美敦力 (MDT) 2007 Q4 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by. We do appreciate your patience today while the conference assembled. And good afternoon, everyone. Welcome to Medtronic's fourth quarter earnings conference call. At this point we do have all of your phone lines muted or in a listen-only mode. However, after management's prepared remarks there will be opportunities for your questions. (OPERATOR INSTRUCTIONS) And as a reminder today's call is being recorded. So with that being said we'll get right to this fourth quarter agenda. Here with our opening remarks is Medtronic's Vice President of Investor Relations, Ms. Martha Goldberg Aronson. Good afternoon, ma'am, and please go ahead.

Good afternoon, and welcome to Medtronic's fourth quarter and fiscal year end 2007 conference call and webcast. During the next hour we will review the results of our fourth quarter and fiscal year which ended April 27th, 2007. Following these introductory remarks, Medtronic's Chairman and Chief Executive Officer, Art Collins will comment briefly on the fiscal year. Next, Bill Hawkins, Medtronic's President and Chief Operating Officer, will provide insights on the fourth quarter results. Chief Financial Officer, Gary Ellis will follow with a financial summary by business as well as an update on guidance. After our prepared remarks we will conduct a Q-and-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 summary, nonGAAP 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's investor relations or corporate communications if you are unable to access the press release or the transcript. Today's webcast includes statements regarding Medtronic's anticipated financial results, market growth, product acceptance, and regulatory approvals as well as other forward-looking statements based on management's 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 10K for the year ended April 28th, 2006, filed with the Securities and Exchange Commission. We encourage you to review those carefully.

All statements are made 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 fourth quarter fiscal year 2006. With that, I am now pleased to turn the call over to Medtronic's 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 fiscal 2007 full year and fourth quarter financial results. While generating $12.3 billion in revenue this past year, we were able to post a 15% annual increase in diluted earnings per share even though the year-over-year downturn in the U.S. ICD market negatively affected our performance throughout the fiscal year. As you will note, annual results exceeded the upper end of our most recent EPS -- EPS guidance. After subtracting the net positive effect of unusual items, including special charges for asset impairment, restructuring, and tax benefits, fourth quarter diluted earnings per share on a nonGAAP operating basis grew 12%. Our annual and quarterly performance again reflected the benefits of Medtronic's broad product portfolio and geographic diversity, together with successful initiatives to enhance leverage throughout the P&L. While delivering strong bottom line performance we continue to invest in our future with annual R&D expenditures of over $1.2 billion running a 10% of revenue for the year and the fourth quarter. Important new products have been introduced across the company and our product pipelines are full with a number of major launches planned during the remainder of fiscal year '08.

As will you hear later in this call, and in more detail at our upcoming investors conference, many of our new product programs are directed at improving patient outcomes while simplifying surgical procedures and reducing hospital stays and readmissions. We're also incorporating new therapeutic agents, additional sensors, and advanced information technology into many of our devices. All of these efforts will benefit patients and support more cost-effective delivery of healthcare in the United States and around the world. In order to give you a deeper look into some of the core technologies and emerging therapies that will continue to improve our competitive position, drive growth in our existing markets, and open up new markets, we have restructured the format of our investors conference on June 20th in Minneapolis. This will be my last Medtronic investors conference and I look forward to sharing with you some final thoughts on several key trends that will help shape our industry and the future, together with the steps we are taking to enhance Medtronic's leadership position. Stay tuned for information on this topic in the coming weeks.

Before I turn the call over to Bill, I would like to cover two additional topics. First, will you remember that this time last year we were very concerned about the potential negative impact of the draft rule for in-patient DRG rates in the U.S. Through a great deal of effort we were able to work constructively with the center for Medicare and Medicaid services to obtain modifications in the final rule that resulted in more realistic reimbursement rates. During this year's cycle we started discussions early with CMS and the draft rule that was issued on April 13th is a much more reasonable starting point than last year. We are currently in discussions with CMS to address areas that still need some attention, and we are optimistic that these discussions will result in an acceptable outcome when the final rule is published on or about August 1st.

The second item I would like to discuss is the CEO transition that we announced on February 28th. This process started over three years ago and was approached by the board in a very thoughtful and comprehensive fashion, as has been the case in past CEO transitions at Medtronic. The transition continues to run smoothly, and Bill Hawkins will assume responsibilities as President and CEO, and Michael DeMane will step into the COO position at the annual shareholders meeting on August 23rd. I'm confident that these moves, together with other related organizational changes, will continue to position Medtronic with the necessary leadership to deliver strong performance in the future. With that, it is now my pleasure to turn the call over to Bill.

Thanks, Art. So let me start by saying that I am proud of our teams around the globe who rallied in the face of some challenging market conditions to achieve a very strong quarter and fiscal year. Compared to the fourth quarter last fiscal year, revenue of $3.280 billion increased 7% including a $71 million positive impact of foreign currency translation. If you exclude physio from both periods the revenue growth was 10%. During the fourth quarter four of our business segments saw double-digit revenue growth. Vascular and diabetes each grew 22%. Neurological grew 15%. And spinal and navigation grew 11%. Fourth quarter revenue in the United States was $2.27 billion, up 1%. Outside the U.S., revenue of $1.253 billion which represents nearly 40% of the corporation's total revenue increased 18%, including a $71 million positive impact of foreign currency. We continue to be very pleased with the growth of our operations outside the U.S. and look forward to sustaining this level of growth going forward.

I would like to focus my comments around the strategic imperatives we have been highlighting in our more recent meetings. Namely, market development, geographic expansion, and operational excellence. Gary will take you through the quarter's financial details by business, but I want to share with you my thoughts on some of the key achievements and challenges of the fourth quarter, along with the reasons I'm excited about fiscal year '08. Market development is critical to our growth going forward. Let me start by commenting on the growth of the ICD market and our performance during the fourth quarter. We believe the U.S. market grew 5% sequentially this quarter. It was still down 6% versus the fourth quarter of last year. The good news is that going forward the comparisons will be more favorable. Globally, we believe the worldwide market grew approximately 8% sequentially and 2% versus last year. Our worldwide ICD revenue was $770 million and was driven by growth outside the U.S. of 30%. Recent market dynamics are encouraging. However, we continue to be somewhat cautious about the exact timing and the degree of rebound of the U.S. ICD market. For the year, our share was flat versus a year ago in the U.S. and up approximately 3 points outside the U.S.

Going forward, we will be opportunistic in gaining profitable share, and we will vigorously defend our existing shares. On the pacing front, we are encouraged by recent performance and the prospects that growth will continue. The pacing market grew 7% this quarter. Looking ahead, CRDM has a number of new products, such as Concerto AT with a unique suite of AF features. The Reveal [XTDX], our subcutaneous diagnostic with long-term AF monitoring, the attained star fix lead and a new common platform of pacemaker defibrillator and cardiac resynchronization devices. Our neurological businesses met several key market development milestones during Q4. The process study, the first multicenter randomized controlled clinical trial demonstrated the benefits of neurostimulation to control pain versus conventional medical management and has been accepted for publication in the Journal Pain. An article supporting the cost effectiveness of our Intrathecal baclofen therapy for children with severe spasticity from cerebral palsy was published in the Journal of Child Neurology. Knowing that guideline adherence is a key element of market development for all of our therapies, we are working with the American Academy of Neurology to deseminate their recently adopted Parkinson's treatment guidelines which include our Activa deep brain stimulation therapy as a viable treatment option. We also completed enrollment during the fourth quarter for the SANTE trial utilizing deep brain stimulation for the treatment of epilepsy.

Looking ahead, we anticipate receiving a humanitarian device exemption this quarter from the FDA for deep brain stimulation as a treatment for severe and intractable obsessive compulsive disorder. Finally, InterStim therapy revenue grew over 50% due to the strength of our latest product as well as the success of our efforts to reach out to new implanting physicians. Moving to our spinal business you can see another example of leveraging technology. During the fourth quarter we launched INFUSE for certain oral maxillofacial and dental regenerative applications. It is estimated more than 350,000 bone-grafting procedures to generate, or regenerate bone in size augmentations are performed in the United States each year. So far hundreds of physicians have been -- have begun the training program. Needless to say we are excited to be entering the market. INFUSE continues to be a strong growth driver for our spinal business and we remain optimistic about expanding indications going forward.

In addition to the Prestige cervical disk for which we expect final FDA approval in the near future, I am pleased to announce on this call that we are scheduled to present BRYAN cervical disk data to the FDA Orthopedic Panel on July 17th. On the heels of BRYAN is our Maverick lumbar disk. Positive data was presented recently from the Maverick IDE trial and the study will be published this summer. Now that we're talking about FDA panels, let me give you an update on ENDEAVOR. Late last week the FDA requested ENDEAVOR for nine-month data prior to setting a panel date. Given that we are expected to have the ENDEAVOR IV clinical results next month, the FDA informed us that they anticipate we will be on a panel in September or October. With this time line we still believe that a U.S. launch in the second half of calendar year 2007 is achievable. A few hours ago some of you may have seen in Barcelona at the PCR meeting the very positive data that was presented on our ENDEAVOR drug-eluting stents as well as our next-generation DES RESOLUTE. Four-year results from the ENDEAVOR I trial and three-year results from the ENDEAVOR II trial continue to demonstrate excellent safety, sustained efficacy, low clinical event rates and no late-stent thrombosis. The ENDEAVOR II study also shows that our driver bare metal stent offers consistent and durable long-term clinical results, with long-term follow up now available on approximately 1,300 ENDEAVOR patients, the performance of the ENDEAVOR stent has become well characterized over time.

In addition, the RESOLUTE nine-month results showed a low number of adverse cardiac events and no stent thrombosis. In stent late loss the study's primary end point was .22 millimeters. Finally, in Europe we just launched the ENDEAVOR Splint, a second-generation product that combines best in class splinter balloon technology with an ENDEAVOR stent providing even better deliverability.

I would like to comment now on the FDA panel that took place during the fourth quarter to review the Chronicle implantable hemodynamic monitor. As you know the panel voted against recommending approval for Chronicle and we subsequently received a nonapprovable letter from the FDA. Although we were able to show an improvement in hospitalizations, the study did not show a statistically significant reduction. Given the positive input from heart failure specialists on the power of this diagnostic tool, we remain committed to bringing this technology to the market. We are currently evaluating the clinical programs options for Chronicle and will share more information with you on this program at our investors conference in June.

As you heard Art mention, new products introductions are key to our growth going forward. And here are just a few of the key products that I believe will drive market growth and market share this coming fiscal year. First, the ENDEAVOR drug-eluting stent. The Prestige, BRYAN, and Maverick discs, and Progenics, a bone-graft substitute, which we announced yesterday. A new neurological surgical lead and the RESTORE Ultra, a smaller rechargeable neurostimulator. Reveal XT, the Attain star fix lead and the [Advisa] pacemaker, the first pacemaker with wireless connectivity. Consulta, our first CRT-P and CRT-D built on a common platform, and the Secura ICD with increasing commonality and simplicity. And, finally, RESOLUTE, outside the U.S. -- outside the United States, the next-generation drug-eluting stent.

The other key growth strategy is geographic expansion. And as I mentioned earlier we continue to be very pleased with our growth outside the United States. In western Europe, ICDs grew well over 20% and pacing grew well over 10% during the fourth quarter. Japan continues its very high growth in ICD as well. We submitted our [talent thoracic shonen] in April. And our ENDEAVOR shonen earlier this month. ENDEAVOR is our first product to use a new process called harmonization by doing, or HBD, which is an international effort to develop global clinical trials and address regulatory areas that may be impediments to timely device approvals. We are optimistic this will accelerate approval time. During the fourth quarter we also announced the formation of the new cardiovascular business unit under the leadership of Scott Ward which combines our vascular and cardiac surgery businesses. This new organization will be focused on coronary artery, vascular and structural heart diseases. The combined effort between these groups on the transcatheter valve, which utilizes both catheter and valve technology, is just the first example of the power of this new combination. I just attended the American Association for Thoracic Surgery meeting and the news of this business -- of this new business was very well received by the surgeons I spoke to there.

So before I turn the call over to Gary, I'd like to provide a quick update on Physio-Control. We continue to address the issues that led us to suspend the U.S. shipments of Physio-Control. We're in the final phase of discussions with the FDA regarding the corrective actions we need to complete before resuming shipments in the U.S. We expect to finalize these actions and resume shipment in the back half of fiscal year '08. During the quarter we eliminated approximately 300 physicians to better align the cost structure given the revenue reduction. And I want to reemphasize that these challenges have not changed our intent to spin off Physio-Control, although the original timing has been delayed. So having just attended several major medical conferences and (inaudible) sales meetings, I can tell you that our organization is upbeat and enthusiastic as we enter the new fiscal year. I also want to reiterate that we remain very confident in our overall market position in all businesses and in our ability to continue to deliver industry-leading performance. We will continually innovate to drive new products, therapies, and growth platforms. We will also develop the necessary clinical and cost-effective evidence and be extremely focused on executing on our strategies. These three things, innovation, evidence and execution, comprise the framework for June investor confidence, so I look forward to sharing more information with you at that time. So now I will turn the call over to Gary.

Thanks, Bill. In my remarks I will review this quarter's revenue performance by business, and then discuss the income statement, balance sheet and cash flow statement. I will also provide detail on the unusual items that while having only a minor impact on the year, do complicate the understanding of our income statement this quarter. Finally, I'll close the call by discussing our financial guidance for fiscal year 2008. As you heard earlier, fourth quarter revenue up $3.280 billion while was -- $3.280 billion, while net earnings was $812 million, or $0.70 per diluted share. These earnings and earnings per share represent increases of 10% and 15% respectively over the prior-year. The fourth quarter was the first full quarter with U.S. shipments suspended at Physio-Control. Excluding Physio-Control in both periods revenue growth was 10%. After adjusting for nonGAAP reconciling items our adjusted FY '07 fourth quarter net earnings and diluted earnings per share were 706 -- 76 -- $67 million and $0.66 respectively, an increase of 9% and 12% over FY '06 fourth quarter adjusted results.

Physio-Control had negative impact of $0.01 on the earnings per share in Q4. These nonGAAP results have been adjusted for a number of unusual items. First, we recorded a $129 -- $129 million benefit or $0.11 per share tax benefit associated with the reversal of excess tax accruals for settlements reached with the IRS and other tax authorities, as well as adjustments related to the finalization of our 2006 tax returns. Also, we incurred a $59 million, or $0.05 earnings per share after-tax special charge related to the impairment of intangible assets associated with the acquisitions of Transneuronix and Angiolink. Inadequate clinical results and resulting delays in product developments have impaired the carrying value of these intangible assets and we recorded a noncash charge to write them off. Additionally during the quarter, we recorded a $25 million or $0.02 per share after-tax restructuring charge related to initiatives designed to drive manufacturing efficiencies, in our vascular business, downsize our Physio-Control business and adjust resources within our Cardiac Rhythm Disease Management business. $5 million of the after-tax charge relates to inventory and assets written off in cost of sales and the remainder relates to severance costs for our affected employees. In total all these unusual items had net benefit in Q4 of $45 million on after-tax profits and $0.04 in diluted earnings per share.

Let's now turn to a brief review of our business segments. We'll start with Cardiac Rhythm Disease Management. Starting this quarter, we have broken out separately the Physio-Control results, CRDM will only reflect implantables. This quarter total CRDM revenue of $1.291 billion increased 4%. Worldwide ICD revenue of $770 million increased 2%, ICD revenue in the U.S. decreased 8%, which was fairly consistent with the estimated U.S market decrease. Outside the U.S. ICD revenue grew 30%. The worldwide patient revenue was very strong growing almost 9%. Turning to our Spinal and Navigation business, fourth quarter revenue of $690 million increased 11%. Spinal instrumentation sales increased 9%, while spinal biologics grew 15%. The navigation revenue increased 31%. The revenue was driven by InFuse, the new CD HORIZON LEGACY Peek Rod System and our Verte-Stack Crescent Vertebral Body Spacer. Total vascular fourth quarter revenue of $333 million increased 22%. Coronary vascular revenue increased 22% on a worldwide basis and we saw double-digit growth in all major geographies. Endovascular and peripheral vascular revenue increased 19%. Worldwide coronary stent sales of $161 million increased 41%. Of this amount ENDEAVOR revenue was $84 million, a 9% sequential uplift from the previous quarter. ENDEAVOR gained share in a tough quarter that saw more competition and an increased focus on safety.

Switching to our neurological business fourth quarter revenue of $326 million grew 15%. [Coronaral] revenue increased 10% driven by double-digit growth and our pain stimulation and movement disorder businesses. Gastro and urology revenue grew 45%, the overall growth was slowed slightly due to divestiture of the urological diagnostic business. This month the gastrodiagnostic business was divested and this is expected to be followed next quarter by our neurodiagnostics business. Our diabetes had another strong quarter with revenue of $229 million and an increase of 22%. We recently commenced a national rollout of our Guardian real-time continuous glucose monitor for consumers. Our Guardian and Paradigm products now communicate with SGM sensors via the MiniLink transmitter that we also launched during the quarter. MiniLink is the smallest and lightest transmitter on the market. Two features that we believe will increase patient comfort and appeal. Cardia surgery fourth quarter revenue of $195 million grew 7%, led by strong sales in heart valves which grew 10%. Ear, nose and throat had fourth quarter revenue of $147 million, an increase of 9% driven by strong growth in disposables. And finally, Physio-Control, which we are breaking out for the first time in Q4, had revenue of $69 million, a decrease of 52%, reflecting a suspension in the U.S. shipments for the entire quarter. Overall these revenue results for the company, in light of the several challenges, reflect and reiterate the strength of our portfolio businesses.

Now let's turn to the rest of the income statement. This quarter's gross profit margin of 73.6% was impacted by 60 basis points for Physio-Control and 20 basis points due to the restructure related inventory and asset write-offs primarily associated with Physio-Control. Without these items our gross margin would have been approximately 74.5% and we expect margins to normalize back to that level in FY '08. Fourth quarter R&D spending of $327 million represented 10% of revenue. Fourth quarter SG&A expenditures of $1.95 billion increased 12% over the prior year. Mostly in marketing and selling and represented 33.4% of sales. The expensing of stock options increased the SG&A as a percentage of revenue by nearly 75 basis points versus the prior year. Net other expense for the quarter was $52 million compared to $66 million in the prior year fourth quarter. This change is partially due to currency hedges which resulted in gains in the quarter of $4 million versus gains in the fourth quarter of the prior year of $31 million. Similar to Q3, the quarter also reflects an incremental $28 million of royalty income from the accelerated amortization of payments previously received in connection with the product supply agreement. Net interest income for the quarter was $41 million compared to $35 million in the prior year period. As of April 27th, 2007, we had approximately $6.1 billion in cash and cash investments compared to debt of about $6.1 billion. We continue to generate in excess of $600 million of free cash flow per quarter defined as operating cash flow minus capital expenditures.

Let's now turn to our tax rate. As I discussed earlier, we did record a $129 million, or $0.11 per share tax benefit associated with a settlement reached with the IRS, other tax authorities, and adjustments related to the finalization of our 2006 tax return. In addition to these adjustments, the tax benefit of our OUS operation was larger than we estimated for FY '07, resulting in reduction of tax rate to 24.5% from the 25.25% rate we had recorded during the year. We project that the 24.5% tax rate will continue into FY '08. Our current tax position reflects the success of a number of actions taken over the last several years and we will continue to make investments and put in place strategies that have the potential to reduce our tax rate. These efforts are designed to provide additional funds to invest in growth initiative and to help improve return to our shareholders in the fourth quarter.

Fourth quarter weighted average shares outstanding on a diluted basis were 1.160 billion. In fiscal year 2007, we repurchased over $1 billion of our common stock which represents over 21 million shares. Even though the repurchase of our shares reduces our net earnings because of the foregone interest income, it is accretive to earnings per share and remains a very compelling use of our cash. In the fourth quarter alone we repurchased approximately $600 million of stock or 12 million shares. As of April 27th, 2007, we had remaining capacity to repurchase over 15 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. Let me now turn to financial guidance for fiscal year 2008.

We have received a lot of input from many investors on how and when we provide guidance. And we have listened to you. Our goal has always been to be as transparent and realistic as possible in providing guidance. We also acknowledge that there are several factors affecting our markets that can significantly influence our business, both positively and negatively. Our diversified business model provides us the opportunity to minimize the impact of some of these market fluctuations and we are convinced that we're in the right markets with the right strategies to deliver long-term sustainable results. Having said that, providing very precise guidance is not easy, especially more than one year out.

Considering these factors, and input from the investment community, we have made several decisions regarding guidance. First, we will not provide guidance past one year. We have long-term objectives, but guidance will be limited to the fiscal year we are in. Second, we will not provide quarterly guidance. Timing of new product introductions and market shifts can have a material impact on quarterly results that make precise guidance difficult to predict and less meaningful. Third, particularly at the beginning of the fiscal year, our annual guidance will be more general and directional in nature versus specific. In light of these decisions let me address FY '08 guidance. With respect to revenue, most analysts' estimates have our revenue growth in FY '08 in the low double digits, and we are comfortable with that view.

Regarding earnings per share, we have communicated our intent and action plans to continue to improve our overall operating leverage, and as a result, we would expect earnings per share to grow somewhat faster than revenue in FY '08. We have assumed Physio-Control is included for the full year, although we still intend to spin off that business. As in the past, the guidance that I just provided excludes the impact of any unusual charges or gains that might occur. That's all for our prepared remarks. We will now answer your questions. Please limit your questions to only one per firm. We would like to end the call by about 4:30 PM central time. Operator, please initiate the question -- the Q-and-A period.

Well, indeed, I would be happy to. And thank you very much, Mr. Collins, Mr. Ellis, and our host panel. Today, we do appreciate that. (OPERATOR INSTRUCTIONS) Representing JPMorgan, our first question we go to the line of Mike Weinstein. Good afternoon, sir. And please go ahead.

Thank you. Can you hear me okay?

Yes, we can.

Okay Perfect. Thanks for taking the questions. I guess the first question, Gary, is going to be on the guidance which you just gave. It was obviously intentionally very broad in your commentary. Do you want to -- are you going to comment specifically on a range of where you're comfortable for either revenues or EPS?

No, Mike, as I said in my comments, we have talked to a lot of you, both on the buy side and the sell side, as far what is our guidance is, and the input we have received is that we are -- we should not be as specific as we have been in the past, so with the guidance I provided from the standpoint of low double digits, would I think most analysts are on the revenue side, we are comfortable with. And as I indicated in my comments on the earnings per share side we would expect to grow somewhat faster than that on the earnings per share side, but other than that we're not going to get any more specific. Next question.

Indeed. Thank you, Mr. Weinstein. We have Rick Wise now with Bear, Stearns. Please go ahead.

Good afternoon, everybody.

Hi, Rick.

Maybe I will turn to the CRM piece. Perhaps you could talk a little bit more about the CRM slight rebound, if my figure is correct the market grew year-over-year something like 1.5% or so. Why did it improve from here? Should we assume it it improves from here? Just talk about your specific actions both in the U.S. and internationally that -- can you sustain 30% international growth? Thanks so much.

Yes. Yes. This is Bill, Rick. Couple things. First, as I mentioned, yes, we are cautiously optimistic. We have seen some positive trends. We are also have the benefit of favorable comparisons going forward with last year being the way it was. Yes, we continue to be very optimistic on the potential outside the U.S., and we see good double-digit growth sustaining outside the U.S. So where we are is in the U.S. low to mid single digit growth and worldwide mid to upper single digit growth.

And does it accelerate from here, Bill?

Yes, we see some reacceleration occurring. But as I said, we're cautiously optimistic.

Okay.

And thank you, Mr. Wise. We have Tao Levy with Deutsche Bank. Please go ahead, Tao.

Good afternoon. So, I was wondering, the figure control levels that we're seeing now, Gary, is that where we should expect until we get the FDA back on track there?

Yes. I -- we were just under $70 million for the quarter and we would expect that to continue as we go forward from the international revenues that we're generating, so, yes, that's the level you should be expecting until we get back in the marketplace.

And the RESOLUTE European timing just given some of the data that was presented today at PCR, just thoughts on filing, when we should expect that on the European market. Thanks a lot.

Well, again, we were very encouraged by the data on RESOLUTE and are looking for it in the second half of FY '08.

Representing Lehman Brothers, we have a question from Bob Hopkins. Please go ahead, sir.

Hi, Bob.

Hello. This call keeps going like it's been going, we're going to be done in five minutes here. Let's see, my question is on the ICD market, and I was wondering, Bill, if you could comment on what's going on right now with your marketing and awareness campaign, and where we are with that $100 million spend, and what we should be assuming about that spend going forward, given what your views are of the marketplace right now, just incur on where that's going. And also any more on should we expect any more expense control within CRM relative to the minor announcements that we've seen over the last couple of weeks?

Well, two comments. First, on the awareness campaign, it's still in full swing. We're continuing to do the advertising. We'll reevaluate that at the end of the second quarter and see kind of where we go, but we're very pleased with what we've done. We've gotten good feedback and we're very encouraged by the -- just the awareness that it has created. On the $100 million, that was really referencing a bundle of activities, including one of which was the cardiac awareness program, so I wouldn't necessarily assume that all the expenses were directed at that. And then, thirdly, just to the question about the overall expense structure, yes, we continue to look at our businesses and will rebalance, restructure, based on certain decisions to invest in some businesses versus other businesses and according to market conditions. So I can tell you that you we are managing that business appropriately.

Our next question we go to the line of Dhulsini de Zoysa with Cowen and Company. Please go ahead, ma'am.

Thanks, gentlemen, I wondering if you could help us break out overseas versus U.S. pacing growth. Is that fairly consistent across the geographies, and also, we're hearing from customers about some aggressive pricing over -- in overseas markets to take share by your competitors. Is that something that you're aware of and responding to?

Well, first, Dhulsini, this is Bill, yes, we're seeing good growth in the low-power business in many different markets outside the U.S. in -- I mean, I'm not going to give you specific numbers, but, yes, we're seeing good solid double-digit growth in many of the markets outside the U.S. And yet we're always dealing with different factors, different competitors, but our share is going up, and it's based on really the strength of the technology platforms that we brought forth in the last couple of years and we feel very good about going forward.

Okay. And you're -- you're comfortable that the pacing share is tracking upward and not sort of tied closely linked to your ICD share?

No, they're -- we feel very good about -- well, first of all, we're gaining share both in high power and low power outside the U.S. But I wouldn't necessarily say they were tied together. We're working -- we feel very good about where we -- the direction we're going with both those businesses.

Our next question we go to Jason Wittes with Leerink Swann. Please go ahead, sir.

Hi, thank you very much. I guess, two pricing questions relating to spine. You do have several new products coming out. INFUSE, you've got AMPLIFY, and then you've got several cervical discs. Can you give us an idea about pricing? Are these going to be premium priced products potentially helping to boost the growth rate a bit?

Yes, well, first of all, we're not going to comment necessarily on what the price is going to be until we launch the product, but we will price it according to the market to be able to make sure that we can continue to expand the use of these products in the different markets that we're in.

Let me just ask a quick follow up for AMPLIFY. Is that going to be -- I take it that INFUSE is already being used for that application already, or do you suspect that to be expand -- to expand the application for INFUSE?

It's kind of a combination. And, again, we're not going comment on kind of what the pricing strategy for AMPLIFY will be until we bring it out to the marketplace, but again, we're excited about that product. It's going to -- there's a real demand for it, and we're still in the regulatory process. So, until we get through the regulatory process and get to the market, then we'll comment more then on what the price willing be.

Thank you.

Thank you very much, Mr. Wittes. Representing Morgan Stanley. Glenn Reicin now. Hello Mr. Reicin.

Good evening, folks. Just two quick questions. In terms of Physio-Control, the $0.01 loss, is that a normalized loss going forward? And then, I just -- I think a more important question, how do you think of the extra selling days here this quarter? How should we look at that just if you can just give us your general views on that.

Okay. With respect to physio, Glenn, the $0.01 earnings loss that we talked -- the earnings per share loss that we talked about for this quarter, going forward I would expect it might be a little less than that, but I think that's -- because as Bill mentioned we have taken efforts to reduce our cost structure out there with the elimination of 300 positions, and so that should improve slightly until we get back on the marketplace, but I think the expectation is, yes, that we should continue -- we probably will continue to lose some money in that marketplace until we're back on complete in the market. So whether it's $0.01 or slightly below is what I would put -- where I would kind of assume. With respect to the extra selling days there, as you indicated, there are extra selling days in our fourth quarter. We have those every year versus our Q3, so there's not any more selling days versus the prior year. It only affects your sequential numbers, and that has been something we've always experienced. It's always been there in any given year. So I don't think there's anything unusual about it. It's why our fourth quarter is always up sequentially versus the Q3. So right now I don't -- there's nothing unusual about that.

I think it's another reason why we've moved away from giving quarterly guidance. Selling days in a quarter can move the actual results as can many other factors. So it was a factor that entered into why we were -- we saw a difference in terms of absolute revenue and profit between the quarters going forward.

Okay.

Thank you.

Next question.

Indeed, sir. And we have Tim Nelson next in queue with Piper Jaffray. Please go ahead, sir.

If I can ask a quick question on the clinical results presented today at EuroPCR, particularly relative to E2, was there any incremental arc defined restenosis in E2, I mean your [pseudo 3]?

Tim, this is Bill. I don't believe there was. In fact -- but I -- we'll have to get back to you with specifics on that. The data was extremely robust, and I can tell it was just -- I just talked to Scott Ward who called in, and he's feeling -- he says there's a buzz all about Medtronic over there because of the strong E1, E2 results that we had, and the RESOLUTE, which was a real win.

We'll have to get back to you on that, Tim.

We'll get back with you on the specifics. We'll have Martha or Jeff get back to you on the specifics.

Thanks.

And thank you and next we go to the line of Tim Lee with Caris & Company. Please go ahead.

Hi, guys, good afternoon, thanks for taking the question. Just on physio at this point given your headcount reduction and impairment of the franchise, should we assume that it won't be sold and it will just be strictly a spin? And on that point how quickly will it get spun off post the resumption of U.S. shipments?

No, I don't think you should assume that it's -- we have communicated, before the board has authorized a spin. That is still the only thing that has been authorized by our board is a spin of that business. That does not mean that once -- we would have to evaluate any offers that would come in if somebody was interested in looking at the business, but we have assumed right now it is a spin of that business ultimately. What I think you -- we don't know how much longer after we resume shipments before we would actually do this spin. We would obviously want to make sure that the procedures we've put in place are working effectively before we would spin off the business, but we don't know exactly how long that will be at this point in time. And as I mentioned in my comments what we have assumed though is that the spin would not occur in FY '08, but we don't know that until we get through the actual resolution of the shipments.

Thank you.

Next question.

Yes. And next we go to the line of Ben Andrew representing William Blair. Please go ahead, sir.

Sure, on the spine side, was curious, the construct and biologic growth has been kind of using a bit for several quarters. Do you see it stabilizing at this level, or is other forces beyond the new products that can push that back up, and so that relates to the timing of when you would see CMF and dental kicking in on the biologic side, obviously?

Yes, the biologics we feel very good about the sustainability of the growth there with the expansion of indications and with just the things that we're doing to -- just to strengthen the overall product line with AMPLIFY, as well as with the new indication we got for OMF, and -- plus the news coming out on OP1 which basically says we're not going to have the competitive issue there that some people were building into the model, so we feel good about sustainable growth of our biologics franchise.

But thanks for the constructs. Obviously, the new will help, but in terms of the existing kind of base spine market what do you think that will grow at over time?

Well, first let me take you back to the overall market growth. The overall spine market continues to grow in the 15% plus. So the market is very strong in overall spine. And on the construct, yes, with the -- with -- as we shift to more innovative products like some of the cervical discs and some of the dynamic stabilization product like Peek Rod and Agile which, by the way are doing extremely well, we think that we can maintain and grow our market share. And the other one is math. The minimally invasive spine procedure is getting more and more traction in the market place. When you combine the math, the dynamic stabilization, you look at some of the new -- the cervical discs and lumbar discs, we feel pretty good about the spine outlook. Next question.

And we have Ed Shenkman -- Shenkan now with Needham & Company. Please go ahead.

I just wanted to ask about pricing in the ICD market in the U.S. Could you tell what the change in pricing was sequentially year-over-year?

Well, basically the pricing per ICD both in the U.S. and international is basically flat, both sequentially and year-over-year. It's flat.

If I could, a follow up on the spine business. So we attended an analyst day on Arcuet back in November. Just wanted to get an update on the launch of that product. Are you pleased? Are you going to put more resources behind it going forward? And what can we expect for future generations like DIAM?

Yes, overall we're pleased by the physician interest in both Arcuet and Arcuet XP. Where we have -- where we have dedicated reps we're seeing very good traction. The challenge that we have is with all the products that our client sales force has, and that's always going to be a challenge for us. But the product is working, working well, we're excited about the whole interventional spine sector. Next question.

And next we go to the line of Glenn Novarro with Banc of America. Please go ahead.

Hi, thanks for taking my question. Just on ICDs, you had a good quarter. You beat our number by $10 million. Can -- can you tell us whether or not that was pure demand? Was there any stocking in the quarter? Just elaborate on kind of the sprint of that 700 -- $770 million number. Thanks.

Glenn this is Gary. The number reflects the very strong demand. As Bill indicated, obviously, the growth outside the U.S. been very strong. In the U.S. we also saw sequential uplift based partly due to the fact that we did have more selling days that we went through it. With respect to stocking, no, as we've indicated there was nothing unusual, in this quarter, and that's all I would say on that point at this level. It's demand related.

Yes, I mean, outside the U.S., we get growth of almost 29%, 30% growth.

Okay. Can I just have one quick follow up just on the guidance, Gary?

Yes.

I understand you're offering low double-digit -- low double-digit top line, a little bit faster on the bottom line. The street tends to, when they hear that, just model growth evenly across kind of quarter after quarter. Can you at least help us out -- is it going to be a back-end loaded year, a front-end loaded year? Where should we expect any seasonality? Any help putting just our models together on a quarterly basis would be appreciated.

Okay, Glenn. I won't get specific. I'll give direction, again.

Yes, that's fair.

Back to your point, I think obviously as we talked about as we went through, a lot of this will depend on the ICD market in the U.S. accelerating, ENDEAVOR in the U.S. just from the standpoint of what we've talked about, you're talking about back half of the fiscal year, end of this calendar year, for that. You're -- with physio, as we indicated in the back half. So those factors taken in consideration I think it's fair to say that in first one or two quarters, yes, I would say it would be a little bit lower, but as we get into the back half of the year, you will see an acceleration as we see all these new products really hitting the market and having an impact. The only other thing I would add is, that being said, Q1 was obviously a very difficult quarter for us last year and so the comps are a little easier in Q1. But, directionally, I would assume a little slower in first half and then accelerating in the back half.

Okay, great. Thanks, Gary.

And we have Bruce Nudell next with Sanford Bernstein. Please go ahead.

Good afternoon, and thanks for taking my call. Bill, as you have seen in the (inaudible) data (inaudible) seems to be gathering steam somehow, late loss is getting better. Are your TVS assumptions for [taxis] and ENDEAVOR IV and how much head room do you have, 1., 2., 3. etc.? And then with regard to Prestige, which seems to be figuring heavily in your plans, do you need a superiority label to get commercial reimbursement, and what are the prospects for that which that did have a pretty good trial. So if you could comment on that, that would be great. Thank you.

First, Bruce, let me talk about the ENDEAVOR IV and what the input was. As you know, the primary endpoint for ENDEAVOR IV was target vessel failure. And target vessel failure is target lesion revascularization plus MACE. There was some noise coming out about maybe Boston, the taxis and the costar trial had better than expected performance. One of the things that we just learned, which is very important, and that is that they calculated TLR -- the clinical TLR versus an angiographic TLR. And it -- so, in that context, it underrepresents what the real TLR -- TLR rate is. So even with that, though, when we look at what their numbers are and we consider what ENDEAVOR I, II, and III is, we feel very good about our ability to hit the endpoint on TFF -- TVF with the ENDEAVOR IV, but, again, I would just -- and Bruce, you should go back and look at that, because what they did is they calculated TLR off a clinical endpoint versus off an angiographic endpoint. And we understand that once -- post angiographic TLR went up.

Correct. At nine months.

Second question was on Prestige. I think it's premature to say what CMS will require for reimbursement, but having said that we are confident that we will come forward with a superiority claim.

Actually, I -- is CMS really the driver here or is it really commercial reimbursement given the importance of the commercial payers in the spine space?

Yes, I think it's more -- it's more the -- ultimately the reimbursement versus the regulatory.

Right.

We believe that we're well positioned with Prestige. Of course, it's already been approved.

The recommendation.

Recommendation.

Thanks so much.

Next question.

Thank you very much, Mr. Nudell, and next in queue is [Asheem Anan] representing Natexis Bleichroeder. Please go ahead.

Hi, guys. I was wondering if you can give us some update on spinal and navigational which obviously did well in terms of market share gains or losses.

Well, in terms of the spine, actually we lost a little bit of share in the overall spine market, and primarily due to the plethora of small surgeon-owned spine companies, which we are addressing, one, by bringing out PMA type of products, the new cervical disk, the new products like Peek Rod and Agile, so we have a clear strategy as to how to compete with those companies. And there are other things that could happen that may make it difficult for those companies going forward. So the honest answer is, we actually lost a little bit of share this last quarter, but going forward, we feel very good about our position to gain share.

And that was on spine. I think you had also (inaudible) to give the navigation. I don't know what the share on navigation was.

No, what -- we -- again -- that's an oligopoly with [Bright] Lab and us and there's some Stryker in there, but our position is we've been maintaining share in the navigation. In fact, we had a good performance with 30% growth in navigation this last quarter. Okay.

Just a follow up. In spine, when do you expect to get back to your prior share levels?

Well, we're working at it every day.

Okay.

Next question.

Indeed. And next we go to the line of Joanne Wuensch representing BMO Capital Markets. Please go ahead, ma'am.

Thank you, can you hear me?

Yes, we can.

Terrific. Two questions. The first, can you give us an idea where you are on building your cardiac rhythm management sales force, and then secondly, your diabetes number up 22% was very nice again this quarter. Could you give us an idea of sustainability of that type of growth rate? Thank you.

Well, on the CRDM sales force, again, if you look at where we are, we have, by far, more people in the field than anybody else, when you add the clinical, as well as the direct sales, as well what is we call our therapy sales reps. So, we're constantly evaluating the different regions to see whether we have the right mix of skills, but overall we feel pretty good about where we are in the overall CRDM market space. On the diabetes piece, yes, we're very -- feel very good about the long-term prospect of diabetes. There we are adding people. We added about 30 sales people in the diabetes sales organization last year, and we're going to continue to invest in that business given the underpenetrated market. If you look at type I diabetes there's still 800,000 people out there in the U.S. who could, we believe, use a pump.

Okay. Why don't we take one more question before we end the -- end the call here. Next question.

Okay. Thank you.

One more question. Brad?

Question from the line of Alex Arrow. Please go ahead.

Thank you very much. On your diabetes franchise you had several different iterations of the Guardian RT in real time. Can you tell us, for the continuous glucose monitor, are you on your full final iteration of that product and then a national launch and what's your outlook for reimbursement? And if I could ask a follow up on the cardia surgery business, 6% to 7% growth in the total business, can you say what -- and led by heart valves, can you say what was the heart valve growth rate?

Just quickly on cardiac surgery, I will respond to that. And, Bill, I indicated in my comments that heart valves was up 10% which I indicated in my comments. Bill, you want to talk about that?

Yes, on the diabetes side, we just launched the Guardian III, and we also launched the new MiniLink that ties into the Paradigm real time, but to suggest that that's the last iteration, it would not be a good assumption. We're continuing to evolve that technology, but today it is -- we feel very good about what we have.

And the Arcuet reimbursement for that?

Well, we continue to work. The STAR trials are underway, and those big part of the STAR trials is to help to us get reimbursement. The STAR III trial which we have just -- we have been enrolling in now, I think we've got, what, 60-some patients out of several hundred. So we're in the process of -- we're enrolling in STAR III, which is going to be the trial that will support our reimbursement going forward.

In the next calendar year, would you say?

No, it -- reimbursement -- we'll update you more in June. I can't remember the exact date, but at the analyst meeting in June we'll give you an update.

Alright, well, listen, I'd like to thank everyone for their questions and comments. I think we probably set a record of -- by my count, 15 different individuals getting to ask multiple questions. We hope you appreciate that. In closing, I just want to say, we feel good about the quarter, how we finished the year, and very importantly, how we're entering this coming year. I hope you sense from the group, we're very upbeat, and we're looking forward to seeing all of you on June 20th in Minneapolis for our annual investors conference. Thanks again, everyone.