo volumes.

However, we do want to see how the rest of the market reports and plan to continue to monitor market conditions carefully before calling a bottom on implant rates.

International defib sales of $135 million represented a 3% decrease in constant currency from the second quarter of last year.

We are launching new products in many countries outside the US and expect improved performance during the second half of this year.

Finally, in pacer the launches of our INGENIO pacemaker family in both the US and Europe are going very well, and we have received positive feedback from customers.

Moving on to our Peripheral Interventions business, PI delivered strong growth again this quarter with double-digit increases in Asia Pacific and Canada and 7% in the US.

Worldwide revenue within this business was up 7% in constant currency in the second quarter.

Once again, we drove higher growth from new product launches and stents, balloons, and CTO devices, and we expect this growth to continue.

Average selling prices were favorable benefiting from a favorable mix shift to higher ASP products.

Looking forward, we have several other key product launches planned that we expect to help drive continued revenue growth throughout 2012 in this $700 million-plus business.

Worldwide non-stent interventional cardiology was down 4% constant currency.

While revenue declined in the US compared to the second quarter of last year, we were very encouraged that our international business turned positive for the first time in quite a while.

We expect to launch new products in vascular access, balloons, and IVUS later in the third quarter, and expect to see improvement in this business as a result.

Worldwide elective physiology was flat in constant currency during the quarter as some softness in both the small tip and large tip US businesses was offset by growth in other segments.

Our Endoscopy business had another solid quarter with worldwide sales up 7% in constant currency, led by 8% growth in the US.

This performance was a result of broad growth across several of our key product franchises.

In addition, our bronchial thermoplasty business continued to build momentum with revenues of $3 million in the quarter, which was nearly as much as we generated in all of 2011.

We expect bronchial thermoplasty to be a meaningful contributor to growth revenue growth in 2013.

In constant currency, our worldwide Urology/Women's Health business was flat versus second quarter of last year but was up 10% internationally.

The Urology business maintained its leadership position and delivered 6% worldwide constant currency growth driven by strong international growth of 11%.

Our Women's Health business declined 13% on a worldwide constant currency basis, primarily due to the continued pressure on elective procedures and concerns around the use of surgical mesh for pelvic organ prolapse.

Outside of the US our international Women's Health business experienced excellent growth and was up 16% in constant currency, driven by new product introductions, increased sales investments, and the penetration of new therapies.

In Neuromodulation we maintained the momentum that we built in the first quarter of the year and grew a very healthy 8% in the US market and 32% internationally.

Our strong growth was driven by a combination of effective commercial execution strategies and a broad product portfolio that leverages our unique smooth wave technology platform.

Moving on from sales, adjusted gross profit margin for the second quarter was 68.5%, or a 280 basis point improvement over the second quarter of last year.

The increase was largely attributable to the continued mix shift towards self-manufactured product in DES as a result of the launches of PROMUS Element in the US and Japan, as well as the expected benefits from our network optimization plan and continued value improvement programs.

Looking forward, we expect adjusted gross margins to be between 68% and 69% for the second half of this year.

Adjusted SG&A expenses were $641 million, or 35.1% of sales, in the second quarter compared to $639 million, or 32.4% of sales, in the second quarter of last year.

During the second quarter of this year benefits from cost savings initiatives were largely offset by weaker sales than expected and a charge related to the termination of a program.

Looking ahead we expect adjusted SG&A to be between 33% and 34% as a percentage of sales in the second half of the year.

Research and development expenses were $213 million for the second quarter, or 11.6% of sales.

This compares to $223 million in the second quarter of 2011.

We expect R&D spending to be somewhat higher in the second half of the year, largely due to the acquisition of Cameron Health.

Royalty expense was $48 million, or 2.6% of sales, compared to $52 million in second quarter of last year.

Consistent with the prior year, we expect royalty expense to step down in the second half as we reach lower per-unit royalty rate tiers under our annual volume-based arrangements.

On an adjusted basis, pretax operating income was $351 million, or 19.2% of sales, down 20 basis points from the second quarter of last year.

The decrease in adjusted operating margins was primarily due to the impact of lower sales, which was largely offset by higher adjusted gross margins.

GAAP operating loss, which includes GAAP to adjusted items that had a negative impact of $3.643 billion on a pretax basis, was $3.404 billion in second quarter.

The primary GAAP to adjusted items in the quarter were the estimated pretax goodwill impairment charge of $3.4 billion that I discussed earlier, a pretax intangible asset impairment charge of $129 million and pretax net litigation-related charges of $69 million.

The intangible asset impairment charge relates to a write-down of in process research and development recorded in connection with the acquisition of Sadra Medical.

Due in part to changes in the regulatory environment, we revised our expectations of the required effort, time, and cost involved in completing the in process projects and bring the related projects to market.

These changes resulted in the intangible asset impairment charge in the quarter.

Despite the charge, we continued to believe that the unique technology acquired through the Sadra acquisition represents a significant opportunity for us in the structural heart market.

Now I will move on to the other income and expense.

Interest expense was $64 million in the second quarter, which was $9 million lower than the second quarter of last year, primarily due to our pre-paying $1.25 billion of debt in first half of last year.

Our average interest expense rate in the second quarter was 5.4%, or about 20 basis points higher than the second quarter of last year.

Our tax rate for the second quarter was approximately 1.1% on a reported GAAP basis and 15% on an adjusted basis.

Our adjusted tax rate in the second quarter remained consistent with the expected full-year operational tax rate of 16%.

We expect our adjusted tax rate to be slightly higher than 16% over the remainder of 2012 as the Q1 and Q2 timing items reverse.

Moving on to the balance sheet DSO of 62 days was up one day compared to the second quarter of 2011 due to continued weakness in certain areas of Europe, partially offset by solid progress in collecting overdue Spanish receivables and strong US collections.

Despite lower inventory levels, days inventory on hand of 141 days were up 18 days compared to the second quarter of last year, primary due to lower cost of goods sold due to the PROMUS Element transition.

On a reported GAAP basis operating cash flow was $407 million compared to $390 million in the second quarter of last year.

During the second quarter we received approximately $60 million of receipts from the Spanish government representing the majority of outstanding invoices that were overdue from 2011.

Q2 2012 GAAP operating cash flow included $31 million of restructuring payments compared to $38 million in the second quarter of last year.

Excluding the restructuring payments, Q2 2012 operating cash flow was $438 million compared to $428 million in the second quarter of the prior year.

Capital expenditures were $52 million in the second quarter of this year compared to $82 million in the second quarter of last year.

Given the favorability in Q2, we now expect our adjusted free cash flow to be closer to $1.1 billion than our previous estimate of $1 billion.

Reported free cash flow was $355 million in the second quarter this year compared to $308 million in the second quarter of last year.

Turning to share repurchases, we repurchased 18 million shares for approximately $112 million in the second quarter.

During the past four quarters we have repurchased 122 million, or approximately 8%, of our outstanding shares.

At our current stock price we estimate we have almost $500 million of remaining capacity under our authorize share repurchase programs.

We continue to believe that our stock price is undervalued and now expect to utilize approximately one-half of our full-year adjusted free cash flow of $1.1 billion for share repurchases in 2012, subject to business development opportunities, market conditions, our stock price, regulatory trading windows, and other factors.

Let me now briefly provide some perspective on our outlook and walk you through our guidance for the third quarter as well as updated guidance for the full year.

Looking ahead over the rest of the year, we expect to continue to face a challenging competitive environment and dynamic market conditions.

We believe the risks of increasing macroeconomic weakness, particularly in Europe, and softening procedure volumes are real.

As a result, we are carefully monitoring conditions and have applied what we believe is a reasonable level of conservatism in our guidance to account for these factors.

However, despite these uncertainties, we believe there is reason to be positive.

We have recently launched key new products in most of our businesses and are seeing mid single digit or better sales growth in several of them.

We have opportunity to turn improved execution into market share gains and to improve in our defib and Women's Health businesses in the US as we anniversary significant prior-year market declines.

As a result, we remain focused on returning to top-line growth in the near term.

At the same time, we also believe we have significant incremental opportunities to enhance profitability and expect to continue to generate very strong cash flow.

With that background we expect consolidated third-quarter sales to be in the range of $1.725 billion to $1.825 billion.

If current foreign exchange rates hold constant, we estimate that the headwind from foreign exchange will be approximately $50 million or around 270 basis points relative to the third quarter of last year.

On an operational basis we expect consolidated Q3 sales to be in a range of up 1% to down 5% compared to the third quarter of last year.

On a worldwide basis, we expect DS revenue to be in a range of $295 million to $325 million and CRM revenue to be in a range of $445 million to $475 million in the third quarter.

We expect third-quarter adjusted EPS to be in a range of $0.14 to $0.17 per share and reported GAAP EPS to be in a range of $0.06 to $0.09 per share.

Moving to the full year, we now estimate that consolidated 2012 sales will be between $7.2 billion and $7.4 billion.

Assuming that current foreign exchange rates hold constant, we expect the full-year headwinds from foreign exchange to be approximately $150 million and the neurovascular divestiture to be $40 million.

On an operational basis consolidated 2012 sales should be in a range of flat to down 3% with the year-over-year growth rates improving sequentially in the second half as we benefit from new product launches, share recovery in the US DS market, increasing contributions from emerging markets, and easier comparables in our US defib and Women's Health businesses as we anniversary the significant declines we experienced last year.

From an earnings standpoint we now expect adjusted EPS for the full-year 2012 to be in a range of $0.62 to $0.68 and would again encourage you to model the midpoint of the range.

This guidance now includes $0.01 of dilution from the acquisition of Cameron Health, which we closed in the second quarter.

On a reported GAAP basis we expect net loss for the year to be in a range of $2.09 to $2.16 per share.

That is it for guidance.

Before we move to Q&A we would like to announce that Sean Wirtjes will be transitioning to be our controller of Asia-Pacific and will be replaced by Michael Campbell, the current controller of Asia-Pacific.

Sean has done a very good job heading up the investor relations function here at Boston Scientific and we wish him very well in his next assignment.

We would also like to welcome Michael Campbell, our next Vice President of Investor Relations.

Michael has been with the Company for over 15 years and brings a wealth of both company and financial experience.

Sean and Michael will move into their new roles full-time next month following a short transition period.

With that I will turn it back to Sean who will moderate the Q&A.

Sean?

Thanks, Jeff.

Linda, let's open it up to questions for the next 20 minutes or so.

In order to enable us to take as many questions as possible, please limit yourself to one question and related follow-up.

Please go ahead, Linda.

(Operator Instructions) Glen Novarro, RBC Capital Markets.

Good morning.

I wonder if you can drill down a little bit more on what is happening in the ICD business, specifically for Boston Scientific.

And I am wondering if you can drill down between single, dual, and tri chamber share.

I am guessing that in the tri-chamber market you are losing share to St.

Jude's Quad-Pole, but I'm wondering how you are holding up in the single and dual chamber segment of the market.

Then I had a follow-up.

Sure.

Good morning, it is Mike Mahoney; just to comment on that.

For the quarter, overall, we continue to see nice sustainable share and a slight uptick in our de novo implants based on the heels of our INCEPTA, ENERGEN, and Ingenio.

As mentioned in the call, we continue to see some headwinds in our replacement market.

And overall to your question on CRTD we see a stable, but slightly declining, share position in CRTD offset by a slight increase in de novo overall ICD share.

Then just as a follow up, we would have expected you to do a little bit better in terms of a US ICD number just given the issues that St.

Jude is having.

And I know you called out the RELIANCE doing very well.

Are you surprised that you're not able to pick up more generator sale?

Thank you.

Good question.

We are really optimistic about the trend.

We are seeing continued lead percentages increase actually month over month, so we continue to see an uptick in our leads based on the high performance and that is an encouraging trend for the future.

Clearly, we would like to convert that to [can] sales as well, per your comment.

So we are not satisfied with that [can] conversion yet, but we continue to have momentum on the lead side.

And we believe over time with the RELIANCE lead and our platform as it continues to roll out across the US with our thin platform, our battery platform, and sustainability of our lead performance will be a positive trend for our business.

Is there any feedback you are getting from your sales force as to why you are not picking up the generator sale?

Thanks.

And that is my last question; I will get back into queue.

As you know, traditionally this has been a market where share is difficult to move.

Absent large one-time events share has moved slowly.

The good news is our portfolio position really has never been stronger at Boston Scientific.

I think if you look at our current platforms that we have launched this year and with the pending approval in the first half of next year of Cameron we really have never had a better portfolio end-to-end in our business.

So as we look forward we are optimistic about the future of our CRM business.

David Lewis, Morgan Stanley.

Thanks.

This is actually James in for David.

First question on gross margins, and I apologize if I missed this.

Our line dropped in the middle of a call.

But gross margin strength in the quarter, I think certainly margins were a little stronger than we would have expected considering that you missed in what we would consider some of your higher margin products.

So what was driving the strength there, and to what extent is that sustainable to the rest of the year?

James, this is Jeff.

So the gross margins, frankly, were not a lot stronger than we expected.

I think we were very clear with people that we thought the gross margins would expand as we went through the year on the strength of PROMUS Element replacing PROMUS.

That was a big part of our short-term cost opportunities in terms of expanding gross and operating margins coupled with the benefits of getting manufacturing ramped up at a low-cost manufacturing facility down in Costa Rica as well as our value improvement programs.

So those initiatives are working.

That was part of the plan a couple years ago and the team has executed pretty well despite some lower share within DES.

So as you look at the gross margin picture year over year, the big factor was the PROMUS Element conversion to PROMUS that was a significant part of the margin expansion.

But also a big part of it was the standard cost reduction -- moving a lot of our manufacturing down to Costa Rica and the consistent discipline of taking out at least 5% of our standard cost of goods sold.

So those three factors more than offset the continued price erosion that we experienced.

Looking forward 68% to 69% is the guidance for the back half of the year.

Frankly, for this quarter, if we had done better from a DS perspective and the CRM volumes had been stronger, we would have pushed a lot closer to 69%-plus.

So this is all part of the plan that was put in place to drive up gross margins, and I think the team is executing pretty well on it.

Okay, perfect.

Then on the stent side, can you just give a little more granularity in terms of your share in the quarter in the US?

I think you said it was exiting the quarter in the high 40%s.

Where do you think that gets back to in the back half of the year?

James, this is Hank.

We see the fact, and I think we have alluded to this on previous calls, that we anticipated that due to the competitive trialing that we would experience what we refer to as an air pocket.

And we hit that air pocket.

The low point, as I said, was in April and we saw recovery in May and further recovery in June.

So I am very happy with where we landed as we exited the quarter.

I think that momentum will continue, as I alluded to or described in my script, to where we get back in the 40%s.

One of the things to keep in mind is the fact that our PROMUS Element long lengths did not launch until late in the quarter.

We believe that that will be a key contributor to not only stabilizing, but increasing our share position as we March through the second half of the year.

James, just to be clear, we weren't in the high 40%s at the end of the quarter.

We were at 40%, right at 40%.

Okay, helpful.

Then is there any way to quantify how much of the R&D disconnect was driven by valve spending or how much that item is going to be worth relative to your prior expectations?

No, we are not going to get into a lot of detail.

The most helpful thing we can point you to is as you look at other -- as you look at other people that have come in to the US market with clinical programs, clearly the FDA is being more specific and more expansive in terms of their expectation of clinical programs.

And so we are kind of reading that signal and adjusting our expectations accordingly in terms of our expected spend.

Okay, thanks, very helpful.

I will get back in queue.

Mike Weinstein, JPMorgan.

Thank you and good morning.

Maybe, Jeff, just talk about your thoughts on the overall growth profile of the Company in light of this second-quarter weakness that you saw in the DES and CRM sides of the business.

I know you were hoping to exit the year in positive territory in terms of constant currency revenue growth.

Do you still feel like that is a reasonable target?

Clearly, the performance in DES was a bit of a setback this quarter.

Having said that, as we look at kind of the back half, despite a weaker second quarter DES-wise, as Hank has said, having the long stent, the two sizes that we didn't have until the very end of the quarter, will provide us with a big shot in the arm in the back half of the year.

That was a little bit better execution that we think is going to get us back into the low 40%s from a share perspective.

As you look at kind of the back half of last year, we ended last year with 46% share in DES and we had 51% in the second quarter of last year, so we are up against easier comps in the back half from a stent perspective.

So we think we will recover and we are seeing signs of that, so that is good news.

The CRM market we had called from the beginning.

You saw per our recordkeeping 5% unit market declines in the first quarter of 2011, 8% in the second quarter, and then 10%/10% was three and four.

So we are now seeing kind of some stabilization on the units and we expect that to kind of be, unit-wise, kind of flattish, maybe slightly negative to flattish in the back half of this year.

So the CRM market we think is going to stabilize.

We kind of want to see Medtronic report before we officially conclude that, but we think that is going to happen.

So that means those two businesses we think we will do better in the second half than we did in the front half.

You couple on top of that the performance of the other businesses, which represent 42% of sales this quarter, frankly, they all performed extremely well.

You put on top of that the emerging markets investment return that we expect as [manics] acceleration, so we are optimistic that we can get back to, hopefully, breakeven probably by the fourth quarter from a revenue perspective.

Is there some risk in that?

There might be some risk in that depending on the end markets, but we have got a number of favorable factors that we expect to benefit from.

Okay, that is helpful.

Jeff, let me ask you just on capital allocation.

You and I have had this discussion; the positives you guys have in buying that stock over the last four quarters as you have called out.

But that obviously isn't helping the share price at this point.

Can you just, again, tell us why buybacks are a better use of your cash versus a dividend?

Well, from where the Company stands, frankly, I get this question all the time.

You're buying back stock and the share price isn't moving.

The reason the share price isn't moving isn't related to the share repurchases, it is related to the revenue.

Once we reestablish breakeven to slightly positive revenue trajectory the share price is going to move and it is going to move, I think, quite a bit.

We are going to look back at the share repurchases that we have done here over the last year and I think it is going to be a very good deal for the shareholders.

So I would say that first of all.

Second of all, the combination of driving the share countdown at a low price with moving the revenue growth to positive and getting it to low single digits will be a much higher return for the shareholders than the dividend.

So at this point in time, until we get the revenue growth back to positive where we want it, a dividend is more of a third priority behind share repurchases and bolt-on acquisitions to drive the revenue of the Company.

Then last one just on the acquisition side.

I know you guys have signaled that you were being active going back a quarter ago and that you were looking at different assets, maybe ones that actually had revenue stream at this point.

Can you just give us a sense of what we should expect on the business development front in the back half of the year?

I think we will continue to look at different assets and look at what they bring to Boston Scientific.

That is a search for a needle in a haystack type of approach, because we do have some disciplined financial expectations and we are going to be fairly critical of assets as we look at them.

So it is just going to depend on what is available and what the value equation is for shareholders.

So, yes, we will be active.

Yes, we will be disciplined.

Very difficult to predict what we will get done, but we continue to look pretty hard at adding technology that will improve our growth outlook.

Thank you, Jeff.

Bruce Nudell, Credit Suisse.

Good morning.

Thanks for taking the question.

Hank, with regards to guidance in drug-eluting stents, you are positing momentum in share in the US and yet the guidance range is $295 million to $325 million versus $318 million this quarter.

I know that Q3 is seasonally weak in Europe; could you kind of reconcile improving share gains with constancy in overall revenues?

I think it is multi-factorial.

I think what you hear us saying is we exited kind of in the 40% range here in the US and I think as long as we can improve upon that position.

But if you look at the overall market ASP pressure is still there and the impact that we are seeing from the alignment of physicians with hospitals, as well as with RAC audits are having an impact on the overall number of procedures that are being done.

So if you add up all those factors in terms of revenue that you put on a board, it tends to be a little bit less than more.

But that is the way I would kind of handicap it at this stage in the US for sure.

Okay.

And I agree with Jeff that the key to the stock price is positive revenue and probably the biggest swing factor that is not in many models right now is Cameron.

My question is what sort of worldwide share gains can you get with this first devise in the near, rather than longer, term?

I think you intimated earlier than expected approval is plausible now and certainly the panel indicated that, so it is kind of a closer potential driver than a longer-term driver.

And I am just wondering if you could help scale that for us.

Sure, and I'm going to ask Mike Mahoney to comment on that one, Bruce.

Bruce, good morning.

A couple items.

One is in terms of the overall market -- well, I guess, first of all, in terms of their approval.

As we indicated, we expect approval clearly in the first half of 2013 and hopefully it will come sooner than that projection, which is great, news.

Now that we have closed the deal -- it has been about 30 days since we closed the deal and obviously the integration teams are working closely together.

On the market itself what we talked about is approximately a $750 million worldwide market in the future for this product.

As you know, we are the only company that offers it.

This is a new opportunity for us.

In terms of actual share projections, at this point we haven't called specifically what our anticipated share gains will be.

We do believe this will drive share, not only in de novo implants with primary and secondary patients, but also in replacements.

Patients who already have transvenous lead systems who need a revision procedure.

So we do believe there is share gain in both de novo implants and revision procedures, and it is a very large market.

I think as we go forward we will provide more clarity in 2013 as to what our share expectations will be.

Thanks so much.

Kristen Stewart, Deutsche Bank.

Thanks for taking the question.

Just wanted to go back to the gross margins; I was wondering if you could maybe just help us bridge the components on a year-over-year basis as you've done in the past between mix and maybe price.

Then also how we should think about foreign currency maybe influencing this quarter and also the guidance going forward, since I believe your hedges do roll through that line and probably have an upper bias on the gross margin percentage?

Kristen, I am not going to get into intricate detail on the gross margins, but suffice it to say that the PROMUS Element conversion was the largest positive contributor.

Slightly behind that was the benefits from moving more manufacturing to Costa Rica and the value improvement programs.

Then the third factor was price which was less than the other two, so that is about as much detail as I am prepared to get into.

Okay.

Is it correct, though, to think about FX and the hedging just kind of putting at least upward pressure on gross margins?

Improving them basically as you roll the hedges through.

FX was slightly positive for us given the way we hedge, but we are -- unlike some other of our competitors, we hedge out and we are predominately hedged for this year, significantly hedged for next year, and partially hedged for the following year.

It's just part of our program.

So FX doesn't move us around as much as other companies.

Perfect.

Then just going back to Lotus.

I know you had mentioned you recalibrated the in-process R&D, that you were down on longer timelines.

Is that not just Europe but also the US?

And maybe can you just help us understand what is different about the regulatory path relative to what you had concluded in expectations?

Well, what is predominately different is the size of the clinical trials and the involvement with regard to the FDA approval process.

There really isn't much different relative to the European CE Mark process or timing, so it is more the US cost of getting through the clinical trial process.

Perfect, thank you.

Matthew Taylor, Barclays.

Thanks very much.

It is actually Dan stepping in for Adam.

Quick questions, couple quick ones on the low voltage side actually.

So you guys have launched -- I mean INGENIO; it looks like you guys can kind of regain some share there.

So I guess my first question is what -- given the new products, are you guys seeing some improvement in the pricing dynamic there, or is the pricing pressure still kind of stable despite the new products?

On the pricing side in the worldwide pacer market we are seeing low-single digits, call it in the 2% to 4% range for pricing in pacer.

We do believe with some of the new features of our INGENIO platform, which is the first platform we have launched in a decade at Boston Scientific, that as we continue to roll that product out it should improve the pricing profile.

But currently we are seeing that 2% to 4% negative range.

Okay, that is helpful.

Then on the [MRIC] pacer side -- I dropped off for a few seconds earlier so I don't know if you provided an update.

So I guess for Europe would that still be on track?

I am assuming the trial is going on now; would that still be on track for launch next year and then I guess maybe a later part of next year, early 2014 for the US?

The MRI-safe program for brady in Europe will be launched in third quarter, and we will actually do our first implants next week.

So the MRI plan is on schedule in Europe.

All right.

Thanks very much for the help.

Larry Biegelsen, Wells Fargo.

Hi, this is Kevin in for Larry.

Thanks for taking the question.

Just a quick question on Japan.

The Japan price cuts that went into effect earlier in the year, can you provide a little bit more color on how severe they were and whether there were more significant price cuts on certain devices such as stents and pacers?

So the price cuts in Japan tend to happen every two years as part of their methodology that they set prices, and they weren't any different than we expected.

Kind of in line with trends in prior years.

I am not sure I have all the details to specify price cuts DS versus CRM, but they weren't terribly dissimilar if my memory serves me correctly.

Okay.

And one follow-up question on the pipeline I think it was mentioned on the last call that you might be able to provide some additional color on your renal innervation program on this call.

Would that be possible?

And if you could provide us an update on first-in-man and potential launch that would be helpful.

Thanks.

This is Hank, Kevin.

Bottom line, we are still on our plan to launch a CE mark device in Europe next year, and as we discussed on the last call we believe we will be in first-in-man later this year.

That obviously would lead us to that CE mark indication in 2013.

Okay, thank you.

Thanks.

With that we are going to conclude today's call.

Thanks for joining us.

We appreciate your interest in Boston Scientific.

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