美敦力 (MDT) 2008 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Medtronic first-quarter earnings call. At this time, all lines are in a listen-only mode. Later, there will be an opportunity for questions, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). And as a reminder, this conference is being recorded.

I will now turn the conference over to our host, Martha Goldberg Aronson, Vice President, Medtronic Investor Relations. Please go ahead.

Good afternoon, and welcome to Medtronic's first-quarter conference call and webcast. During the next hour, we will review the results of our first quarter of fiscal year 2008, which ended July 27, 2007. Following these introductory remarks, you will hear from Medtronic Chairman and Chief Executive Officer Art Collins. Next, Bill Hawkins, President and Chief Operating Officer, will provide comments on the first-quarter results. Chief Financial Officer Gary Ellis will follow with a financial summary and comments on guidance. After our prepared remarks, we will take your questions, concluding the conference call at around 4:30PM 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, acquisitions, divestitures, product acceptance and regulatory approvals, as well as other forward-looking statements based on management's current expectations. It is 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 27, 2007, filed with the Securities and Exchange Commission. We encourage you to review this 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 references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2007.

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 fiscal 2008 first-quarter financial results. Compared to the first quarter of last fiscal year, revenue of $3.127 billion increased 8%. If you exclude Physio-Control from both periods, the revenue growth was 10%.

Net earnings for the first quarter of $675 million resulted in a diluted earnings per share of $0.59, which grew 16% over the first quarter a year ago. After adjusting for restructuring, certain litigation and in-process research and development charges in both the current and prior year's quarters, our first-quarter diluted earnings per share on a pro forma non-GAAP basis of $0.62 grew 13% on net consensus estimate.

During the quarter, four of our eight business segments in each major geography outside the United States saw double-digit revenue growth. Our quarterly performance again reflected successful initiatives to further enhance leverage throughout the P&L and the benefits of Medtronic's diverse business portfolio. As mentioned last quarter, we anticipate an acceleration of growth as we move into the back half of this fiscal year. Bill Hawkins will highlight some of the upcoming product launches and other initiatives that we believe will help drive growth and continue to improve operating performance.

It has been a very busy time since we kicked off our new fiscal year on April 30. Throughout the quarter, we worked constructively with the Centers for Medicare and Medicaid Services as IPPS reimbursement rates were finalized, resulting in a neutral to positive outcome versus last year. A successful FDA panel for the BRYAN Cervical Disc was concluded, and our PRESTIGE Cervical Disc has just been launched in the United States, with very favorable initial results.

We also continue to prepare for the Endeavor drug-eluting stent launch in the United States with two key milestones being met -- first, the successful attainment of the primary endpoint for the ENDEAVOR IV clinical trial, and second, the much-anticipated FDA panel review for Endeavor is now set to occur in October.

We continue to roll out new products and move forward on a number of key clinical trials, while at the same time selectively pruning our product portfolio.

On July 27, we announced an agreement to acquire Kyphon, and throughout the quarter we successfully continued the CEO and COO transition that will be completed at our annual shareholders' meeting on Thursday with the election of Bill Hawkins as President and CEO and Michael DeMane as COO.

Since announcing the CEO transition in February, I have traveled extensively inside and outside the United States. I have had the chance to speak with a number of our customers and the patients they serve, together with regulators, payors and other government officials. And I can tell you that Medtronic is well positioned with all these groups. I have also met with a broad cross-section of our employees, and as you will hear from Bill in just a few moments, we're looking forward to the remainder of this year with a great deal of excitement and optimism.

Since Bill Hawkins will be elected President and CEO at our Board of Directors meeting on Thursday, I am going to let Bill and Gary run the rest of the call and the question-and-answer session. However, since this is my last investors' call as CEO of Medtronic, I would like to again say that I have enjoyed my interaction with the investment community for more than 25 years, the past 15 while I have been at Medtronic. I also want to reinforce how good I feel about the Company and its future and how confident I am in the leadership that Bill, Michael, Gary and the rest of their team will bring to the business going forward.

Bill, it is all yours.

Well, thank you, Art. And first, on behalf of the entire executive team, I would like to thank you for your leadership. Medtronic is on very solid ground and I'm highly confident that we will continue to deliver top-tier growth and industry leadership in the years ahead. Rest assured that all 38,000 employees are dedicated to continuing the legacy of leadership that is the foundation of this great Company. So Art, we wish you and your wife, Anne, all the very best for the future.

I am now going to focus my comments around three areas -- new products, market development and geographic expansion, including some of the key achievements and challenges of the first quarter, along with some insights into what I believe will strengthen our growth as we move through this fiscal year.

Innovation continues to be the lifeblood of Medtronic. We saw significant progress during the first quarter with the approval and launch of several new products. We received FDA approval for the PRESTIGE Cervical Disc, and not only is PRESTIGE the first commercially available cervical disc in the U.S., it is also the first artificial disc to receive an FDA labeling claim of superiority. To date, we have trained over 800 physicians and plan to train about 200 more each weekend for the next several weeks. With regard to reimbursement, we're working closely with commercial payors on a case-by-case basis, and thus far we are encouraged by early reimbursement coverage.

Also in the artificial disc arena, our BRYAN Cervical Disc received a positive recommendation for approval from an FDA panel in July. We expect to launch this product before the end of our fiscal year. Following BRYAN in the product pipeline is the Maverick Lumbar Disc, which is currently working its way through the FDA approval process. Taken together, these products will form a market-leading artificial disc portfolio that will bring more treatment options to patients, changing the basis of competition by raising the bar.

In the coronary vascular market, we experienced a quarter of market turbulence. This continues to be a very attractive market and one we believe will strengthen over the long run as next-generation products come on the market. Procedure rates for percutaneous coronary interventions and penetration rates for drug-eluting stents both declined during the first quarter. However, our performance continued to be strong, with coronary stent sales growing 27% and Endeavor revenue of $81 million, an increase of 22%. We believe that with the anticipated introduction of Endeavor in the United States later this calendar year, we will see the market rebound as there continues to be a lot of excitement about this product, given its unique safety and strong efficacy profile.

With regard to the timing of Endeavor, you may remember that we announced earlier in the quarter that the ENDEAVOR IV clinical study met its primary endpoint and was submitted to the FDA for review. We have been notified by the FDA that the Endeavor dossier, including results from ENDEAVOR I, II, III and IV, will be reviewed at an FDA panel meeting in October. The FDA will announce the exact date and location four to six weeks prior to the meeting in accordance with standard FDA procedures.

We expect the full ENDEAVOR IV results to be presented at the TCT Congress in Washington, D.C., in late October, and we plan to hold an investor briefing there on Monday, October 22. At that time, Scott Ward and his team will provide a full update on the Endeavor program as well as an overview of our cardiovascular business.

Another strong growth component of our cardiovascular franchise is our endovascular business, which continues to grow in double digits. We expect this growth to accelerate as we expand into the thoracic segment in the U.S. Last month, we submitted the PMA for our Talent thoracic product, and we expect to submit the PMA for our Talent AAA stent graft later this quarter.

In our diabetes business, the introduction of Continuous Glucose Monitoring continued to drive strong sales growth of 23% and it continues to generate considerable interest among both physicians and patients. We saw quite an enthusiastic response to our launch of the MiniLink, a rechargeable low-profile sensor transmitter that enables continuous glucose monitoring capabilities for both our Paradigm insulin pumps and stand-alone Guardian monitors. And we received FDA approval and launched the Paradigm and Guardian systems for pediatric indications during the first quarter.

I am also pleased to announce that we just signed two agreements that enable Johnson & Johnson's LifeScan glucose meters to wirelessly communicate with our pumps in the United States and for Bayer glucose meters to do so in other geographic markets. We believe that these agreements will provide compelling benefits for our patients and further enhance the appeal of insulin pump therapy.

Looking ahead to the remainder of the year, I continue to be excited about our plans to launch many more new products in various parts of the world. These products include Resolute, our next-generation drug-eluting stent; the BRYAN Cervical Disc; the Restore Ultra neurostimulator; Reveal XT, a subcutaneous diagnostic for atrial fibrillation; and the Consulta/Secura/Advisa family of CRDM devices, our next generation of pacing and defibrillator products and the first to be build on a common platform. I am confident that these new products, along with many others, will enable us to gain market share and expand markets.

In addition to the steady cadence of new product introductions, our market development efforts are critical to our growth going forward. Let me start by commenting on the growth of the ICD market and our performance during the first quarter. Over the last five quarters, the U.S. market has been essentially flat. Outside the U.S., the market continued to be strong, growing at approximately 22% versus last year's first quarter. We believe the worldwide market grew approximately 7% versus last year.

And while we remain confident in the long-term growth prospects, we continue to be cautious about the exact timing and degree of rebound of the U.S. ICD market. As we discussed previously, we remain focused on market development and being opportunistic and gaining profitable share. We continue to work on gathering the evidence that reinforces clinical guidelines which demonstrate that many patients in the healthcare system are not benefiting from optimal treatment, including ICD therapy.

Many of these potential benefits are already being seen by cardiologists. Along those lines, the IMPROVE HF study is designed to raise this awareness. Initial data from this 160-center study will be presented at the upcoming Heart Failure Society of America Congress in September.

In regard to our sudden cardiac arrest awareness campaign, which we launched in January, we are pleased that the effort has successfully helped to raise the public's awareness of sudden cardiac arrest and bolster confidence in the benefits of ICD therapy. We have received positive feedback from both physicians and patients. As we indicated when we launched this campaign, there are many facets to the campaign beyond the television and press -- consumer media components. So we will now be building upon the efforts to date by shifting our focus into other components of the campaign, specifically in the areas of protocol and guideline adoption, as well as physician and patient education.

Our pacing business remains healthy as we saw the market grow 6% during the first quarter.

One final remark on CRDM. We completed the leadership transition in this business on August 1, when Pat Mackin assumed the role of Senior Vice President and President of the Cardiac Rhythm Disease Management, succeeding Steve Mahle. Pat brings tremendous customer focus, energy, a competitive drive and the discipline to his new role. Steve has done an exceptional job in leading our CRDM business for nine years and contributing to Medtronic for over 35 years. He will take on a new role assisting in the area of health policy.

Turning to neuromodulation, this past quarter we changed the name of this business to more accurately reflect our areas of focus in this segment. Even though we continue to believe this will be one of Medtronic's most attractive long-term growth platforms, we did fall short this quarter in our pain and movement disorder product lines. In response, we are stepping up our efforts to reach more patients and find new applications with clinical studies, referring physician education and focused local marketing activities. Although we lost market share this quarter, the U.S. pain stimulation market continues to grow at a healthy double-digit rate.

On a positive note, we received FDA approval for our new surgical lead, and the initial customer reaction has been very favorable. We continue to work through the FDA approval process for the smaller Restore Ultra neurostimulator, as well as additional leads which we believe will even better position us to regain market share. During the quarter, we also completed a reorganization of the business to provide more focus on chronic pain and movement disorders.

In our InterStim product line, recent market development efforts to reach out to new implanting physicians resulted in 26% revenue growth this quarter.

So next, I want to talk about growth outside the U.S. All of our businesses, excluding digital control, posted double-digit growth. IPDs grew 25% outside the U.S. or 19% on a constant currency basis. In the cardiovascular business, thoracic products outside the U.S., along with drug-eluting stents in parts of Asia, drove very strong growth. We continue to make progress towards bringing Endeavor to the Japanese market, having filed our shonin in May.

Going forward, we expect to see strong results continuing from Japan with the help of our EnRhythm pacemaker. EnRhythm received regulatory and reimbursement approvals in Japan during the first quarter, with premium C1 pricing, which reflects the Japanese regulators' acknowledgment of the benefits of our unique MVP algorithm. Along with EnRhythm, we launched Concerto and Virtuoso in Japan during the first quarter. In Western Europe, we continue to lead the market in the cervical dynamic stabilizations segment with both the PRESTIGE LP and BRYAN Cervical Disc. This is another example of Medtronic utilizing technology to lead the transformation to a new standard of care. Also in Europe during the quarter, neuropathic pain treatment guidelines were published, which we believe will be another key growth driver for the neuromodulation market.

Now, next, let me update you on Physio-Control. We continue to address the issue that led us to suspend U.S. shipments in January and we are constructively working with the FDA regarding appropriate corrective actions. We have recently resumed limited shipments to critical-need U.S. customers. Assuming resolution of the issues, we anticipate resuming full U.S. shipments in the back half of the fiscal year. I want to reemphasize that we remain committed to the spinoff of Physio-Control at the appropriate time. As we have discussed before, we are continually evaluating our entire business portfolio. And during the first quarter, we did divest two nonstrategic product lines -- our [durodiagnostics and gastrodiagnostics], which together had annualized net sales of approximately $40 million.

On the flip side, we are moving forward with obtaining the necessary regulatory approvals around the world to close the Kyphon transaction. A few weeks ago, I had the opportunity to meet with the Kyphon salesforce, and it reinforced why we're so enthusiastic and encouraged about the prospect of our two companies working together. We expect to complete the acquisition in the first calendar quarter of 2008.

Now I will conclude by saying that I am proud of our teams around the globe who, despite challenging market conditions in some of our businesses, delivered solid financial results, particularly on the bottom line.

With that, I want to now turn the call over to Gary Ellis. So, Gary?

Thanks, Bill. In my remarks, I will review this quarter's revenue performance and then discuss the income statement, balance sheet and cash flow statement. I will also provide detail on the unusual items that complicate the understanding of our income statement this quarter. And finally, I will close the call by discussing our financial guidance for fiscal year 2008.

As you heard earlier, first-quarter revenue of $3.127 billion grew 8%, while net earnings were $675 million or $0.59 diluted earnings per share. These earnings and diluted earnings per share numbers represent increases of 13% and 16%, respectively, over the prior year. After adjusting for certain reconciling items, our adjusted first-quarter non-GAAP net earnings and diluted earnings per share were $711 million and $0.62, respectively, an increase of 11% and 13% over FY '07 first-quarter adjusted results.

Excluding Physio-Control in both periods, revenue growth was 10%. Physio-Control also had a negative impact of $0.01 on earnings per share in Q1. However, we still expect Physio-Control to be earnings neutral in this fiscal year.

The reconciling adjustments are comprised of a $33 million pretax charge for in-process R&D, primarily representing a milestone payment on a previously negotiated licensing agreement, and a $14 million pretax restructuring charge related to the initiatives we began in the fourth quarter of last year which could not be recorded at that time.

First-quarter revenue in the United States was $1.948 billion, up 3%. Outside the U.S., revenue of $1.179 billion, which represented nearly 38% of the corporation's total revenue, increased 16%, including a $49 million positive impact of foreign currency. As you heard from Art and Bill, we are particularly pleased with the growth of our operations outside the United States.

In our ongoing efforts to streamline and focus our commentary, I will not reiterate the revenue detail by business as that information is in our press release and corresponding tables. I do want to highlight several reporting changes we're making this quarter which are reflected in the tables attached to the press release.

With the creation of the cardiovascular business, we are splitting out five components on the revenue tables -- coronary stents, other coronary and peripheral, and endovascular, which together comprise the former vascular segment. Revascularization and surgical therapies, along with structural heart disease, comprise the former cardiac surgery segment. We are also reporting navigation separate from spinal, as it has become part of our newly formed corporate technology and new ventures group. Our navigation business focuses on technologies that we expect to leverage across many of our business, and thus you will see it reported separately.

Now let's turn to the rest of the income statement. This quarter's gross profit margin of 74.7% is consistent with the prior-year first quarter, but was negatively affected by 30 basis points for obsolescence reserves associated with product phase-outs, especially in our neuromodulation business. In addition, scrap and other product costs at Physio-Control ended 30 basis points to our cost of sales. We do not anticipate these costs continuing and we expect our gross profit margins to be in line with our previously communicated guidance.

I would also like to remind you, as we discussed at the June analyst and investor meeting, that we have numerous actions underway across the organization to reduce our product costs by 25% over the next five years.

First-quarter R&D spending of $300 million represented 9.6% of revenue. We saw declining clinical costs this quarter versus the prior year as the enrollment phases of several large clinical trials in cardiovascular and spinal were completed. This is a timing issue, and we expect R&D spending to return to approximately 10% of revenue in future quarters.

First-quarter SG&A expenditures of $1.096 billion increased 11% over the prior year, mostly in marketing and selling, and represented 35% of sales. We continue to build the sales organization in the U.S. for the Endeavor and PRESTIGE launches, and we continue to invest in our ERP implementation, where we have been preparing for a large-scale conversion of our U.S. distribution systems to SAP at the end of this month.

We expect to leverage these investments and are taking other steps to reduce our cost structure such that SG&A will exit the fiscal year at approximately 33% of sales as we have previously discussed.

Net other expense for the quarter was $57 million compared to $66 million in the prior-year first quarter. The improvement is primarily a result of $16 million in gains from the sale of certain equity investments during the quarter, partially offset by lower currency gains from our hedging programs. Net interest income for the quarter was $44 million compared to $39 million in the prior-year period.

As of July 27, 2007, we had approximately $6.1 billion in cash and cash investments compared to debt of about $6 billion. We continue to generate in excess of $700 million of free cash flow per quarter, defined as operating cash flow minus capital expenditures.

Let's now turn to our tax rate. Our effective tax rate of 23.25% compares to an effective tax rate of 25.25% in the prior-year first quarter and 24.5% for the prior fiscal year, excluding unusual charges in all periods. Our current tax position reflects the continued success of a number of actions taken over the last several years, and we continue to make investments and put into place strategies that have the potential to further reduce our tax rate. These efforts are designed to provide additional funds to invest in growth initiatives and to help improve the return to our shareholders. We expect our fiscal year 2008 effective tax rate, excluding unusual charges, to fall in the range of 23% to 23.5%.

First-quarter weighted average shares outstanding on a diluted basis were 1.153 billion shares. During the quarter, we repurchased $500 million of our common stock, which represents over 9.6 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. As of July 27, 2007, we had remaining capacity to repurchase over 55 million 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 detail.

That is all for our financial overview. Let me now turn to financial guidance for the remainder of fiscal year 2008.

As you recall, last quarter we made several decisions regarding guidance. Let me review these with you. First, we will not provide guidance past one year. We have long-term objectives, but the guidance will be limited to the fiscal year we are in.

Second, we will not be providing 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, our annual guidance will be general and directional in nature.

FY '08 guidance remains unchanged from last quarter. With respect to revenue, most analyst estimates have our revenue growth in FY '08 in the low double digits, and we remain comfortable with that view. I want to remind you that we did expect the first half of the year to be softer and then to see an acceleration in the back half of the year as Endeavor, Physio-Control, PRESTIGE and other product lines pick up speed.

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 have just provide excludes the impact of any unusual charges or gains that might occur and also excluding any impact of the pending acquisition of Kyphon.

That is all for our prepared remarks. We will now answer your questions. Please limit your questions to only one or two per firm. As Martha mentioned, we would like to end the call by about 4.30PM Central Time. Please initiate the question-and-answer period.

(OPERATOR INSTRUCTIONS). Rick Wise, Bear, Stearns.

Let me start with neuro. Can you give us a little more detail on where and how neuro fell short? You indicated you lost share in a market growing double digits. Maybe help us understand in a little more detail how you turn the business around. Is it new products? Is it new management? Just give us some perspective there. Thank you.

Well, first, as I mentioned, the market is still a very healthy market. It grew about 14%, by our estimates, last quarter. And we did lose some share. There are two things, and it is really related to products. We did not have a surgical lead, and we just got approval for our surgical lead, which we think is going to be a very important competitive product for us to have.

Secondly, we are very excited about the new Restore Ultra, which is the next-generation neurostimulator, which is about half the size of our current generation. And that, as we said, will be coming in in Q3.

In addition, we have made some changes in the field structure. We went through a bit of a reorganization and have put some real focus on the pain stem market versus the movement disorders. So we had some changes in the field structure to provide more focus on both those areas.

So I am very confident that you will see us resume our strong leadership position in this marketplace going forward. So it is a combination of the focus on the field as well as new products.

But it sounds like maybe not next quarter, but in --

I think it is more the back half of the year when we consider Restore Ultra and we get a little more momentum with the new surgical lead. And we have another surgical lead as well coming out close to the back half of this year. So it is going to take a quarter, but by the back half of this year, you should see us building some considerable momentum.

And Rick, just to add to what Bill said, there is also the standpoint that we have, as we indicated, disposed of some of the product lines, a couple of product lines in that business. So that will have a little bit of a dampening effect on the growth rate for the year here.

That is a good point. And just to follow up on another topic, you talked about the second-half accelerators. I will let others ask about Endeavor, etc., but maybe you could give us a little more color or help us think through, Bill or Gary, the impact -- what should we be dialing in for the disc program as it rolls out here? How should we be thinking about how quickly it can build and the effect on growth rates, or however you want to help us think about it?

Well, again, this is probably one of the more exciting products that we have. And as I mentioned, we have already trained 800 physicians and expect to be training a couple hundred per weekend going forward. So we have a massive training effort going on as we speak. And we think that this is really going to be a game-changing technology where a large percentage of the ACDF market will convert to the cervical disc going forward. So it is a large market that we believe will move in our direction based on the technology that we have.

I will sneak in one last one on gross margin. Gary, your math, given the subtractions that hurt the gross margin this quarter, are you saying it should have been 75.3%, really, normalized, and that that is the kind of rate we should be thinking about for the rest of the year?

Yes, what I would say on that is we would expect to be above 75% as we go through the rest of the year. If you pull off those two items, absolutely, our margin would have been 75.2%, 75.3% for the quarter that we are in. So yes, we would expect to see above 75% as we go through the rest of the year.

Bob Hopkins, Lehman Brothers.

Congrats to Art and good luck in retirement. I would like to start with ENDEAVOR, if I may. I assume you guys have now seen more of the data, and I was wondering if you could comment, if you've seen anything that diminishes in any way the safety or efficacy story that you have been advocating in Europe so far?

We're not going to comment on any of the data at this juncture other than to say we are very excited about the fact that we have reached the overall endpoint and are looking forward to both the panel as well as the outcome to be presented at TCT.

That is fair. Have you guys internally seen more of the full data set, though, at this point?

No.

And then moving on on the ICD market a little bit, I was wondering if you guys could do what you have been willing to do in the past, which is to talk a little bit about your expectations for the overall market growth rate going forward, specifically in the back half of calendar '07 and into calendar '08, just some thoughts on the overall market growth rate.

Bob, again, two things -- first of all, outside the U.S., we continue to see very strong double-digit growth. As we shared with you, it was 22% this last quarter. And we see that continuing with the fact that so many of those markets were underpenetrated, particularly in Japan, as well as other parts of Asia and Europe. So outside of the U.S., we are seeing that is moving along very, very well.

In the U.S., as I mentioned, the market has been relatively flat for the last five quarters. And we are continuing to do all the right things to be able to get that market to reaccelerate, to ultimately to get to where we said we the market will go. And that is we have said all along that we think this year in aggregate we can grow the total market in the mid to high single digits and that over the longer run that we will get this market back into the lower-double-digit growth rates. But we still feel very strongly that those are very realistic kind of growth numbers for the U.S., OUS and combined markets.

And then just lastly, Bill, does the Kyphon deal suggest that you guys are unlikely to pursue other $1 billion-plus-type deals over the next 12 months?

No, as we have said, Art has said and I had said it consistently that you can expect us to be looking to grow first with many of the things that we are excited about internally, the organic growth, but at the same time, we will be looking to add possibly potentially two to three additional platforms going forward. And, now, that could range in size, but we will be opportunistic, again, we will be disciplined, and we will be strategic in how we add businesses to our portfolio.

Tao Levy, Deutsche Bank.

Maybe you could just touch on the ICD market again and maybe you could provide some insight, at least here in the U.S. market -- any changes on -- inventory issues were something of a concern the last few quarters. Any changes there? The hospitals still -- again, any changes at the level there? And maybe any trends on procedures over the last couple months, just from your vantage point?

Just a couple comments. Again, as I mentioned, the market has actually been fairly stable. Now, just in terms of looking at our numbers and maybe sequential comparisons this quarter, and not to get into the granularity, but there were a couple of days -- we had two fewer days this quarter. And that is part of when you look at quarter to quarter. But again, if you just look at this market kind of over a rolling 12 months, you will see that it has been pretty stable.

Now, again, we are continuing to do the things that we think are important with the IMPROVE HF study, which we will be presenting that data at the Heart Failure Society meeting in September. And we think that is going to provide some very good direction to the importance of physicians to look more closely at their patients and things like that, plus the work that we continue to do in going upstream and calling on the referring cardiologists and many of the things that we are doing with the electrophysiologists to make sure that they are treating all the appropriate patients.

So there are a number of things that are in play that we believe will ultimately get this market reaccelerated.

And in terms of a couple clarifications, in the new ventures business that you have there, the new segment, is that just for now just the spinal navigation or is there anything else within that?

In terms of businesses, it is just the navigation business.

From the revenue perspective.

From a revenue -- but we have other things that are in that organization. And that is where we will be doing some -- incubating some of our new internal platforms. We talked at the analyst meeting in June about some of the work we're doing on Hep C. And that is an example where we would be doing that work.

And then just lastly, would you mind providing some sort of percentages of maybe the diabetes business, that Continuous Glucose Monitoring, just again, just rough, rough parameters if possible?

Well, I am not sure what the question is. Again, this is a business that we see tremendous upside. We now have been consistently growing this in the 20% range. New pumps this -- or pumps this last quarter grew over 30%. All geographies did extremely well. And again, one of the other areas that has just really begun to take off is in the Continuous Glucose Monitoring sensor. We were well over plan -- I'm not going to tell you what my plan was, but I will tell you we were well over plan.

That is kind of what I was getting at was the plan you had.

We are very excited about the uptake of the new MiniLink for both the Paradigm as well as for the Guardian.

Matthew Dodds, Citigroup.

Just a couple questions. First, Bill, for Japan and the Endeavor timing, you still have the same timing. I just want to make sure -- what is that for potential approval?

And then going back to Neurostim one more time, it sounds like a lot of this was spinal cord stimulation, but were the DBS, InterStim, pumps, were any of the other businesses soft as well? Or is it really confined to spinal cord stimulation?

First, on the Endeavor, we filed the shonin in May. And our expectation is it will be sometime in FY '09 that we should see approval. Now, we did work with Japan -- well, when we submitted the shonin, we did this through the Harmonization by Doing. We actually were the pilot group to actually work with Japan on sort of an improved process for how we would submit shonins. And so we are hopeful that that will be sooner rather than later. But right now, the guidance is in FY '09.

On the neuro side, yes, we actually fell a little bit short in other parts of the neuro business, particularly on the movement disorders, which we believe, to some degree, was an anomaly, because that is a fairly concentrated business right now. There are a few centers who do a number of procedures. And we had some extenuating circumstances with some dynamics where a couple of centers where physicians where changing centers and that actually had a bit of an impact. But again, that is one area where we feel very good about the long-term growth possibilities.

And one of the other parts of that business, though, that did do very well was in the InterStim, which grew over 26%. So there are a number of moving parts within the overall neuromodulation business. And I can assure you that Rick Kuntz and the team are all over that and we will be aggressive in regaining market share in the pain stim business. We will be very aggressive in continuing to develop the market for movement disorders and in our spasticity part of the business, which actually did pretty well, and then we are continuing to fuel the fire on the InterStim business.

Larry Biegelsen, Wachovia.

Just one quick clarification -- did I hear you say that the full ENDEAVOR IV results will be at TCT and not presented at the advisory panel meeting?

The results will be available to the advisory panel and they may or may not present all of that data in a public forum. But it will be presented in a public forum at TCT. As you know, panels, there is -- it's the discretion of the panel as to what they want to be reviewing in a public manner. But it will be available to that panel.

Could you give us an update, please, on your discussions with the FTC regarding the Kyphon acquisition? Is there anything new to report?

No, nothing other than we feel very good about the dialogue that we are having with the FTC, as well as with regulators outside the U.S. Things are moving along on track. We feel -- again, it is going very well.

And one on the ICD market. Could you talk a little bit about the underlying growth in initial implants versus replacements in the U.S.? Are they both growing at a similar rate or is one growing more rapidly than the other?

No. The underlying sort of new implant has been pretty stable. And that is really what we focus on. It has been relatively flat for the last several quarters.

So initial has been flat, and replacement growth? Or you see one --

No, it has been really both. They have been pretty consistent, to be candid.

Glenn Reicin, Morgan Stanley.

Just a couple of follow-ups. So you did mention, I think, that you still expect Endeavor launch this calendar year? I just wanted to know if that is realistic, given that [you have to go to] panel.

Again, the FDA will set the date in October. And we believe that that gives us a couple of months for them -- two-and-a-half or whatever months in October for them to review it. But we believe that they have had a lot of time to review it. And so we believe there's a very good chance that we can get this approved within the calendar year. And then, depending on when it gets approved, if it gets approved in middle of December, then realistically we probably won't do the major rollout until early January. But if we get it approved in, let's say, middle to late November, we will look seriously at launching it in the December time frame.

And then I heard secondhand from a client, and I just wanted to get confirmation from Gary -- you have been quoted saying it is roughly $30 million per month is what you're assuming right now?

I don't know whether I quoted the number. Scott maybe has done in his presentations as far as the impact on the overall U.S. numbers. But I think, again, it depends on what you assume the market size is going to be at that point, because obviously, as you are well aware, the DES market has been in somewhat of a turmoil over the last several quarters here. But again, back to the amount of market share, just assume that we are kind of in that, as we've indicated in the low teens, and you assume that you're in a $2 billion market, $2 billion, $2.5 billion market, you're in a situation of saying $300 million, $350 million, $30 million a month is kind of how you get there. So that number seems reasonable. I haven't said that, but I think that would be a reasonable number based on the market share we have indicated we believe we can achieve.

Just two quick questions as well. Share count for the year -- do you have a view there? And then also, [VMP], saw that it continues to crank along. Can you talk about the contribution from new indications?

What was the first question?

Just on our share count. Share count overall -- our share count, I would assume as we go forward on the share count that it will probably be relatively flat to maybe slightly down. You will have some increases, obviously, as we have some of our new shares going out. We are at 1.153 billion right now in shares. And I would expect it to be relatively flat as we go through the year. We will continue to be opportunistic in buying back stock. So could you see that number drop if we are more aggressive? Possibly. But for right now, in the numbers, I would just assume a flat share count.

on the VMP question, yes, there's still a lot of headroom left for VMP. And we did get marginal contribution from the new indications. As you know, we're selling it for OMF, although the big movement on OMF will come when we get the small-size vials approved, which is probably going to be now the beginning of calendar '08.

Any way of quantifying what the contribution was from the new stuff?

No.

Mike Weinstein, JPMorgan.

A couple topics -- first, on the Kyphon transaction, Gary, are you able at this point to talk a little bit more about financing?

And then second, as part of that, does the widening of credit spreads have any impact on your thoughts on the accretion and dilution in the transaction?

With respect to financing, no, we are continuing to look at different alternatives. We have had, obviously, several of the banks in to meet with them as we evaluate different options. We literally are looking at all types of options. We are looking at options to potentially use our own U.S. cash. And there are some things that we think there is a possibility of using some of that as we go forward. We're still evaluating. We're talking to the banks. We have, [thoroughly] have the capacity of the bridge loans that are available to close the transaction.

As far as the widening of the credit spreads at this point in time, we don't see that having a tremendous impact on us. Obviously, that will depend on where the spreads are by the time we actually do finance the transaction and close on it. So I don't think that is going to have a significant impact on the accretion and dilution at this point.

As you well now, a lot of that that is going on in the marketplace is obviously for lower-quality credit companies than where Medtronic is at. But it will have a slight impact on us, but right now we don't think it is going to have a major one on accretion and dilution.

And then a follow-up on the guidance commentary. You basically reiterated the guidance you gave, Gary, on the May call. One piece of difference today versus May is that in May, you indicated that the 24.5% tax rate should carry through fiscal 2008. And you're going to benefit from a lower tax rate -- 100, 150 basis points. What do you want the Street to do with the incremental earnings, in theory, that are generated by a lower tax rate?

Again, Mike, you are absolutely right. Obviously, from the standpoint of when we gave our original guidance, we were thinking at that point in time the tax rate would still be closer to the 24% to 24.5%. So we are, based on what we see currently, expecting that that tax rate will be slightly lower. As I mentioned, for the year we are thinking 23% to 23.5% as we go through the rest of the year. And so there will be a benefit from the tax rate for the year itself.

We are not changing the overall guidance at this point. If anything, I would hope that the Street would view that as just giving us some additional leverage on the P&L to make sure that we can achieve the overall objectives that we have in our organization. So we're not changing the overall guidance.

You don't have official earnings guidance.

That is correct.

Right, your earnings guidance is we are going to grow earnings a little bit faster than revenue, so there is no change to that commentary, but --

That is right.

Your commentary is qualitative, not quantitative.

That is correct.

And then I just wanted to maybe get a better feel on Physio-Control. You are going to have two obvious drivers of growth in 2008. One should be the Endeavor approval, hopefully. The second will be Physio-Control's return, which has hurt you in 2007.

Your comment is in the back half of the fiscal year. Any guidance on whether right now you think it is early back half or late back half? That would be helpful.

No, Michael. I really can't give you any more granularity around front or back half. It will be, as we said, in the back half of our fiscal year.

Joanne Wuensch, BMO Capital Markets.

What came across the table when we were talking was the agreement that you have regarding the LifeScan blood glucose monitors. Could you just comment briefly on that and then what it may mean to you in terms of potential revenue?

We are excited about both of the partnerships, one with J&J and the one outside the U.S. with Bayer, which enable us to provide the diabetic customers that we serve a more complete offering of the products that they need to manage their diabetes. So it enables us to really be kind of a one-stop shop for many of the things that people with diabetes have.

So on the financial side, we're not really disclosing any of the terms by which we structured this arrangement with both J&J and Bayer, although we do believe that this will be attractive to us going forward, as we are able in some way to recognize some of the contribution from both the meters and the strips.

And then can you remind us on your plans for reimbursement for your artificial disc program?

The plan is that we're going payor by payor. And what I can tell you is that it is going very well. I think about 80% of the cases have been reimbursed so far, which is very, very good. And we are in discussions with the large regional payors, and we are optimistic that that is going to turn out favorable for Medtronic.

So as you start generating revenue this quarter, when we think about it building, is this a slow, cautious rollout? Is this a pedal-to-the-metal type of rollout of product?

No, I would say that we are going to be very careful. We're going to make sure that physicians are well trained. And we are putting a lot of effort behind the training. As I mentioned, we have already trained 800 physicians. We are doing a couple hundred every weekend. So our people are dedicating a lot of time to training. A lot of the rollout will be dependent on how quickly we train people. But that is going along very, very well.

So I don't think you can expect to see a major inflection this quarter. But you will see, we believe you will see going through the rest of this year a nice contribution coming in from the addition of the cervical disc.

Tim Lee, Caris & Co.

Again, just wanted to follow up on the PRESTIGE reimbursements. When do you think we could see widespread reimbursement? Is that two quarters away? Is that three quarters away? When can we see it when it is in place and no longer on a one-off basis?

That is a hard question to answer. Again, it is working payor by payor right now. We have been in discussions with some of the large regional payors. Again, I wish I could tell you -- I wish I did control the timetable there. But again, what I will say is what I said, in that the conversations are going extremely well. We have the right people with our medical director, Dr. Matthews, who is in there, and the other people that we have in front of these groups. And I think people recognize the superiority benefits that we have with the cervical disc and appreciate the clinical data that suggests that patients with these procedures can return to work that much sooner. So we believe we have all of the right information to get ultimate approval from the different payors. And we will keep you abreast of that. As we learn things, we will let you know.

And just one follow-up, if I may. In terms of your share buyback program, given your pending Kyphon acquisition and your potential use of proceeds or operating cash flow for that transaction, could we expect to see you be more conservative on your share buyback program from the recent run rates that we have seen?

Obviously, we will be in a situation there where we are going to have to make sure that we have the cash, whether it is through debt or using our existing cash, to make sure we can complete the transaction with Kyphon.

On the other hand, I think as we shared at the June analyst meeting, the cash flows this Company generates, not only for the current year but as we go forward, is very, very significant. And as a result of that, I think we still have the financial flexibility to do both as necessary. But I think you can assume that, yes, we will be a little bit more cautious as we go through the next quarters here and make sure we've got everything lined up before we do major stock buyback. But from our perspective right now, we think we have the financial flexibility to do both of them.

I think we have time for one more question.

Tim Nelson, Piper Jaffray.

Some comments on the international ICD market growth, if you please. It seems to me that it is a little bit less robust than it was last quarter. And I'm just wondering whether there is any significant changes in the source of that growth in terms of geographic mix?

No. This is Bill. I wouldn't read anything into it. We are in the summer months right now. There's always a little bit of a slowdown, particularly in Europe in the July timeframe. But we're -- all the trends are very positive. We remain very optimistic about the long-term growth prospects for defibrillators outside the U.S. Again, you just look at the number of defibrillators implanted per million in the U.S. versus outside the U.S., 600 in the U.S. and something on the order of 80 in France and 28 in Japan. So there's a lot of headroom -- there's a lot of runway left to increase our business.

And was Japan itself as robust as it was last quarter?

Yes. Japan continues to be a very strong market for us. Again, there is a lot of runway left in Japan with the fact that today the penetration rates are so low there. And there is more and more government support. They recognize that they are behind in some areas in providing the latest medical technology for their patients. I was over there just recently, and it is pretty clear that the government is very keen to make sure that patients in Japan have access to the latest and the best technology. So I am encouraged by the long-term prospects in Japan.

And finally on the cardiac surgery business, the old cardiac surgery business, can you make some comments on how heart valves did and some of the other components in the old reporting business?

Overall, the heart valves hung in there very well. We continue to feel very good about the competitive position that we have with our tissue valves. And I think we, for the quarter, gained a little bit of share. So we feel good about the prospects going forward there.

So let me, being mindful of the time, it is exactly 4.30 our time, and whatever time it is where you are. But I do want to say that we appreciate you being on the call and we hope that you will join us on Thursday for our annual shareholders' meeting. And again, thank you for participating on the call today. So with that, we will sign off.

Thank you. And ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.