Boston Scientific Corp (BSX) 2013 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Boston Scientific Q1 2013 earnings call.

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

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

(Operator Instructions) Also, as a reminder, this teleconference is being recorded.

At this time we will turn the conference call over to your host, Vice President of Investor Relations, Mr. Michael Campbell.

Please go ahead, sir.

Thank you, Tony.

Good morning, everyone, and thanks for joining us.

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

We issued a press release earlier this morning announcing our Q1 results for 2013, which included reconciliations of the non-GAAP measures used in the release.

We have posted a copy of that release as well as reconciliations to GAAP of the non-GAAP measures used in today's call, along with 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.

Mike will begin our prepared remarks with an update on our business progress and his perspectives on the quarter and for the remainder of 2013.

Jeff will then review our Q1 financial results and business performance, as well as Q2 and full-year 2013 guidance.

We will then open the call up to questions.

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

Before we begin I would like 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, believe, estimate, and other similar words.

These forward-looking statements include, among other things, statements about our growth and market share, our markets and market trends, our products, including product approvals, launches, and performance, procedural volumes and pricing, regulatory filings, clinical trials and results, cost savings and growth opportunities and their expected impact, our cash flow and expected uses, our expected financial performance, including sales, margins, earnings and other guidance for Q2 and the full-year 2013, tax rates and tax impact, R&D spend and other expenses.

Actual results may differ materially from those discussed in the forward-looking statements.

Factors that may cause such differences include those described in the Risk Factors section of our most recent 10-K and subsequent 10-Qs and 8-Ks filed with the SEC.

These statements speak only as of today's date and we disclaim any intention or obligation to update them.

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

Mike?

Sure, thanks.

Thank you, Michael, and good morning, everyone.

Thank you for joining us.

I'll begin today with some comments regarding our first-quarter performance, which Jeff will cover in more detail a little bit later.

On an operational basis our sales performance came in at the midpoint of our stated guidance range for the quarter.

We delivered net sales of $1.761 billion, which is down 6% on a reported basis and down 4% on an operational basis.

This excludes the impact of foreign exchange and the divested Neurovascular business.

So as anticipated, the year-over-year comparisons in the first quarter were challenging from a top-line perspective, primarily driven by DES comparisons and the impact of fewer selling days than in the prior period.

We estimate a negative impact of fewer selling days in Q1 2013 to be approximately 200 basis points from a year-over-year growth perspective.

In addition, FX is more of a headwind than anticipated in our first-quarter guidance range.

However, five of our seven businesses, after adjusting for the fewer selling days, continued to grow at or above the market during the quarter.

The revenue growth figures that I will highlight on this call are all on a constant-currency basis.

On a worldwide basis, Neuromodulation grew at 6%; Endoscopy grew at 5%; and Peripheral Interventions grew at 3%, as compared to Q1 of last year.

We continue to see strong returns on our investments in emerging markets during the quarter, with combined revenue in Brazil, Russia, India, and China growing 35% as compared to first-quarter '12.

We are also pleased with the improved performance of our CRM business relative to the market performance.

In terms of EPS we delivered adjusted EPS of $0.16, which is at the higher end of our guidance range and of Street consensus.

On a year-over-year basis we delivered adjusted EPS growth of 7% even after absorbing a $0.01 impact in the quarter due to the medical device tax.

We also generated solid cash flow and used $100 million to buy back approximately 13 million shares of stock in the quarter.

So now let me go into more detail regarding our business performance for the quarter.

We will start with our MedSurg sector.

In Endoscopy we had a solid quarter with 5% revenue growth worldwide driven by strong results internationally.

Despite the fewer selling days we experienced broad year-over-year growth across several of our key product franchises in the quarter.

Our metal stent franchise led the way, driven by our industry leading WallFlex product family.

Our hemostasis franchise continued to strengthen based on the adoption and utilization of our Resolution clip for GI bleeding.

And our biliary device franchise continued to grow faster than market via our endoscopic ultrasound platform.

In addition, we continue to see improved adoption for the Alair platform.

There continued to be a sequential increase in the number of patients seeking treatment as well as an increase in private payers covering this procedure on a patient-by-patient basis through the predetermination process.

In the quarter we continued to see an increase in sites, exceeding 250 centers across 18 countries.

We also expect to publish five-year safety and efficacy data by the third quarter of '13 and continue to execute a focused coding coverage and payment strategy for this important and very differentiated technology.

So overall we believe the worldwide markets in Endo are healthy and we continue to drive above market sales growth performance on a global basis in 2013.

In our Urology/Women's Health division, revenues in the quarter were flat compared to the prior year as our growth in Urology was offset by a challenging pelvic floor market in Women's Health.

We continue to see strong international growth as a result of our global commercial expansion and effective new product launches.

In the US we successfully launched five new products -- three in Urology and two within Women's Health.

We expect this division to return to growth in the second half of 2013 given our pipeline, further global expansion, and an anniversary of the pelvic floor market declines.

Turning to Neuromodulation.

Our team is executing very well as we continued to gain market share during the quarter particularly in the US.

For the quarter we delivered 6% revenue growth on a worldwide basis despite the fewer selling days.

We recently received FDA approval for our Precision Spectra spinal cord stimulation platform in the US.

The Spectra platform is the world's first and only system with a three-dimensional programming algorithm and 32 dedicated power sources that will provide patients pain relief to a wide range who suffer from chronic pain.

We are currently in limited launch in the US and have been pleased with the enthusiastic physician response.

Precision Spectra is another example of our emphasis on clinically meaningful innovation focused on patient outcomes, and we have high expectations for this platform going forward.

So despite consistent procedural growth outside the US, as expected we continue to see the worldwide Interventional Cardiology market decline in the low to mid single digits, driven by procedural softness in the US plus global pricing pressures.

While we expect these market headwinds to persist, we believe they will moderate over time due to underlying patient demographics and introduction of differentiated technologies such as our SYNERGY stent platform.

During the quarter we estimate that our IC sequential global market share was essentially flat.

Our worldwide IC revenues declined 14%, driven primarily by the US.

In the US, as expected, we experienced difficult comparisons to first-quarter 2012, which saw the launch of PROMUS Element Plus and predated the US introduction of Resolute Integrity.

The difficult comparisons should end in late second-quarter 2013, reflecting the anniversary of a competitive launch in the US, and we estimate our first-quarter US DES share to be in the mid 30%s.

In addition we anticipate an improvement in our IC revenue performance starting in the second quarter primarily due to the new product launches and improving global commercial execution.

In terms of our DES pipeline our next-generation SYNERGY stent continues to perform very well.

The limited launch we began in Europe after receiving CE Mark approval late last year has been progressing according to plan and expanded to include our Asia-Pac region.

Globally, customer feedback continues to be very positive, and the selling price has been healthy even in our most challenging markets.

Further, enrollment in the SYNERGY US IDE trial, called EVOLVE II, is tracking ahead of schedule with over 500 patients recruited to date.

In February we announced CE Mark approval of a new stent platform in our DES portfolio.

It is called PROMUS Premier.

The introduction of Premier is another example of our commitment to leadership and an innovative product cadence.

Premier will enhance deliverability and is the only platform to have customized stent architecture, and other novel features that increase both axial strength without compromising the key performance.

We recently began a European launch, and customer feedback has been very positive.

Data from the first human US trial -- first human use trial, will be presented as a late-breaking trial at EuroPCR next month.

We anticipate FDA approval for PROMUS Premier in the fourth quarter of 2013.

So with our PROMUS durable polymer platform, combined with our SYNERGY bio-absorbable platform, we believe that we have the most compelling DES portfolio and pipeline in the industry.

With continue focused on commercial execution, a strengthened overall IC pipeline, and continued favorable clinical evidence of our DES platforms, we believe that we have stabilized our DES share and expect to grow our DES share in the second half of 2013.

In our core IC business we improved our performance sequentially despite continued procedural softness.

We continued the US launch of the Emerge balloon catheter during the quarter and have continued to receive positive feedback from customers.

In addition we accelerated our commercial rollout of the BridgePoint Medical suite of coronary CTO devices that add to our unique and clinically differentiated portfolio of IC products, all of which we believe enable us to be uniquely positioned to provide treatment for complex PCI procedures.

Turning to structural heart, on the structural heart front we continue to make progress in TAVR with the Lotus valve.

Lotus is a highly differentiated, second-generation valve that is fully repositionable and recapturable post-deployment.

At ACC, favorable six-month data for the REPRISE I trial demonstrated minimal perivalve regurgitation, which is an important determinant of late outcomes.

Enrollment in REPRISE II, our 120-patient CE Mark trial is now complete, and we expect early results will be presented at a late-breaking trial at EuroPCR next month.

We anticipate commercialization of the Lotus valve after CE Mark in the fourth quarter of 2013.

Moving on to Peripheral Interventions, despite the fewer selling days PI delivered worldwide revenue growth of 3%.

Global revenue growth was led by certain countries in the Asia-Pac and Latin American regions that delivered consistent double-digit growth again this quarter.

We are also making excellent progress on integrating our next-generation renal denervation system, Vessix, and believe we are on track to launch this platform commercially in Europe and other international markets ahead of schedule.

Vessix is a differentiated, low-energy, bipolar, over-the-wire device which offers predictable renal ablation, coupled with rapid procedure times.

We remain optimistic both about the opportunity of the renal denervation market and our position in it.

Overall we believe that the worldwide market in PI is healthy, and we will continue to drive above-market growth both in the US and globally in 2013.

Now let's focus on our Rhythm Management segment.

We are pleased with the improved performance of this business.

In the first quarter, our worldwide CRM business declined 4% in a market that we believe was down mid single digits versus prior year.

In our defib business, we continue to drive de novo share gains with INCEPTA and ENERGEN family of ICDs, which lead the industry in longevity.

In an environment where hospitals' cost pressures continue to increase, we believe now more than ever that the device longevity and its potential to reduce hospital readmissions and infections will continue to be a key differentiator for Boston Scientific.

In addition, sales of our highly reliable RELIANCE family of ICD leads remains very strong, leading to a fifth consecutive quarter of elevated lead-per-port ratios.

Let me now provide an update on our controlled launch of the S-ICD System.

During the first quarter, our sales exceeded our internal global forecast, and demand has outpaced our ability to supply.

We continue to make progress in our efforts to enhance the S-ICD supply chain following early FDA approval last fall.

But despite these efforts we have been supply constrained since early March, and we will only be able to provide a very limited supply of S-ICD in the second quarter.

We are managing the supply shortage with our customers, and we continue to work diligently to expand our production capacity.

We expect these efforts will put us in a position to resume our controlled launch of the S-ICD later this summer.

Despite these near-term obstacles, the strong market for the S-ICD continues to highlight the strategic importance of this innovative technology to patients and to our CRM business.

As highlighted previously, we anticipate launching our S-ICD 1.5 release device in the fourth quarter.

We expect that this release will enable BSC to meet the growing demand for the S-ICD platform.

While the current shortage of the S-ICD product is unfortunate, we are encouraged by the performance of our core defib franchise in the quarter and look forward to building on these successes with resuming the controlled launch of S-ICD in the coming months.

Now turning to the pacer segment, we are now approaching the one-year anniversary of the launch of our INGENIO family of pacemakers and CRT-P devices.

Over this time period we have been pleased with the performance of this platform, which include a number of new design features including wireless telemetry and access to our recently launched LATITUDE NXT remote patient management system.

With the recent launch of Latitude we are now able to provide our customers with greater flexibility in how they receive, review, and manage patient data and device data.

Thanks to the benefit of this new family of devices we believe our pacer business outperformed the first quarter worldwide pacer market, which we estimated declined in the mid single digits.

From a pricing standpoint we continue to see relatively stable pacer pricing on a year-over-year basis.

Now turning to left atrial appendage closure, the WATCHMAN product line continues to show strong growth in international markets on both a sequential and a year-over-year basis, with international revenues growing by more than 30% as compared to the first quarter of last year.

From a US standpoint, we continue to work through our final statistical analysis of the PREVAIL data, and we expect to submit the final PMA module to the FDA in second quarter.

We expect long-term efficacy results from the PROTECT AF trial will be presented as a late-breaking trial at HRS next month.

Finally, our EP division's worldwide revenue did decline 5% during the quarter as compared to the prior year.

However, we are making good progress on several internal A-fib focus projects, and we continue to be excited by the recent acquisition of Rhythmia Medical and its next-generation mapping and navigation solutions.

We have submitted all the necessary regulatory filings and expect CE Mark approval of the Rhythmia platform in second-quarter '13, with FDA clearance expected in the second half of '13 and the full US/Europe launch expected in 2014.

So to wrap up, overall the results of the first quarter were in line with our expectations.

While we are encouraged by our performance in the first quarter we are certainly not satisfied.

We continue to direct our investments toward meaningful innovation to drive clinical and economic value by improving patient outcomes, reducing the cost of healthcare, and increasing patient access to therapies.

We made progress towards the global execution in our core markets by driving de novo share gains in ICD and pacer markets and through successfully introducing new, innovative platforms including PROMUS Premier in Europe and Precision Spectra in Neuromod in the US.

We are making progress on several of our key strategic initiatives to expand into high-growth adjacencies.

We continue to see improved performance from our Alair platform as we expand the number of centers.

We have made good progress on our Lotus valve program including favorable six-month data from REPRISE I and completion of REPRISE II trial.

We believe that we are on track to launch our Vessix renal denervation platform in Europe ahead of schedule.

And we continue to expand globally, with combined revenue in Brazil, Russia, India, and China growing 35% in the quarter.

So as we further build our capabilities in these countries, we expect this growth trend to continue.

We also remained focused on margin improvement, as evidenced by the expansion of our 2011 restructuring program.

Lastly, we continue to make important operational changes that we believe will improve our execution and strengthen our customer focus.

These changes include moving to a global operating structure across all of our business units during the quarter.

We believe this structure is enabling us to operate more efficiently and effectively by improving our speed and global resource allocation.

As a result of this important change we have now established new and different financial reporting segments, which Jeff will further discuss in his section.

In second quarter we expect revenue performance to improve versus first quarter, with sales guidance of minus 2% to plus 1% on an operational basis.

As we look forward to the remainder of 2013, we expect to stay committed to our productivity initiatives.

We continue to be focused on continuous improvement and executing on our restructuring initiatives to reduce cost and improve margins while we prudently invest in our strategic initiatives for future growth.

We expect to continue generating strong cash flow, which will enable us to fund more share repurchases and to continue to look at appropriate acquisitions to improve our future growth profile.

We continue to believe that we will return to growth in the back half of 2013 with our full-year sales guidance at negative 1.5% to positive 1.5% growth, as we anticipate sequential quarterly growth improvement.

We believe the steps we are taking are what is needed to improve our performance and return BSC to consistent revenue and EPS growth.

Now let me turn the call over to Jeff for a review of our first-quarter results and to provide guidance for the second quarter.

Jeff?

Thanks, Mike.

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

Despite challenging year-over-year comparisons, we generated adjusted earnings per share of $0.16, which was at the higher end of our guidance of $0.14 to $0.17 and at consensus.

This represents improved profitability from the prior year, which was driven by continued gross margin improvement, lower operating expense, a favorable tax rate, and fewer shares outstanding, partially offset by a $0.01 impact from the medical device tax and increased investments in our strategic growth initiatives.

In addition, we generated adjusted free cash flow of $166 million and used $100 million to repurchase approximately 13 million more shares in the quarter.

As noted in the earnings release and consistent with our strategic imperatives to focus on global opportunities, we completed the reorganization of our businesses from geographic regions to global business units, effective January 1, 2013.

As a result, we now have three reportable segments consisting of Cardiovascular, which is comprised of our Interventional Cardiology and Peripheral Interventions businesses; Rhythm Management, comprised of our Cardiac Rhythm Management and Electrophysiology businesses; and MedSurg, which is comprised of Endoscopy, Urology/Women's Health, and Neuromodulation.

We have restated prior-period segment information to conform to the current-year presentation within the exhibits attached to this earnings release.

In conjunction with the interim goodwill impairment testing required following the change in composition of our segments and reporting units, we recognized an estimated $423 million pretax goodwill impairment charge associated with our new global Cardiac Rhythm Management business unit.

It is important to note that our assumptions on the CRM market and our expected operational results remain unchanged from year-end and that the primary driver of this charge was the reorganization to global business units, which changed the composition of our reporting units, including the amount of intangible assets, other assets and liabilities, and the expected cash flows allocated to the new global CRM reporting unit.

As a result of this charge, the remaining goodwill assigned to our global CRM business has been fully written off.

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 firmly believe our Rhythm Management business represents a future growth opportunity for the Company given our new products and future technology offerings.

We believe that over the past several years we have invested in technology and acquisitions to improve the Company's growth profile.

Some of these investments have been used to revitalize our core CRM portfolio and to provide the EP with a comprehensive set of solutions, including differentiated platforms such as the S-ICD, the WATCHMAN device, and the recently acquired Rhythmia mapping and navigation system.

As this focused strategy continues to gain traction, we believe we can drive Rhythm Management's profitability to levels more consistent with our other business segments.

Now I'll move to the detailed review of our business performance and operating results for the quarter.

For the first quarter of 2013, consolidated revenue of $1.761 billion represents a decrease of 6% on a reported basis and a decrease of 4% on an operational basis, which excludes the impact of foreign exchange and the divested Neurovascular business.

The actual headwind from foreign exchange on sales was approximately $35 million as compared to the prior year, and was $25 million higher than what we had assumed in our first-quarter guidance range.

On an operational basis, our sales performance was at the midpoint of our guidance range and somewhat consistent with the performance in the fourth-quarter 2012 after adjusting for two fewer selling days in the first quarter of '13.

It is important to note that all revenue comparables this quarter have been negatively impacted by approximately two fewer billing days in the prior year.

In Interventional Cardiology, worldwide revenue came in at $514 million in the first quarter, representing a constant-currency decrease of 14% compared to the first-quarter 2012.

Worldwide DES revenue came at $291 million, representing a constant-currency decrease of 18% compared to the first-quarter 2012.

US DES revenue was $117 million in the quarter, representing a decline of 34% compared to the first quarter of last year.

This decrease was primarily due to a strong comparison to the prior-year quarter, driven by the full launch of PROMUS Element Plus, lower share to competitive products, lower [a-speeds] and continued softness in PCI volumes and the number of devices used per procedure.

We estimate that our US DES share was stable sequentially in the mid 30%s in the first quarter.

International DES sales of $175 million represented a decrease of 3% in constant currency compared to first quarter of last year, driven by over 60% growth in the emerging markets of China and India, primarily offset by pricing declines in Europe and Japan.

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

However, with upcoming launches of new products along with the ongoing success of BridgePoint Medical suite of CTO devices, we expect to see improvement in this business over the course of 2013.

Moving on to CRM, worldwide revenue was $478 million in the first quarter, representing a constant-currency decrease of 4% compared to the first quarter of last year.

In the US, CRM revenue of $283 million represented a 3% increase from the first quarter of 2012.

International CRM sales of $195 million were down 5% in constant currency compared to the prior-year quarter.

On a worldwide basis, defib sales were $350 million in Q1, which was down 4% in constant currency from the first quarter 2012.

In the US, defib sales were $221 million; this was down 4% compared to Q1 last year.

International defib sales of $129 million represented a 5% decrease in constant currency from the first quarter of last year.

Worldwide pacer sales declined 2% on a constant-currency basis as compared to Q1 2012, driven by continued strong performance from our INGENIO family of pacemakers and CRT-Ps.

In the US, pacer revenue was flat compared to first quarter of last year, while international revenue declined 4% in constant currency for the quarter.

Additionally, our worldwide Electrophysiology business declined 5% on a constant-currency basis compared to the first quarter of last year.

Our Peripheral Interventions business continued to deliver growth, with worldwide revenue up 3% in constant currency compared to the first quarter of last year.

Global growth was driven by strong performance in Asia, up 27%, and 13% growth in Latin America.

Our Endoscopy business continued to grow faster than the market and had another solid quarter, with worldwide sales up 5% in constant currency, led by 7% revenue growth internationally.

In constant currency, our worldwide Urology/Women's Health business was flat from a growth perspective during the quarter.

However, sales growth was particularly strong internationally at 7% compared to the first quarter of last year.

Our Urology business maintained its leadership position, with 2% worldwide constant-currency growth in the quarter driven by strong international revenue growth of 6%.

Our Women's Health revenue declined 7% on a worldwide constant-currency basis as compared to the prior year.

However, our international business delivered 4% growth on a year-over-year basis.

We continue to see pressure on elective procedures due to concerns around the use of surgical mesh for pelvic organ prolapse, specifically in the US market.

Neuromodulation had another solid quarter, with 6% worldwide sales growth including 36% growth in our international revenue compared to the same period in the prior year.

We expect to sustain and build on this momentum in the remainder of 2013 as we fully launch Precision Spectra in the US spinal cord stimulation market.

Moving on from sales, adjusted gross profit margin for the first quarter was 67.3% or 80 basis points higher than the first quarter of last year.

The increase was largely attributed to the mix shift toward self-manufacturing products in DES, as a result of the launches of PROMUS Element in the US and Japan in the prior year, as well as benefits from our value improvement programs, partially offset by price erosion, mix, and some product transition costs.

Looking forward, we expect adjusted gross margins to be between 68% and 69% for the second quarter and to improve sequentially as the benefits from our value improvement programs are expected to increase as we progress through the year.

Adjusted SG&A expense was $626 million or 35.5% of sales in the first-quarter 2013, compared to $654 million or 35% of sales in the first quarter of 2012.

During the first-quarter 2013, the impact from our cost-saving programs were offset by continued investments in our strategic growth initiatives and costs associated with expanding in the emerging markets.

In addition, SG&A expenses in Q1 '13 include the impact of approximately 100 basis points from the medical device tax under the US Affordable Care Act.

Currently, the accounting treatment for the medical device tax is not consistently applied across the industry.

We expect to absorb the first full-year impact of the medical device tax during 2013.

Looking ahead, we expect adjusted SG&A as a percentage of sales to be between 35.5% and 36.5% in the second quarter of this year, as we expect to accelerate investments in our strategic growth initiatives in preparation for the commercialization of several new technology platforms plus continue to build our capabilities in emerging markets.

Adjusted R&D expenses were $204 million for the first quarter or 11.6% of sales.

This compares to $215 million in the first quarter of 2012.

We expect R&D spending to be in the range of 11.5% to 12.5% of sales in the second quarter this year as we continue to transform our R&D organization and refocus our spending to drive innovation and growth.

Royalty expense was $41 million or 2.3% of sales, compared to $48 million in Q1 last year.

We expect Q2 royalty expense to be higher in the first quarter of 2013.

On an adjusted basis, pretax operating income was $314 million or 17.8% of sales, up 50 basis points from the first quarter of last year.

The increase in adjusted operating margins was primarily due to higher adjusted gross margins and lower operating expenses, partially offset by the impact of the medical device tax.

It is very important to note that the medical device tax negatively impacted our operating margins by 100 basis points.

Accordingly, our margin expansion would have been 150 basis points without this tax.

GAAP operating loss, which includes GAAP to adjusted items that had a negative impact of $643 million on a pretax basis, was $354 million in the first quarter of 2013.

The primary GAAP to adjusted items in the quarter were -- the estimated pretax goodwill impairment charge of $423 million that I just discussed earlier; pretax net litigation charges of $130 million; and pretax amortization expense of $103 million.

Now I will move on to other income and expense.

Interest expense was $65 million in the first quarter, which was $4 million lower than the first quarter of last year, primarily due to the collection of Spanish government receivables and the refinancing of our revolving credit facility in mid 2012.

Our average interest expense rate in the first quarter of this year was 5.7%, or about 10 basis points lower than the first quarter of last year.

Our tax rate for the first quarter was 10.2% on a reported basis and 9.8% on an adjusted basis.

The difference between our reported and adjusted tax rates for the quarter is attributable to the net benefit of restructuring, litigation, and other net charges excluded in determining our non-GAAP results.

Our adjusted tax rate in Q1 included a net benefit of approximately $8 million for discrete tax items primarily related to the retroactive extension of the US R&D tax credit for 2012 that was recognized in the first-quarter 2013.

We estimate our full-year tax adjusted tax rate to be between 10% to 12%.

This excludes any other discrete tax items that may arise during the year.

Moving on to the balance sheet, DSO of 63 days improved one day compared to March 2012, primarily due to good performance in Japan and Europe.

Despite lower inventory levels, days inventory on hand of 133 days was up four days compared to March of last year, primarily due to lower cost of goods sold, primarily driven by the PROMUS Element transition and standard cost improvements.

Adjusted free cash flow for the quarter was $166 million, compared to $177 million in Q1 2012.

Capital expenditures were $53 million in the first quarter of 2013, compared to $66 million in the first quarter of last year.

We continue to expect full-year 2013 adjusted free cash flow to be approximately $1.2 billion.

Turning to share repurchases, we repurchased 13 million shares in the quarter for approximately $100 million.

Since July 2011 we have repurchased 200 million shares, or approximately 13% of our outstanding shares.

We announced in January 2013 that our Board of Directors authorized the Company to repurchase an additional $1 billion of the Company's stock.

We continue to believe that our stock price is undervalued, and we currently expect to utilize approximately one-half of our estimated available adjusted free cash flow for share repurchase in 2013, subject to business development opportunities, market conditions, our stock price, regulatory trading windows, and other factors.

As a reminder, we announced on our Q4 earnings call in January the expansion of our 2011 restructuring program, intended to build on the progress made under that program to strengthen our operational effectiveness and efficiencies and supports new investments, which we expect will increase shareholder value.

From a cost perspective, we expect a substantial portion of the total program savings will be reinvested in targeted areas for future growth, including our strategic growth initiatives and continue to build our capabilities in the emerging markets.

Let me now walk you through our guidance for the second quarter as well as updated guidance for the full year.

Looking ahead over the remainder of the year we continue to expect dynamic market conditions, with the risks of macroeconomic weakness, particularly in Europe, and softening procedure volumes in the US.

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 continue to believe there is reasons to be positive.

We have acquired new technologies and have launched key new products in most of our businesses as we remain focused on returning to top-line growth in the second half of 2013.

We also believe, despite the medical device tax, that we have the opportunity to enhance profitability and expect to continue to generate strong cash flow.

We expect Q2 consolidated revenues to be in the range of $1.740 billion to $1.800 billion.

If current foreign exchange rates hold constant, the headwind from FX should be approximately $30 million or around 170 basis points relative to the second quarter of last year.

On an operational basis, we expect consolidated Q2 sales to be in a range of up 1% to down 2% compared to the second quarter of last year.

On a worldwide basis, we expect DES revenue to be in a range of $275 million to $295 million and CRM revenue to be in a range of $450 million to $470 million in the second quarter.

We expect Q2 adjusted EPS to be in a range of $0.14 to $0.17 per share, and we encourage you to model to the midpoint.

We expect reported GAAP EPS to be in a range of $0.07 to $0.10 per share, which includes an estimated $0.07 per share impact from amortization expense.

We also wanted to remind folks to look at their models for Q3 and Q4, as historically Q3 has been our lowest quarter primarily due to seasonality, typically lower than Q2; and we expect Q4 to be our strongest quarter given seasonality and the timing of some of the our expected new product launches.

Moving to the full year, we now expect that consolidated 2013 sales will be between $6.950 billion and $7.150 billion.

Assuming that current foreign exchange rates hold constant, we expect the full-year headwind from FX to be approximately $140 million.

On an operational basis, consolidated 2013 sales should be in a range of down 1.5% to up 1.5%, and we encourage you to model to the midpoint.

The range assumes that the IC and CRM markets continue to stabilize and our revenue performance improves sequentially throughout the year, driven primarily by continued stabilization and improved performance and our IC and CRM businesses; more meaningful contribution from emerging markets and our strategic growth initiatives; plus benefits of new product launches across our divisions.

From an earnings standpoint we expect adjusted EPS for the full-year 2013 to be in a range of $0.65 to $0.70, and we encourage you to again model to the midpoint of the range.

This range reflects the estimated impact of approximately $0.04 per share from the medical device tax.

On a reported GAAP basis we now expect EPS for the year to be in a range of $0.01 per share to a net loss of $0.06 per share.

That's it for guidance.

So with that I will turn it back over to Michael, who will moderate the Q&A.

Michael?

Thanks, Jeff.

Tony, 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 one related follow-up.

Tony, please go ahead.

(Operator Instructions) Rick Wise, Stifel.

Good morning, Mike.

So many questions here.

Let me just start with two product questions, since that is key to the reacceleration story.

SYNERGY and the S-ICD.

SYNERGY in Europe, why the limited launch?

The US trial is enrolling ahead of schedule.

Talk about, if you would, what accelerates the launch in Europe and the impact of that accelerated enrollment on US filing and potential approval, if you would.

Yes.

Thanks, Rick.

Good morning.

Overall we are pleased with how we have positioned SYNERGY right now.

We have a two-stent platform, as you know, our SYNERGY and then we have also launched in Europe PROMUS Premier, which we think offers a differentiated portfolio.

With SYNERGY we are rolling ahead of schedule in terms of our enrollment in the US.

And then in Europe we believe we are being smart in terms of how we are positioning the product.

We do believe that this product deserves and warrrants a pricing premium, and so we are being selective in terms of markets and customers that we are approaching with SYNERGY.

We will have a full-blown launch.

We will expand that launch in first-quarter 2014 in Europe and we will continue to enroll.

But we believe that two-tiered position is the way to go and the launch in first-quarter 2014.

And we will continue to do the controlled launch in the appropriate markets that justify the premium price point that the product deserves.

On the S-ICD front, Mike, the demand ahead of supply; I understand that with Gen 1 especially.

But with Gen 1.5 that you're going to launch this summer, it sounds like on track, how quickly are you going to be able to supply the demand that is there?

Is it going to take six months or two years?

Help us understand how quickly Gen 1.5 can launch.

Thanks.

Sure.

Well, on the -- in Investor Day we talked about S-ICD in quite a bit of detail.

We expect to continue to deliver the revenue that we discussed at Investor Day in 2013 for S-ICD.

The revenue will be more heavily weighted to what we delivered in first quarter and more heavily weighted to the back half of '13 based on the supply, but we expect to deliver that.

So it is not an issue of demand.

As you know, the product was approved early.

So for a number of months since we have acquired the company we have been focused on boosting the supply chain and capabilities with this device so we can deliver it at quality and at the right quantities.

This 1.5 release really is focused on that.

As you said this 1.5 release will occur during the second half of the year, and we believe that we will be able to really deliver the demand that is needed in the fourth quarter of 2013 and clearly as we go into 2014.

So we will begin to take the foot off the brake a little bit more in third quarter.

But you will see us be able to increase our capabilities to supply in fourth quarter and clearly in 2014.

And we expect to deliver the overall S-ICD guidance that we provided at the Investor Day.

Thanks for that.

David Lewis, Morgan Stanley.

Good morning.

Jeff, just one interesting thing on guidance we thought was R&D.

I thought you had talked about R&D actually being heavier in the first half of the year; it now looks like it is going to be lighter.

And it sounded to us that that trend probably continues.

So can you just talk to us about -- what is a good number for R&D for the year?

And specifically, is this more of a strategic structural change for how the Company is going to spend and organize innovation?

Yes, David, thanks for the question.

I would say that in the first quarter R&D was probably a little lighter than we anticipated, and a lot of that just has to do with timing of when things happen in terms of trials and activities.

Our guidance indicates that R&D as a percentage of sales will be between 11.5% to 12.5% for the rest of the year.

So that would be a bit of a step up sequentially, because we're at 11.6% in Q1.

So I would expect R&D would tick up here in the second and third quarters.

Those tend to be slightly lighter quarters revenue-wise.

And then probably be at the lower end of that 11.5% to 12.5% in '14 -- in Q4 as revenue picks up in the fourth quarter.

Okay.

Very helpful.

Then, Mike, maybe a question on the outlook.

I think the theme of the call and I think the focus for investors is improving organic growth rates and constant-currency rates throughout the balance of the year.

I guess some skeptics would say you've benefited from a couple of areas, specifically in CRM and Neuromodulation, where some of your peers have been a little weaker; and as they begin to get a little stronger or recover from their issues in the back half of '13, it is going to be harder for you to get to that back half of the growth improvement.

Maybe just talk about what expectations you have made for competitors rebasing their businesses, and how confident you feel that you can still get to these improvements into the back half.

Absolutely.

We are actually pleased.

We delivered first quarter as we guided, and the year looks -- we believe we are going to execute in 2013 similar to what we provided at the Investor Day, with sequential quarterly growth.

We called first quarter what we think will be our toughest growth, and improvement in second quarter, and sequential improvement from there.

The key factors -- I won't go through the whole script, but the key factors, there is four of them on why we believe we will continue to improve the sequential growth.

First one is our MedSurg and PI businesses.

They continue to grow at or above market in markets that are healthier, led by Endo, the Spectra launch with Neuromod, and a consistently growing PI and Urology business.

And as a percent of overall BSC, that continues to grow slowly in terms of the proportion of our revenue.

So we think that will continue to make a positive impact each quarter in '13.

The second big one, the wildcard if you will, has been the performance of IC and CRM.

You saw a stabilization of share, we believe, in our global CRM business in first quarter.

And we expect that trend to continue, which is a strong turnaround from the previous years.

IC business, we believe we had our worst quarter in first quarter and that will get better.

We launched Premier in the second quarter in Europe.

We had the full year for chronic total occlusion with our BridgePoint acquisition, and we believe a more efficient commercial organization to improve our performance in Interventional Cardiology.

The adjacencies that you know about, we ticked through them during the call -- the third point -- are making progress in their milestones and we believe the adjacencies will deliver against the revenue that we called out at the Investor Day.

And the fourth one is our BRIC.

We continue to grow a solid 35% in that, in those areas.

So those are our four-point plan there, and we believe we are executing to what we communicated at the Investor Day.

Okay.

Thanks, Mike.

Then, Jeff, just a real quick follow-up.

Would you say the revenue guidance revision is entirely currency?

And if it is not 95% currency, was there some other dynamic that would have driven the revision?

Thank you.

Yes, so if you go back and look at our original guidance for the year, I believe it is $7.050 billion to $7.350 billion; so we have lowered back by $150 million, both the high and the low end, for FX.

The FX rate is obviously because of the yen predominantly have just hit everybody.

So we have taken $150 million off both ends of the ranges.

And then in essence we added $50 million of revenue to the lower end of the range, and we took $50 million off the higher end of the range.

So from a percentage basis, the guidance is predominantly affected by the FX, which affects everybody.

We still, as Mike laid out, are very focused and confident on our ability to return to growth.

I think we have got a lot of positive things going for us in the back half of the year.

Great.

Thank you very much.

Glenn Novarro, RBC Capital Markets.

Hi, good morning, guys.

Had a question on the CRM guidance for 2Q.

I think you mentioned guidance would be $450 million to $470 million, and I think you just did $478 million for the first quarter.

So is that conservatism?

Or is there something in the markets that you are concerned about?

And then I had a follow-up.

Well, thanks, Glenn, for the questions.

So our worldwide CRM business was down 4% on a constant-currency organic basis; and our guidance would imply a low of down 7% to a high of up 3%.

So the midpoint somewhere around 4% or 5%, so somewhat consistent with the first quarter.

So I think we expect more of the same Q1 to Q2.

Being off the market in S-ICD obviously hurts us a little bit.

But we see a lot of positive things, particularly in the pacer area with the INGENIO launch.

So the performance is expected to be similar to the first quarter.

And as I said earlier, given everything going on in the markets I think we have leaned a little bit more conservatively on guidance and hopefully we can exceed that.

Okay, and just as a follow-up, just to flesh out the US market a little bit more, you are actually -- your IC number came in better than we thought here in the first quarter.

Is that a function of maybe the market doing a little bit better?

Was pricing not as bad?

Were there share gains?

Can you comment on those?

Yes.

From a market perspective, Glenn, I think we continue to be somewhat optimistic about the pricing trends.

As we identified back in mid 2012, we walked away from some business which was very price sensitive.

And given our portfolio and all the new technology we have coming to market that is differentiated, we intend to continue to be disciplined from a price perspective.

We did see in the first quarter pricing activity that was better from a percentage basis than the fourth quarter, and better than the trend.

So that is encouraging.

So that is good news.

The PCIs are kind of similar, down low to mid single digits, so unchanged on that front.

So overall we were pleased with a sequential stabilization, if not a slight uptick, in share from Q4 to Q1.

But the real interest is in the back half of the year when we get PROMUS Premier and we continue to roll out our CTO devices and the rest of our technology takes off.

Then just one quick follow-up.

The share comment, that you thought you may have picked up sequentially, were you referring to ICDs?

No.

And on the pricing -- okay.

So you think pricing share on ICDs is stable?

Yes, well on core ICDs it is up I think -- from a share perspective.

And my comments on pricing related to DES; I thought that was what you were referring to.

No, I was referring to ICD pricing.

Generally the ICD pricing in the overall market has been down anywhere between 3 and 5. And as I looked at your ICD results, they did come in better than we thought.

So we were just trying to figure out, was it maybe pricing came in a little bit better?

Were there share gains?

Or did the overall market come in a little bit better?

Just to clarify then, so the comments on pricing, I thought you had switched to DES.

My error.

On the ICD side the pricing is no different than what it was in the fourth quarter.

Okay.

Yes, I think just to add some color to that, the pricing [somewhere] as Jeff said in ICD we believe we picked up some share in de novo ICD in the second quarter -- I'm sorry, in the first quarter, which helped our performance.

Thank you, guys.

Mike Weinstein, JPMorgan.

Thanks.

Just to follow up David's questions, relative to the revenue guidance.

So the 2Q, I guess, difference between where you are guiding to, the $1.74 billion to $1.80 billion versus the Street, what do you think that is?

Do you think that is just more conservatism?

What is it you think that is in your model that is not in the Street's?

Well, Mike, one of the biggest differences is probably FX.

I think when the Street set their models was when we set our guidance, and at that point we were expecting I think FX to be negative $10 million, and now it is negative $140 million.

So there is almost a $150 million negative impact of FX and that is spread through the quarters.

So what I would encourage the analysts to do is go back and look at their models relative to FX, because it was a $25 million negative impact in the first quarter; and I think I said in the script it was something like $30 million negative in Q2.

And when we originally set guidance that was supposed to be minimal in Q2.

Okay, so you think the Street is just lagging on FX?

Yes, I do believe that.

Okay.

Let me ask about gross margin, because I think gross margin this quarter was a little bit lighter than I think we in the Street were looking for.

What's -- maybe just give us your thoughts on that.

Is that -- is the decline, or let's call it the shortfall there, is that a function just of mix and the weakness in the IC side of the business?

Is that in part because of what you sold on the S-ICD this quarter and that weighed on it?

And how do we think about gross margin over the balance of the year?

Thanks.

Yes, sure.

Thanks, Mike.

So yes, maybe the best way to do it is kind of bridge you off the fourth quarter to the first quarter -- the fourth-quarter '12 to the first quarter, and why would margins be down 100 basis points.

It is really three factors.

One is a bit from a mix perspective.

We had a slightly less rich mix of products; so that was about a third of the impact.

Another third was the Neurovascular distribution revenue that we had was actually higher in the first quarter than it was in the fourth quarter, and that was slightly unanticipated.

So I think as we have discussed before, that has basically distributors margin, very low margin.

So that weight on the margins.

And then the third factor, which was roughly a third as well, was that we ended up taking our inventories down maybe a little bit lower than we had thought we would initially.

And that had an absorption impact that rolls through the margins in the first quarter.

So a third makes, a third Neurovascular distribution being higher than planned, and a third absorption.

If you look now going forward, what do the margins do from a sequential perspective from the first quarter to the second, second to the third, there is really kind of three factors.

One is we expect that our value improvement programs and our cost-saving initiatives will continue to be enough to offset, from a margin percentage perspective, price; and that mix will be less of a challenge.

So we think those kind of neutralize if not slightly more favorable.

What also happens is from a Neurovascular perspective, our Neurovascular revenue, the distribution revenue to Stryker drops off quite a bit from Q1 to Q2 and then again from Q2 to Q3.

In those step-downs we get a margin uplift from those.

So there is roughly a 50 basis point benefit from Q1 to Q2, and then another 50 basis points from Q2 to Q3 from just basically taking that distribution revenue down from roughly $36 million in the first quarter to almost zero in the third quarter.

So you get a margin benefit from that.

And the third factor is from an FX perspective, what the rates are, where they are today.

That helps a bit from a margin percentage perspective.

Okay.

I think that's clear.

One last question and I'll let others jump in.

As you get ready to launch the Lotus valve in Europe, can you just talk about what your plans are from the distribution standpoint?

Obviously you've got a very strong Interventional Cardiology presence, but you haven't called historically on the cardio-thoracic surgeon.

So how are you preparing for that?

And what are you going to do differently?

Thanks.

Certainly.

We are not going to provide lots of detail on our commercial strategy.

As you said we have a large Interventional Cardiology sales team, and we have clinical sales specialists that we have not only for our Atritech program, but also for our Lotus program.

So we will leverage our clinical sales teams in structural heart and also the commercial presence that we have across our Interventional Cardiology team to commercialize Lotus.

Does that help?

Yes, thanks.

Matt Taylor, Barclays.

Good morning.

Thanks for taking the question.

I wanted to just touch on the constant-currency guidance.

Just was curious.

You gave a lot of moving parts around new products.

Has your expectation for contribution from new products versus the core business changed at all versus prior guidance?

Yes, that's a good question.

If you go back and you look at what we had laid out relative -- at Investor Day in terms of expectation of contribution of some of the adjacencies that we have entered, I would say that our expectation has not changed.

We still feel pretty good about the expected contributions.

And those really start to kick in, in Q3, and then in a bigger way in Q4.

Certainly there will be some puts and takes but overall we feel pretty good about the contribution of the adjacencies in addition to the new products that have been developed internally -- the PROMUS Premier launch, the continued rollout of INGENIO, and the other countless new products that come out within the MedSurg business.

Then just maybe quickly on two that you are launching and ramping here that you covered a little bit.

But could we get more color on left atrial appendage, given the data that you showed earlier in the quarter?

And also any color on the Asthmatx launch that you can give above and beyond what you talked about in the script would be great, and your expectations there.

Ken, you maybe can provide some comments in addition to mine on Atritech.

So we have had nice sequential growth, year-over-year growth in Europe with Atritech exceeding 30%.

We expect to file with the FDA in the second quarter.

And we will also be announcing at hopefully a late-breaker here at HRS, the efficacy results of our PROTECT AF trial.

So, Ken, any other comments you want to make on Atritech?

Yes, I would just say, just to reiterate we were very encouraged by the PREVAIL data.

It, to our thinking, goes a long way to resolving the concerns people had about safety of the device, particularly with new implant; theirs showed comparable efficacy outcomes to oral anticoagulation.

Also just want to emphasize to everyone that when we do file with FDA it is not just the PREVAIL data; it is the totality of all the data we have with the device, the pilot study, PROTECT-AF, the ASAP trial in contraindicated patients, as well as PREVAIL.

And again just to reiterate, as Mike said, we will be presenting the long-term follow-up data in PROTECT-AF as a late-breaking trial at HRS, and that is going to be by far the longest experience that anyone has had in a large-scale randomized clinical trial with left atrial appendage closure.

And with respect to Alair, we had a few comments there in the script.

We certainly want -- we're very optimistic about this program and we're making steady progress.

We yet don't have the final reimbursement numbers that we have; but we have seen sequential improvement.

Our Asthmatx business grew about 70% in the first quarter.

We are opening new centers.

We are seeing high renewal rates and terms of reordering rates amongst the physicians that are using it.

We applied and were granted a Category I CPT code in first quarter, and we continue to make efforts to drive a reimbursement strategy to open up this market.

We think a key deliverable will be our five-year efficacy data that we will present either late second quarter or early third quarter.

And we are hopeful that that will be a trigger to help unlock some of the reimbursement that has been clogging the channel for Alair.

Great.

Thanks for all the detail.

Matthew Dodds, Citigroup.

Good morning.

First thing, on the US stent market, it looks like the volumes -- unless Medtronic has a big quarter -- are going to be down about 10%.

But I think you said in the commentary stents per procedure might be off a little.

So I just wanted to see, A, why you think that might be.

And what do you think -- what is happening with the volumes in the US?

Why are they still falling so fast?

Matt, it's Jeff.

I am not sure we would agree that the volumes are falling 10% from a -- so exclusive a price I think we would put PCIs probably down, probably low to mid single digits.

That is our intelligence so far looking at what we track, what Abbott has tracked; and of course we will see what Medtronic reports.

And price, obviously, is a negative on top of that.

So we are more low to mid single digit PCI contraction year-over-year.

Then how about the stents per procedure?

That comment, is that something new?

No, I think we started to see that six to nine months ago.

That was a dynamic that -- maybe midpoint last year and it was reflected in our assumptions going forward for guidance and for the market.

Okay.

Then, Jeff, one more thing for you.

Given the high percentage of sales in Japan, the impact on the top line, why -- is there an impact in the bottom line that you're covering?

Or do you offset it through the P&L?

Yes, that's a good question.

We -- our hedging philosophy is to neutralize for FX.

So at any point in time we are almost -- pick a percentage -- 90% hedged for the current year and the next 12 months, depending on where you are in the year.

The following 12 months we are probably somewhere between 70% hedged.

And we are about 50% hedged for the third year.

So when we see these types of dramatic changes in currencies like the yen, we are pretty much protected from an OI perspective.

Now we hedge operating income; we don't hedge at the revenue level.

So you will see fluctuations in our revenue, which is why the guidance comes down $150 million on the top line, because we don't hedge the revenue.

But it doesn't have a big impact for us from an operating income and EPS perspective because we neutralize for that.

You give up some of the upside, but you neutralize for the downside, which in this environment actually plays out pretty well for you.

Are those hedges all in the gross margin, or are they also in other parts of the P&L?

The majority of them are run through the gross margin.

And some -- well, the impact hits you in the gross margin and some of the SG&A as well.

Thanks, Jeff.

Tony, we are running past the hour here, so we have time for one more question.

Bruce Nudell, Credit Suisse.

Thanks for squeezing me in.

I guess we have heard some -- I don't mean to be disrespectful, but surprisingly nice things about Lotus and that people really like the stress-free implant experience.

Could you just opine on -- is this going to be, in your view -- I know you need other sizes and all and the rollout is controlled and you don't have transapical right away.

But in the transfemoral segment, how do you view this product in terms of market share?

Hey, Bruce.

It's Mike.

Thanks for your high expectations you had in the product, man (laughter).

No, no, no.

We have consistently heard very nice things from surprising sources, I would say.

Good.

Well, why don't we first start off with -- Dr. Keith Dawkins is on the phone.

He was just at the Crealive event where Lotus was implanted live.

So maybe he can make some comments.

Yes, it is good to hear you were surprised, Bruce, about a good product.

Yes, I am at TCT Asia Pacific in Seoul, and the first live Lotus valve was done yesterday.

No aorta regurgitation at all, and just a completely different experience compared with the competitive products.

Early valve function.

As you say, a relaxed procedure.

Predictable, retrievable, repositionable.

And I think the aortic regurgitation is really the Holy Grail.

You will have seen the Sapien XT results at ACC with 29.2% moderate and severe aortic regurgitation, which really clinically is completely unacceptable.

So we're very excited by this product.

The operators that have now used it in the CE Mark trial in four countries, Australia, France, Germany, and the UK, have just been blown away as has the core lab, the echo core lab.

As you know, when you assess aortic regurgitation and compare products, it is important to use an echo core lab, and some of the smaller players don't do that.

So we are very excited and looking forward to discussions with the FDA, further discussions with the FDA around the IDE trial and commercializing after CE Mark in the back half of this year.

I guess my only follow up is a small niggling question.

How should we be thinking about revenue in the discontinued operations bucket for the rest of the year?

Yes, Bruce, it's Jeff.

So as I said in responding to Mike's question on margins, we would expect that the distribution revenue to the Stryker would go from the mid 30s down to -- which is what it was -- it was $35 million off the top of my head in Q1; down to like $20 million in Q2; down to pretty much zero in Q3.

Thanks so much.

Yes, you're welcome.

Great.

Tony, there seems to be a lot of interest, just looking at the queue.

So we can take a few more questions.

Kristen Stewart, Deutsche Bank.

Hi, thanks for adding me in.

Just wanted to see if you guys would be willing to give just S-ICD contribution in the quarter, just to try to better understand what the base ICD business is doing.

Kristen, we are not going to get into contributions from each of the product lines.

As I think Mike pointed out in his comments we had a very strong result for the first quarter in CRM, despite the fact that we weren't on the market much with the S-ICD device.

And I think we will probably leave it at that.

Okay.

Then just looking at the operating margins that you are now providing as well, I was somewhat surprised by just how low the Rhythm Management margins were.

And they declined on a year-over-year basis; looks like now they are at 12%.

Can you maybe just, I guess, explain why margins were down so much year to year and where do you see those margins going, since you are substantially below where we would expect Medtronic and St.

Jude's margins to be?

What are going to be the key initiatives you have to basically moving that up?

I'm not sure how much of an impact the S-ICD has with that on year-to-year basis.

Yes, that's a very good question, Kristen.

As you have noticed in the earnings release, we have -- as we've discussed, we have moved towards these global business segments, and now we will be disclosing the operating income profitability of Cardiovascular, Rhythm Management, and MedSurg on a regular basis.

I am going to take you back in answering your question to the Investor Day.

We clearly had outlined a game plan to improve our overall Company operating margins by at least 600 basis points over the next five years.

And, frankly, the Rhythm Management business was a big piece of that.

The reason why they are lower than we would like them to be and perhaps some of our competitors, one factor obviously has been the market declines and some of the historical issues we've had.

But the second issue, which is pretty important, is we are investing aggressively in that business, both the Cameron acquisition, the Rhythmia acquisition, the Atritech acquisition have all added significant investments in research and development and commercial operations.

So that is important to understand.

Now, why does it change?

Certainly what you are seeing now is the weight of all those investments and not much of the return.

So as we finish the R&D programs and as we get through the commercialization investment and the revenue starts to take off in the back half of the year and into '14, you're going to see a pretty dramatic change in the profitability.

Because right now it is weighed down by all those investments and not much revenue.

And in the back half of this year -- starting in the back half of this year and into next year, you get the release of some of that investment because we are through some of those programs, and then you start to get the revenue at pretty good margins.

So that in combination with the revitalized portfolio of our core business, which frankly is doing very well, if you look at our results relative to at least St.

Jude's on the core CRM side; we had a pretty good quarter relative to them.

And then you look at our differentiated platforms, the S-ICD, WATCHMAN.

Getting into higher-growth markets, the EP space is a space of focus for us with the Rhythmia acquisition and all the investment we are doing in EP.

As well as all the productivity initiatives; in the second quarter we announced of '11 a restructuring program and at the end in January we announced expansion of that program.

A lot of that benefit from a cost perspective flows through the Rhythm Management business.

So we expect to be able to grow that business, and with these new acquisitions taking off the back half of the year and next year to lead to significant operating margin improvement.

So as you come back to the 600 basis points of overall Company margin improvement, we would expect that the CRM -- the Rhythm Management segment would benefit disproportionally from those programs and from those activities.

Just real quick and last on the WATCHMAN device.

Do you guys anticipate having to go back before a panel for approval?

Hey, Ken.

Do you want to comment on that?

Yes, well, we are prepared to go to a panel if we have to.

But I am not going to speculate on what the FDA is going to decide in that regard.

Obviously, the device has already been through a panel previously that did recommend approval.

Thank you.

Larry Biegelsen, Wells Fargo.

Guys, thanks for fitting me in.

One on the P&L; one product question.

Similar to a question that was asked earlier on R&D, Jeff, can you talk about the SG&A spending from an absolute standpoint?

Last year it actually trended down through the year.

And second, on royalties, it was a little bit higher than we expected this quarter.

Do you expect that to trend down as we saw last year?

And then I just have one follow-up, product related question.

Okay, Larry.

From an SG&A perspective, you're right, it did trend down as we went through the year in 2012.

We do expect it to trend up slightly in Q2 and Q3 based on some of the commercialization investments that we are making to bring the TAVR product to market, which we expect to hit the market in the back half of the year; the Vessix product to the market; as well as continue to roll out PROMUS Premier in Europe now and in the back half of the year for the US.

So we expect it to uptick slightly in Q2 and Q3 from a percentage perspective.

So hopefully that is helpful.

So that is from an SG&A perspective.

From a royalty perspective we do expect it to trend down in the back half of the year.

Because what happens is the percentages, those tiers in the royalty arrangements where you get to a certain tier of revenue and the percentage actually drops.

So you sell more, the percentage goes down as a result of the overall average percentage drops down as you go through the year.

And that is consistent with pretty much every year.

That's very helpful.

Then on the product question, another one on the Lotus valve.

Like, Bruce, we have also heard positive things on the valve.

So two-part question.

One is, can you remind us of the rollout plan on the different sizes?

And second, in the first study there was a relatively high pacemaker rate; but it was a very small study, four out of 11.

Do you guys think that you guys have addressed that and we would expect to see the pacemaker rate probably in line with other self-expanding transcatheter valves, such as the core valve pacemaker rate?

Thanks.

Yes, Keith, you can make some comments.

What we will be shooting for CE Mark approval will be two valve sizes, the 23 and the 27 that you are hearing the results on.

We will continue to expand the portfolio of valve sizes over the future.

With respect to the pacemaker rate, we will be presenting some data at the upcoming PCR.

But in general, we would assume that the pacemaker rate would be in line with the core valve product.

Thank you.

That's very helpful.

Yes, I will just add, Larry, as you said in REPRISE I, that was an 11-patient study and there were four patients who were paced; but two of the pacemakers have not been used.

Then as Mike says in EuroPCR, in the late-breaking trial we will present the 30-day data from the first 60 of the 120 patients in REPRISE 2, the CE mark trial; and that will include the pacing data.

It is not strictly a self-expanding valve, just to correct you there.

It is not the same as a balloon expandable valve or a self-expanding valve.

It is a hybrid valve.

It is between one and the other.

Thank you very much.

Brooks West, Piper Jaffray.

Thanks, guys, for taking the additional question.

I wonder, Mike, if I could steer you back to the emerging markets, specifically the BRIC comments, can you talk about the scale of that business?

And then can you talk about the key product mix that is driving growth there?

Sure.

Within our BRIC markets, we continue to increase -- not in dramatic ways -- but we continue to increase the percentage of the overall mix of revenue for BSC from BRIC.

Historically, we have been 3%; we moved up to 4%; now we are more approaching 5%.

So it certainly is an important growth driver for us and we expect to continue that 35% growth throughout the planning period here.

I won't go through each country.

We are very strong in Brazil.

We're getting much stronger in China.

We are building a solid basis of business in India and Russia.

And most often our Interventional Cardiology, Endoscopy, and peripheral businesses are our largest contributors of growth and operating income to those regions, those three business units.

So we are obviously advancing all of our business units, but those three provide the greatest contribution.

That's helpful.

Then just two quick ones for Jeff.

Can you speak to pricing trends in DES?

We have been picking up some signals that maybe the pricing headwinds, especially in the US, have been getting worse.

And then would you say anything on your exposure to the pelvic floor litigation that has been talked about recently?

Thanks.

Yes, so on the pricing trends, I would say that we were encouraged by the pricing -- we encouraged -- had happen to us in terms of pricing in the first quarter.

So we have been very conscious and have conceded some share historically to walk away from situations where the price was not commensurate with the value we were delivering.

And we will continue to be pretty disciplined, and I think that is actually getting slightly better for us.

So I would say pricing is -- obviously you make that comment with a little bit of hesitation, because you don't know what is going to happen.

But we were encouraged by what we saw in the first quarter from a pricing perspective.

And then on just on the pelvic floor litigation?

Yes, like all litigation matters, we wouldn't comment on that specifically.

Great.

thank you, much.

Jose Haresco, JMP Securities.

Hi, guys.

Thanks for taking the question.

Let's see here.

Just following up on the pricing on DES here in the US, do you have a sense of what factors could be leading to a better environment on the pricing side here in the US?

And can you contrast that with what you are seeing in Europe?

Well, certainly product differentiation is pretty important, right?

If you back up a year, year and a half ago, you had two products that were completely identical in PROMUS and XIENCE; just different boxes.

So now we certainly feel that our PROMUS Plus stent in the US is better than anything on the market, and we are marketing it as such.

And when we come out with PROMUS Premier we think that is another step forward from a product perspective.

And we intend to sell the product for its value, and so we think that is what is driving some better comparables from a pricing dynamic perspective.

Europe is a little bit more of a challenge given the macro factors and the austerity measures.

That pricing erosion is a little higher, upper single-digit if not low 10%, a little bit more than that.

And that is just all driven by the austerity measures.

A follow-up question on another subject.

You mentioned that you thought you picked up some share in de novo implants in the first quarter.

Is that a sustainable trend?

Could you point at one or two things that are leading to that?

On the de novo front, we launched a new platform in 2012, the INCEPTA ENERGEN platform that has differentiated features and price points based on the customers' objectives.

That continues to make good progress, and there's many compelling features on it.

The top three -- one is we still believe it is the smallest, thinnest device that patients enjoy.

Secondly, the longevity of the device and our significant warranties to back that up.

And third, the lead reliability.

So those are three features that we think are differentiated and we believe are helping to contribute to some of the positive share gains we are seeing in the de novo ICD implants.

Thank you.

Okay, with that, we would like to conclude the call.

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