美敦力 (MDT) 2007 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic third-quarter earnings conference call.

At this time, all participants are in a listen-only mode, and later we will conduct a question-and-answer session.

Instructions will be given at that time. (OPERATOR INSTRUCTIONS).

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Ms. Martha Goldberg Aronson.

Please go ahead.

Welcome to Medtronic's third-quarter fiscal 2007 conference call and webcast.

During the next hour, we will review the results of our third quarter which ended January 26th, 2007.

Following these introductory remarks, Medtronic Chairman and Chief Executive Officer Art Collins will provide a brief overview of Medtronic's third-quarter results.

Next, Bill Hawkins, Medtronic President and Chief Operating Officer, will provide insights on individual businesses, markets, and product lines.

Chief Financial Officer Gary Ellis will follow with a financial summary as well as an update on guidance.

After our prepared remarks, we will conduct a Q&A session, concluding the conference call around 4:30 PM Central time.

A few logistical comments -- this call is being webcast via our website, www.Medtronic.com.

Our press release, earnings statement, balance sheet, cash flow, revenue by business summaries, non-GAAP to GAAP reconciliations, as well as a transcript of the prepared remarks will all be posted on our website.

The transcript will remain available on our website until our next earnings call.

Today's commentary should be considered and evaluated in light of the important disclosures and reconciliations contained within our press release, as filed with the Securities and Exchange Commission.

Please telephone Medtronic investor relations or corporate communications if you're unable to access the press release or the transcript.

Today's webcast includes statements regarding Medtronic's anticipated financial results, market growth, product acceptance or approvals as well as other forward-looking statements based on current expectations.

It's important to note that our actual results may differ materially from those anticipated.

Information on factors that could cause actual results to differ materially from these forward-looking statements is contained in Medtronic's Form 10-K for the year ended April 28, 2006 filed with the Securities and Exchange Commission.

We encourage you to review those carefully.

All statements are made of as of today's date, and we undertake no duty to update the information provided in this call.

Unless we say otherwise, the comparisons we make today will be on an as-reported basis, not on a constant-currency basis, and quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2006.

With that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Art Collins.

Thank you, Martha, and good afternoon, everyone.

By now, most of you should have seen the press release discussing our third-quarter financial results.

Before I begin my overview comments, I'd like to underscore the fact that based on input from our investors and investment analysts, we've shortened the press release, and as you'll hear during our prepared remarks this afternoon, we've streamlined our commentary in order to allow more time for questions.

As always, we appreciate feedback on the way in which we communicate our results and discuss our business.

Compared to the third quarter last fiscal year, revenue of $3.048 billion increased 10%, including a $55 million positive impact of foreign currency translation.

Net earnings for the third quarter of $710 million translated into diluted earnings per share of $0.61.

That was $0.03 above the consensus estimate.

To make a meaningful comparison, you need to adjust last year's third-quarter earnings to reflect pro forma stock-option expense.

On that basis, diluted earnings per share increased 17%.

On a GAAP basis with stock options expensed only in fiscal year 2007, diluted earnings per share for the third quarter increased 11%.

During the third quarter, five of our seven major business segments saw double-digit revenue growth.

Those were Spinal and Navigation, Vascular, Neurological, Diabetes, and Cardiac Surgery.

Also, our international operations generated 25% growth with solid performance around the world.

Despite the fact that market dynamics have negatively impacted growth in the U.S.

ICD product line, our diversified product and geographic portfolio allowed us to achieve strong EPS growth again this quarter.

As discussed during our investors conference in New York a few weeks ago, we expect to see more balanced growth going forward, [due] both by business and by geographic region.

At the New York conference, you also heard us speak about operating leverage, and I am pleased that the strong bottom-line results we delivered this quarter reflected the benefits of operational improvements throughout the Company.

During the third quarter, we launched our sudden cardiac arrest and ICD awareness campaign called "What's Inside".

Early reactions to the campaign are favorable, and we continue to make progress on other initiatives to help educate patients and doctors so that we can reach hundreds of thousands of people who could benefit from this life-saving therapy.

At Medtronic, there's nothing we take more seriously than the quality of our products and services.

In that regard, Bill will summarize the steps being taken to address the issues that led us to suspend U.S. shipments of Physio-Control external defibrillators manufactured at our Redmond, Washington facility.

As we move through the remainder of this fiscal year and enter fiscal year 2008, we expect to see good operating momentum and positive contributions from a number of new product launches inside and outside the United States.

We also expect continued progress on market development activities and tangible benefits from a broad range of productivity and supply chain management initiatives.

With that, it is now my pleasure to turn the call over to Bill Hawkins, Medtronic's President and Chief Operating Officer.

Bill?

Thanks, Art.

In the third quarter, revenue in the United States was $1.957 billion, up 3%.

This represents 64% of the Corporation's total revenue.

Internationally, revenue of $1.091 billion increased 25%, or 18% on a constant currency basis.

We continue to be very pleased with the growth of our international operations.

Let's now turn to the review of our business segments.

And we will start with Cardiac Rhythm Disease Management.

This quarter, total CRDM revenue increased 2%, but worldwide ICD revenue decreased 2%.

ICD revenue in the U.S. decreased 10%, which was fairly consistent with an estimated market decrease of 9%.

International ICD revenue growth remained strong at 29%, or 19% on a constant-currency basis.

Worldwide facing revenue grew 8%.

Before getting into other CRDM operating details, I want to briefly update you on Physio-Control.

As you know, we stopped U.S. shipments in mid-January due to quality system issues.

The suspension in the last two weeks of the quarter had an immaterial impact on the Corporation's overall Q3 results.

We are currently in discussions with the FDA regarding the corrective actions we need to complete before we can resume shipping in the U.S.

Since it is difficult at this time to accurately predict how long it will take to execute on the corrective actions, we have begun making necessary changes at Physio-Control to reduce cost.

I want to emphasize that these challenges have not changed our intent to spin off Physio-Control, but the original timing has been delayed.

We will continue to update you on this subject as events dictate.

So turning now to ICDs, let me start by saying that overall we were disappointed with our market share in the third quarter, particularly in the United States.

We believe our current U.S. market share is about 53%, with our worldwide market share estimated at 52%, which is flat year-over-year.

Sequentially compared to Q2, we lost several market share points.

It is important to remember that our Q3 market share traditionally declines during the year ends of our two main competitors.

Even still, we had anticipated a stronger showing.

Average selling prices for the third quarter were relatively flat compared to the prior quarter, which reinforces our discipline in selling Medtronic's technologically advanced products in spite of increasing price pressure from our competition.

Looking at the big picture, we know there are hundreds of thousands of people whose lives could be saved by ICDs.

So let me discuss the actions we're taking to improve patient access, expand the market, and gain share.

We continue to believe that we have the strongest, most experienced sales organization, armed with the best technology on the market.

Concerto and Virtuoso are clear examples of this market-leading technology.

Our proprietary 10-channel wireless capability along with unique features such as OptiVol and MVP continue to fuel strong customer enthusiasm for these unique products and, we believe, will drive share going forward.

Another good example is CareLink, our proprietary patient-monitoring system.

Not only were we the first company to bring an Internet-based monitoring system to the market, but with 1,100 clinics and about 110,000 patients enrolled in our network, we have clearly set the standard for patient monitoring.

As our competitors attempt to follow our lead, we are aggressively working on programs to make CareLink accessible to more patients, which we believe will further extend our lead in this market.

We continue to make solid progress in our multifaceted effort to reaccelerate market growth.

As Art mentioned, our "What's Inside" national awareness campaign is underway, and is being very well-received.

As a reminder, the ads are running on cable, broadcast TV in major markets, and in national print media.

We are also utilizing the Internet and including ads in a broad selection of professional journals.

Average hits to our website and positive viewer reaction continue to exceed our early projections.

We strongly believe that adherence to well-established existing guidelines in hospitals and clinics are essential.

In this regard, we have developed tools such as SCA, or sudden cardiac awareness, protocols and pathways for better screening and identification of heart failure in post-MI patients at proven risk.

We are also making good progress on the effort to improve compliance with recommended guidelines with the IMPROVE-HF study.

We will complete the baseline reviews by the end of the fiscal year, and will then submit the data to the Heart Failure Society of America.

Also this quarter, we will begin to enroll patients in the [NARROW] study, a trial designed to show the clinical benefits of CRT in heart failure patients with narrow QRS as defined by QRS with less than 120 milliseconds.

Sudden cardiac arrest protection and heart failure treatment remain significant opportunities in the U.S., and even larger in international markets, where we expect to see continued double-digit market growth.

We believe that the U.S.

ICD market will rebound, albeit somewhat slower than we had originally anticipated.

Our best estimate is that the worldwide market will move to mid to high single digit growth during our next fiscal year.

Longer-term, the worldwide ICD market clearly has the potential to grow in the double-digit range.

Turning to pacing, the highlight this quarter was international growth.

International pacing revenue increased 17% or 13% on a constant-currency basis, with our global and U.S. market share at 50% and 53%, respectively.

Our pacemakers like our ICDs are benefiting from inclusion in the CareLink system.

We are also very excited about the EnRhythm MRI SureScan pacing system.

Last week, we initiated an international clinical study designed to demonstrate the safety and efficacy of this system.

This is the first-ever pacemaker to be developed specifically for safe use in magnetic resonance imaging, or MRI machines.

Finally, we look forward to the March 1st FDA panel meeting on Chronicle, our implantable hemodynamic monitoring system.

Chronicle represents an innovative tool for physicians to better manage diastolic heart failure patients.

So turning to our Spinal and Navigation business, third-quarter revenue increased 12%.

Growth in our Spinal business was fairly balanced, with spinal instrumentation sales increasing 11% and spinal biologics growing 15%.

Navigation revenue increased 7%.

International spine sales achieved greater than 20% growth, with all major geographies growing in the double digits.

Spinal results were largely driven by the continued growth of the legacy family, INFUSE bone graft, the CD HORIZON SEXTANT system, and the DIAM System internationally.

One trend in the spinal market is that small companies continue to increase their presence in the U.S.

The revenue of over 60 of these smaller companies has more than doubled over the last calendar year, putting pressure on the market in several ways.

As has been reported in the press and in a letter from the Office of the Inspector General of HHS, more than half of these companies involve some type of physician ownership or affiliation model.

We believe that the business practices and ownership structure of many of these smaller companies will come under increasing regulatory and public scrutiny.

As discussed recently in New York, our strategy is to continue to develop products that are differentiated and well protected with intellectual property, and that increasingly require a PMA rather than a 510(k) regulatory review.

In fact, we have 13 key clinical trials in progress that will drive the mix in the industry toward products supported by strong clinical evidence.

Many of these products will increasingly be delivered through less invasive surgical procedures employing our proprietary MAST technology.

Our eagerly awaited new product is the PRESTIGE cervical disc, and we continue to anticipate FDA approval of PRESTIGE before the end of our fiscal year, with the BRYAN cervical disc and the MAVERICK lumbar disc not far behind.

Another effort of hours is in the area of oral maxillofacial bone grafting, which is an important step in the expansion of indications for INFUSE.

This indication for INFUSE, also requiring a PMA, received a favorable FDA advisory panel recommendation last November.

And we expect to receive FDA approval soon.

And speaking of the path to FDA approval, let me turn to our vascular business.

We anticipate the approval of our ENDEAVOR drug-eluting stent in the United States in the second half of this calendar year.

In addition, we plan to submit PMAs to the FDA over the next few months for our carotid stent system and our thoracic stent graft.

Total Vascular third-quarter revenue increased 29% or 24% on a constant-currency basis.

This marks the third consecutive quarter of revenue growth of greater than 25%.

Coronary vascular revenue increased 31% on a worldwide basis, and we saw double-digit growth in all major geographies.

Worldwide coronary stent sales of $148 million increased 54%, driven by the continued success of ENDEAVOR outside the U.S., and strong bare metal stent sales in the U.S. and Japan.

In Japan, we achieved our best performance in the last seven quarters, with growth exceeding 20%.

In the U.S., we estimate that drug-eluting stent market penetration is slightly above 70%, compared to almost 90% at this time last year.

We believe that this shift is due in large part to safety concerns over drug-eluting stents currently on the U.S. market.

We are hearing from interventional cardiologists in the U.S. that they are increasingly interested in drug-eluting stent safety profiles, and are eager to have another drug-eluting stent option.

This is part of what's driving our enthusiasm for the U.S.

ENDEAVOR launch.

ENDEAVOR to date has demonstrated the lowest late stent thrombosis of all drug-eluting stents.

In fact, our data presented at TCP earlier last fall showed ENDEAVOR to have a lower late stent thrombosis than bare metal stents.

In Western Europe, we see a more stable situation, with drug-eluting stent penetration slightly above 50%.

Despite this backdrop, ENDEAVOR grew 6% sequentially to $77 million, which reflects the market's continued acceptance of ENDEAVOR's strong efficacy and unparalleled safety profile.

Regarding RESOLUTE, our next-generation drug-eluting stent, we have completed the submission of the design dossier, and we continue to expect CE Mark approval in the second half of FY 2008.

The nine-month resolute data will be presented at the PCR meeting in May.

Endovascular and peripheral vascular revenue increased over 20%, driven by the success of our AAA products in the U.S. and Western Europe, and our thoracic products in Western Europe.

Turning to our Neurological business, third-quarter revenue grew 17%.

Core neuro revenue increased 15%, reflecting solid growth in both our pain management and movement disorder businesses.

Gastroenterology and urology revenue growth of 27% was driven by our InterStim product line for incontinence and our PROSTIVA line for the treatment of enlarged prostate.

We continue our efforts to augment the clinical evidence for neurological therapies and make good progress during the quarter.

The following are a few of the clinical highlights -- six-month data from [process] showed that spinal cord stimulation is more effective than conventional medical management in the treatment of neuropathic back and leg pain.

Archives of Physical Medicine and Rehabilitation published a study that found Intrathecal Baclofen to be beneficial to stroke survivors with severe spasticity.

The New England Journal of Medicine published a study that confirmed the advantages of Activa deep brain stimulation for the treatment of dystonia, and the journal Neurology published a study that supports earlier treatment of Parkinson's disease with Activa deep brain stimulation.

Our diabetes business had another strong quarter.

Diabetes third quarter revenue increased 24%, driven again by growth in insulin pumps.

Our Paradigm Real Time continues to gain market acceptance around the globe, and remains the only product on the market that integrates continuous glucose monitoring and insulin pump functionality.

As expected, growth of disposables has rebounded back to double-digit rates.

In January, we began enrolling patients in the STAR III trial, which compares sensor-augmented pump therapy to multiple daily injections.

In other clinical news, positive results from the GuardControl trial were published in the December issue of Diabetes Care Journal.

The results show that real-time continuous glucose monitoring using the Guardian RT system was associated with significant reductions in A1C levels compared to self-monitored blood glucose meters.

Finally, I am pleased to announce that the MiniLink, our next-generation sensor transmitter, just received FDA approval.

MiniLink's transmitter has no cable, and is about one-third the size of the previous version.

This represents a significant improvement in patient comfort.

It is rechargeable, it snaps directly into the sensor, and can be used with Paradigm Real Time as well as the Guardian Real Time continuous glucose-monitoring system.

We are finalizing a user evaluation, and plan to fully launch MiniLink later this quarter.

Moving onto Cardiac Surgery, third-quarter revenue grew 13%, led by strong sales in heart valves, which grew 19%.

It's important to remember that last year during Q3, we completed the restructuring of our sales force, which put downward pressure on revenue that quarter.

This quarter, we launched the Navigator, a new device that enables AF ablation procedures.

And just a few days ago, the first patient was implanted in the U.S. clinical study for the Melody transcatheter pulmonary valve to treat patients suffering from congenital heart disease.

In our Ear, Nose and Throat sector, third-quarter revenue increased 7%.

These results were driven by the success of our nerve integrity monitoring products, as well as power systems.

Neurologic technology third quarter revenue increased 8%, due to strong growth from cranial and spinal surgical tools.

So as I turn the call over to Gary for his financial summary and comments on guidance, I want to reiterate that we remain very confident in our overall market position in all of our businesses and in our ability to continue to deliver industry-leading performance going forward.

We believe strongly in our products, service, and distribution, and in our ability to develop markets and drive share growth over the long run.

So Gary?

Thanks, Bill.

In my remarks, I will discuss the income statements, balance sheet and cash flow statement.

Finally, I will close the call by discussing our financial guidance.

As you heard, third-quarter revenue of $3.048 billion increased 10% over last year's third quarter.

Now, let's turn to the rest of the income statement.

This quarter's gross profit margin of 74.6% improved from last quarter's margin of 74.1%, and was more in line with the 74.8% of gross margin in the year ago quarter.

Faster growth outside the U.S., and product mix shift continued to put downward pressure on margins, but were offset by manufacturing efficiencies and cost-control initiatives.

Turning to R&D, third-quarter R&D spending of $293 million represented 9.6% of revenue.

Third-quarter SG&A expenditures of $1.038 billion increased 15% over the prior year, and represent 34.1% of sales.

The expensing of stock options increased SG&A as a percentage of revenue by nearly 90 basis points.

As we find new ways to leverage G&A, will continue to invest in the selling and marketing part of SG&A, particularly in CRDM, Spinal and Diabetes.

Let me also remind you that the significant, multi-million-dollar investment in sudden cardiac arrest awareness campaign also had impact on Q3.

Going forward, we expect to see SG&A as a percentage of revenue decline.

Net other expense for the quarter was $44 million compared to $10 million in the prior year third quarter.

This change is primarily due to currency hedges, which resulted in gains in the quarter of $3 million versus gains in the third quarter of the prior year of $31 million.

The quarter was also positively impacted by $26 million due to the accelerated amortization of payments previously received in connection with a product supply agreement in the vascular business, where the other party elected not to exercise its option to extend the agreement.

In addition, the quarter was negatively impacted by a $10 million charge in connection with an intellectual property dispute.

Last year's third quarter included a $14 million net gain from the sale of Tonometry product lines and other minority investments.

For the next quarter, we expect the net other expense line to be in the $45 million to $55 million range.

Net interest income for the quarter was $36 million compared to $24 million in the prior year period.

As of January 26, 2007, we had approximately $6.1 billion in cash and cash investments, compared to debt of about $6.1 billion.

We continue to generate operating cash flow that exceeds our capital expenditures by more than $600 million per quarter.

Let's now turn to our tax rate.

In Q1, we lowered our effective tax rate to 25.25%, which we have consistently maintained, and expect to continue in Q4.

However, in Q3, the U.S. retroactively extended the research and development credit for calendar year '06, which resulted in a $12 million catch up benefit that was recorded in Q3, the period in which the legislation was approved.

This adjustment results in a 24% effective tax rate for Q3.

We expect to return to 25.25% tax rate in Q4.

Consistent with our ongoing objectives, we will continue to make investments and put in place strategies that may further reduce our tax rate.

These efforts are designed to provide additional funds to invest in growth initiatives and help improve return to our shareholders.

Third-quarter weighted average shares outstanding on a diluted basis were 1.164 billion shares.

Fiscal year to date, we have repurchased over $400 million of our common stock, which represents nearly 10 million shares.

The repurchase of our shares is highly accretive, and remains a very compelling use of our cash.

As of January 26, 2007, we had capacity to repurchase nearly 26.8 million additional shares under our Board-authorized stock repurchase plan.

We will continue to be opportunistic with our stock repurchasing activities.

As before, we have attached an unaudited balance sheet and cash flow statement to this quarter's press release, and I direct your attention to these statements for additional financial details.

That's all for our financial overview.

Now, let me turn to financial (technical difficulty)

As you have heard during this call, we believe (technical difficulty) right markets with the right strategies to deliver long-term, sustainable results better than any other Company in the medical-device industry.

Our diversified business portfolio is focused on many large, underpenetrated markets.

This diversified business model also provides us the opportunity to minimize the impact of temporary slowdowns that naturally occur in any market.

(technical difficulty) Medtronic's overall growth profile has been impacted by what we believe is a temporary slowdown in (technical difficulty) ICD market.

However, we continued to believe the ICD market potential remains large and underserved, and we are taking important steps to reaccelerate market growth.

It is also clear that our other businesses are doing well, and that we anticipate continued growth.

We have taken all these factors into consideration as we reviewed our guidance following the Q3 results.

Last quarter we provided an estimated annual revenue range of 12.2 to $12.6 billion, and an earnings per share range, including the expensing of stock options, of $2.30 to $2.38 for FY '07.

Due to the slower recovery of the U.S.

ICD market, a revenue range of 8 to 10% growth is more reasonable.

Based on this revised growth rate, we now estimate an annual revenue range of 12.2 to $12.4 billion.

We're raising the lower end of our FY '07 earnings per share estimate range from $2.30 to $2.34.

As a result, the earnings per share range is now $2.34 to $2.38 which, after adjusting FY '06 for stock-option expense, represents a 12 to 14% growth.

Both the FY '07 revenue and earnings per share guidance reflect the impact of the Physio-Control suspension of U.S. shipments for both Q3 and Q4.

Turning to FY '08, we anticipate the approval of artificial disc and drug-eluting stents in the U.S., and improvement in the U.S.

ICD market to accelerate our growth.

We still are unable to determine the impact of Physio-Control on FY '08, so when providing future guidance, we will highlight to the extent to which it includes or excludes this variable.

We will also keep a close watch on the impact of our market development efforts in the ICD market.

In light of these factors, we will update both revenue and earnings per share guidance for FY '08 on our year-end earnings conference call and webcast in May.

As in the past, all the guidance that I just provided excludes the impact of any extraordinary charges or gains that might occur.

In summary, we have considered various scenarios in arriving at this guidance, and at this time, we believe it is reasonable, given the dynamics we currently see in each of our markets.

I would like to remind all of you that we will be hosting an investor's conference here in Minneapolis on June 20th.

That's all for our prepared remarks.

We will now take time to take your questions.

We would like to end the call by about 4:30 PM Central time.

Operator, please initiate the question-and-answer period.

(OPERATOR INSTRUCTIONS) Bob Hopkins, Lehman Brothers.

This is actually [Matt Blackman] here for Bob.

A couple questions on the ICD market.

First of all, can you comment if there was anything in particular that happened perhaps in the month of January that might explain the lower-than-expected ICD numbers in the quarter?

That's the first question.

Then I've got another question on Japan after you're done with that.

Yes, this is Bill Hawkins.

In response to the question about January, no, there wasn't anything unusual in January.

We did see around the holiday season, which we typically see -- we saw a slowdown in really the latter part of December.

But you know, we've seen that historically.

It was a little bit more dramatic this year than what we have seen in the past.

Okay, that's helpful.

And then the follow-up question on Japan -- I think you had suggested that perhaps by the end of this calendar year that the primary prevention market in Japan might open up, and I'm curious -- your thoughts on that timing, and maybe when you could expect to see the primary prevention market be a significant contributor to worldwide ICD market growth?

Well, first, the market in Japan has been a growth market for us in the overall ICD market.

It's been growing over 30%.

And yes, we do see encouraging signs in the expansions at the primary prevention market.

But in general, it has been a market that has had good, sustainable growth.

And we think it's going to continue to grow going forward.

Rick Wise, Bear Stearns.

Back to ICD as usual -- help us understand why, with Concerto and Virtuoso and CareLink in hand, you might have lost share.

I mean clearly these are sort of excellent products with very differentiated features.

Was there anything unusual -- for example, do you think the publicity surrounding the employee who had the complaints about the products -- did that have an impact?

Was there anything unusual?

What was different about this quarter than last quarter is what I'm trying to understand.

Rick, this is Art.

First of all, there are some events that take place at the end of every year.

Bill talked about the slowdown around the holiday period.

It also is the end of the fiscal year for our two major competitors, and we saw a good, strong push in the month of December.

With respect to Concerto and Virtuoso, as we mentioned at the last quarter, we were constrained last quarter on the supply.

And as we moved through this quarter, those constraints were removed.

We do believe that the initial focus was on our existing customer base.

And we are now with the sales force -- Bill can comment on this -- refocusing efforts not only to supply all of the existing current customers but also to make a much stronger push into competitive accounts or into accounts where competition is with us, but has some holding.

CareLink, I think, continues to be a plus.

And that will play out even further going forward as we see a greater use of monitoring of different sensors.

But I think we feel very good about where we are -- Concerto and Virtuoso.

And we are seeing increases in the growth in those accounts that have Concerto and Virtuoso.

We are still seeing that.

We just are now -- rolling it out more across the board to competitive accounts in addition to our own accounts.

Yes, if I could just follow-up on that -- if I could just push back a little bit, with all due respect, Art, the seasonality that (indiscernible) here-- that's a normal thing.

But you all described yourselves as disappointed that you couldn't get the job done.

You had more products.

I'm just not quite understanding what changed.

Did the market weaken more?

Was last quarter sort of the push back after the weak first fiscal quarter?

Did you push too hard and pull sales of this quarter?

I'm just not quite understanding the disappointment.

Yes, well, first of all -- Rick, this is Bill -- again, the market was down 9%.

And we were down about 10%.

So that's the bad news.

The good news is we have seen in the last three quarters the market stable, and we are optimistic that it's going to start to turn in a positive direction going forward.

So the overall market was down and we were down.

So that's something that is important to keep in perspective here.

But the last point, as Bill mentioned at the beginning of his comments -- even though we traditionally lose market share in our third fiscal quarter, partly because of the end of the calendar years for our two major competitors, we expect that we would have maintained market share.

And so we were somewhat surprised when we in fact did not do that.

But I can assure you that our sales organization is focused on taking the advantages that Bill outlined previously and gaining market share in this quarter that we are currently in.

Mike Weinstein, JPMorgan.

I will follow-up with one on ICDs, and then I will change the subject, if you would.

The question I think a lot of people have is really just the volatility of the quarter-to-quarter numbers in ICDs.

Last quarter, you had said that you thought that inventory levels had stabilized, you guys had gained market share.

You had taken a big step forward, and now you take a step back.

Do you have the visibility on where inventory levels are?

Is there any reason to think that inventories didn't pull back on you in January after a strong push in October?

Mike, this is Bill.

Yes, we do have visibility to our own inventories.

And I will tell you there was a minimal impact on Q3.

The Q3 levels are fairly consistent where they were with Q2.

So there wasn't -- inventory did not come into play here.

Okay, and so you think the quarter-to-quarter swing, the October quarter versus the January quarter, is not because of inventory?

Mike, this is the Gary -- absolutely not, based on the numbers we've seen.

There's no question.

You know, I think there has been a lot of volatility this year in the quarter as we saw -- as you well know, in Q1, it was very low.

We were up high in Q2.

We're down a little bit here in this quarter.

So overall, again we have continued to gain share as we went from year-to-year, and so we're happy with where it overall has been, but there's no question that in Q3 -- it has nothing to do with inventory, it's just the fact that we lost a few points of share.

Again, the commentary relative to how you're thinking about FY '08 ICD market growth, where previously you have been hoping that would get back to 10 to 15%, and now you're saying more mid to high single digits.

Is that just because it just doesn't look like the market is picking up yet?

I think that's exactly right, Mike.

We expected that we would see a reacceleration in the United States, more rapidly than we've seen.

We've gone over all reasons why we still think it's a very underpenetrated market, you've heard all the efforts that we have underway to stimulate the referral channels.

Outside the United States, markets continue to grow very well.

As we said, it was up 19% internationally on a constant-currency basis, 29% on an as-reported.

But it's a slower reacceleration than we had planned.

Then just last question, Bill -- you had said that -- you described the Endeavor time line as being second half of calendar '07.

Previously, you guys had described summer, and made a point of saying that summer runs up through September.

Is there any new data point there, or are you just trying to frame it differently?

No, we have a meeting coming up with the FDA -- our 100-day review meeting.

Hopefully the next couple of weeks we're going to learn more there.

We submitted all the data.

We feel very good about our dossier.

We aren't scheduled yet for a panel.

So we're just -- we're putting it out there in the second half of the year, which I think is the right way to frame it.

Dhulsini de Zoysa, Cowen & Co.

I just wanted to follow-up on those two themes.

If you could, as we look at the ICD market, just a back-of-the-envelope calculation, it looks like the market was flat year-on-year in the calendar fourth quarter of the overall market, but actually up sequentially just a little bit more than maybe 50 million or so from an unusually light third quarter.

As you think about the roles -- as we roll through 2007, is it reasonable to kind of normalize the volatility that we've seen in your sales, and say $730 million is a good quarterly run-rate, give or take $20 million?

Or should we be thinking about it in terms of the market growing 20 to $50 million sequentially throughout the year, and you holding roughly half of that market?

Well, this is Gary.

As far as the market growth, I think the overall market from calendar Q3 to calendar Q4 based on our numbers is pretty flat.

I mean, it's basically -- it didn't change much during that period of time, so there is not a lot of sequential growth during that period.

Our numbers declined sequentially from that period, and I think obviously as we lost a little bit of share as we indicated.

But I think the market has been for the last three quarters, relatively flat.

And as we get to the point of coming up on that comparison, obviously the comparables become easier, but the market itself has been relatively flat for the last several quarters.

And going forward, as we start to see the market accelerate, we would expect to see obviously our portion of that, our market share piece of that come into play and drop to our revenue line.

And we would expect as we have indicated earlier to see interest share as we go forward based on the strength of our product and our business.

So we haven't seen the market itself -- not up 50 million Q3 to Q4.

Okay.

And then if I could, just switching gears to the Endeavor program -- do you plan to present the FDA with your 12-month follow-up on Endeavor IV during the course of -- I think you completed enrollment in late June '06, so during the course of maybe midsummer (indiscernible)?

This is Bill.

Well, the primary endpoint was nine months, for -- well, the endpoint was 30-day MACE for Endeavor 4.

That was what we had committed to the FDA.

The trial was designed to have a nine-month endpoint.

And as I said, we're going to meet with the FDA next week.

And we had submitted the data that we have negotiated with them.

And at this juncture, it does not include the nine-month data from E-IV.

I guess what I'm asking is whether you could be prepared to provide that as supplemental information?

Yes, absolutely.

I mean, if they come back and ask us for that data, we will be prepared to provide it to them in the June-July time frame.

Glenn Reicin, Morgan Stanley.

Several questions.

I don't want to beat a dead horse here, but getting back to the ICD numbers, you talk about quarterly volatility -- if you look at the quarterly progression in fiscal '06, you basically had a 570 to $580 million run rate.

If you look at the run rate this year, it was close to $500 million in Q1.

It jumped to 550 in Q2, and then we're back down to that 500 to $510 million run rate for Q3.

So in my mind, just looking at those numbers, it looks very logical that inventory levels did play a role here.

So let me ask the question one last way -- if you look at implant rates, what did you see?

What I said, Glenn, is that we saw implant rates generally flat the last three quarters.

Now, as I also mentioned, we did see in the month of December an anomaly.

We saw there was three weeks around the holiday period where we saw an unusually low season.

Yes, but you must seen higher-than-usual volume last quarter, so in fact implant rates if they had been flat for three quarters, it's exactly what we're saying -- they were flat.

Last quarter you enjoyed growth from inventory stock -- or restocking of inventory.

No, as we talked about last quarter, Glenn, it was Q1 that was the abnormal quarter related to what happened with inventory based on the quarter-end deals and how it dropped.

As Bill said in his comments, basically this quarter, our Q3 versus Q2, the inventory levels are basically the same.

The issue was in Q1, as we've talked about earlier.

I very much question your inventory system if that's the case, I'm sorry.

But just additional questions here (multiple speakers) --

Glenn, we've answered the question (multiple speakers) and numerous times.

That's fair, that's fair.

I noticed the R&D line was very light this quarter.

Could you tell us what happened there?

I don't think there's anything unusual, Glenn.

The reality is as we go through any quarter, you're going to see ups and downs on the expense levels themselves.

There's nothing unusual that occurred.

I think it was just a little bit of a lower quarter based on what happened on some of our projects.

We obviously have been primarily focused on [also] market development -- we have been increasing our investments there, because obviously we have a leading product -- not that we're backing off on R&D, but the focus has been more on market development.

And as a result, I think that's why you see a little bit higher expenses in that category.

But there's nothing unusual in R&D.

It just turned out that it was a little bit lower as a percentage of revenue.

And it's within our range that we've talked about -- basically 10% plus or minus 0.5%.

You will see R&D move around slightly quarter to quarter, because remember, in addition to research and development that's in the lab, you have various clinical trials that have ebbs and flows.

Okay, and then finally on the Other Income line, can you explain again what the amortization is?

I don't quite understand -- is that a benefit (multiple speakers)?

Yes, so if you could just walk us through the mechanics of that.

Yes, what happened, Glenn, is basically, we had an agreement, a supply agreement and licensing agreement with a Company in the vascular business.

We had received some income from them previously, but that was deferred income that we had to amortize over the life of the agreement.

What has occurred is -- there was an option to extend the agreement that we were assuming would be implemented.

Accounting required us to do that.

When they did not extend the agreement, we have to accelerate the amortization of that.

And that resulted in a gain in the quarter of about $26 million.

In addition, outside that, we had a $10 million charge in connection with an IP dispute, an intellectual property dispute.

So net, those 2 items ended up being a benefit in our Other Expense line of about $16 million or about $0.01.

Matthew Dodds, Citigroup.

For Bill, you did mention before a little bit on ICDs -- sorry if we go back here again.

You talked about the ASPs -- rather than being specific, can you just comment on what maybe the differential is between your sales from, let's just say, the competition broadly?

Is that spreading?

And is it getting to a point where you can't keep prices flat if prices are going down for the other two companies?

Well, I'm not going to -- I will tell you, there is a differential.

And it varies depending on the region, Europe versus the U.S. versus Asia.

In fact, I was just in Europe recently.

And I will tell you, there's good data to suggest that there is a 10 to 15% difference between our prices and the competition prices.

I will tell you, we will -- I mean, we will be smart about price, and our goal is to grow share.

And if it comes to a price situation, we are in a very strong position to prevail.

But we're trying to be disciplined and to use price strategically.

We believe that we have the best technology, the best value with CareLink, with Chronicle, with Concerto.

And that's what we sell.

We sell value.

Are you saying with December and how December was really soft -- are we talking about the market, or do you think that there was more price used than in the past in December by the competition?

When you talk about December, are you talking about industry or Medtronic in particular?

Yes, I don't really know.

I mean, we don't know exactly whether it was --

We were referring to ourselves.

What the market was doing, we don't know.

Okay, and one last question -- on the biologics, Bill, did that also slow down a little bit?

Is that an anomaly there, or is it just starting to mature in the core market of spine?

No, the law of big numbers -- that's a business continues to do well.

And as you know, with the expansion we're going to get with the OMF indication and as we at get amplified -- I mean we think there's lots of legs for sustainable growth in that business.

The INFUSE still grew 15%.

And obviously some of the comps were a little bit more difficult.

But as Bill said, one of the biggest opportunities we have is continuing to expand the indication.

And we believe we're very close to getting that OMF.

Tim Lee, Caris & Company.

I've got to ask my obligatory ICD question as well.

Just in terms of some of the natural seasonality that you are seeing, assuming that we should expect to see a rebound here, given your fourth fiscal quarter -- so internally, are you expecting to recoup what you just temporarily gave up, or is that going to take a couple of quarters to regain?

Well, we are not going to give a specific number.

But we historically have had a strong fourth quarter.

We intend to have one, and we intend to increase market share.

Correct.

Fair enough.

And then one just quick follow-up one on the Physio side -- in terms of your plans to spin that business out -- I mean, will you spin it prior to the resolution of quality issues, or would you not do that until the quality issues are all resolved?

We intend to address the quality system issues.

And I want to underscore, there is not an issue with the product quality.

It's the quality system.

And we intend to address those.

And as Bill said, it has not changed our intent to spin the business, but to spin the business will be delayed.

Ken Weakley, UBS.

I guess with all the questions about volatility and market share, my question is going to sound similar, but it would seem to be the case the buyer behavior is what's critical here.

And I would guess in a marketplace where technology is changing rapidly, you would expect to have stable market share in the sense that quality drives share.

But perhaps with product quality similar across platforms, you would have market share shifts more driven by price.

So I guess the question is, is the marketplace becoming more sensitive to price?

And if that is the case, what does that tell us about where we are in the product cycle?

Well, I think the market has always been interested in value.

Value is a combination of price, and then the capabilities in terms of product performance.

We believe that this is a market where -- you talk about the ICD market -- where it is not a commodity, where improved product features and capabilities, the improved capability to monitor products will be recognized, and will be paid for.

We do not believe we are in a commodity market.

But doesn't it appear that the interyear market share shifts are greater than what would seem logical for the perception of quality?

I mean, you wouldn't think perception of quality would shift that much in a given year.

I understand over the long run, certainly, but it would appear that on a short-term basis, market shifts are greater than what that description would allow for.

I think what you have to look at is market share over some extended period of time, whether that's a six-month period or a nine-month period.

But as Bill indicated at the beginning, we saw a several-point gain about a year and a half ago or so, and then we've been relatively stable.

If you take the quarterly differences and you normalize them, we've been hanging around that 52% market share over about the last year.

Tim Nelson, Piper Jaffray.

I've got two questions, one on ICDs and the other on neuro.

Would you care to comment at all on your competitor's recent assertion that the OptiVol doesn't have the required sensitivity and specificity needed to be successful, specifically by perhaps telling us the status of the clinical evaluation efforts for that feature and the status of the FDA approval for the patient alert feature?

This is bill.

You know, that's obviously a competitive response to innovation that has been well accepted.

And that's what's been driving in part the share -- or the performance of the InSync Sentry, and now the Concerto.

So we have got data from the MIDHeFT trial, and we have another trial underway that substantiates the value of this feature.

Will we see the results of the trial that's underway?

I will come back to you -- I have got to look it up in terms of what the -- let's go to the next question, and I will try to come back and answer that.

On neuro, could you help us understand what's happening with the neuro stim -- spinal stim portion of that market?

How is that market growing ex-DBS, in drug delivery, and how is your share performance?

Well, the market has been growing at about 20%, if you look at the core spinal cord stimulation market.

And we have held a pretty steady share for the last 12 months.

We saw a little bit of share decline this quarter, but we are going to be bringing out in the latter part of this summer a new RESTORE Ultra and two new leads, which we believe will be very competitive in the marketplace and will enable us to regain and to gain share.

Beth, I think we've got time for just one more call, please -- one more question.

Larry Biegelsen, Prudential.

A couple of questions -- my question on ICDs -- I know you said that your ASP was about flat sequentially, and the competition I think you said was discounted.

But could you talk about ASP trends overall for the market, U.S. and international?

And then on ENDEAVOR, the FDA plans to issue a drug-eluting stent guidance document in the spring.

Could you talk about whether you expect that to have any impact on ENDEAVOR's launch timing?

And then I just want to try to fit one in on diabetes -- the growth rate in the quarter of 24% -- was that the true, underlying growth rate, or was there some catch-up from the problems earlier with the disposables?

First, on the question on ICDs, we don't have visibility to all of the competitors' prices.

So I can't comment on what the overall market ASPs are doing.

I can only tell you what ours are doing.

And I gave you some reference to some insight we got in a different part of the world.

But overall, we can't really comment on the ASPs for our competitors.

On the question on DES -- on the FDA's response to the panel, they will be publishing in the March 8th issue of the New England Journal of Medicine their position on safety.

So we will see what that unfolds.

And then the third question is -- (multiple speakers)

-- diabetes.

Diabetes, we are up 24%.

This was the first quarter we saw a little bit of a rebound, positive growth on the disposables.

We still had very strong initial pump placements, but we turned around what had been negative growth or decline because of working through the inventory, and we said we thought that would be completed by the end of the calendar year.

It was, but the vast majority of the growth was driven by pump placements.

And it's basically, the growth was understated in prior quarters because of that disposable issue.

But now we're getting back to more reasonable on the disposables side.

There was no catch up in the quarter?

No. (multiple speakers).

We had a good, strong, solid pump growth in the U.S. and outside the U.S.

Okay, well, listen -- thank you, everyone.

This is Art again.

I appreciate your questions and comments.

And I would like to close the call by again pointing out that this quarter's results really do reflect the benefit of having a diversified portfolio of businesses and a broad global presence.

As a case in point, you've all talked about it -- in spite of the fact that our U.S.

ICD revenues were down 10% during the quarter, we were able to deliver a very solid 10% topline growth, while posting 17% increase in earnings per share after reflecting the pro forma stock option expense in fiscal year 2006.

As we told you in New York, we believe we are well-positioned in, and we lead some of the most attractive markets in the medical technology industry.

And we continue to make investments to expand our position and improve our operating leverage.

And finally as I mentioned in New York, we intend to further expand our portfolio of businesses and our geographic reach through internal investments and a disciplined approach to acquisition of technology and intellectual property, and if it's appropriate, companies.

So we look forward to seeing you in Minneapolis at our annual investors conference on June 20th.

Thanks, everyone.

Thank you.

And ladies and gentlemen, that does conclude our conference for today.

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