美敦力 (MDT) 2008 Q3 法說會逐字稿

Good morning. My name is Dennis and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic third-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded.

Thank you. I will now turn the call over to Ms. Goldberg Aaronson.

Good morning and welcome to Medtronic's third-quarter conference call and webcast. During the next hour, we will review the results of our third quarter of fiscal year 2008, which ended January 25, 2008. Following these introductory remarks, Bill Hawkins, Medtronic President and Chief Executive Officer, will provide comments on the third-quarter results. Gary Ellis, Chief Financial Officer, will follow with a financial summary of the quarter. After our prepared remarks, we will take your questions. Joining us for the question-and-answer session are Michael DeMane, Chief Operating Officer, and Pat Mackin, President of our Cardiac Rhythm Disease Management business.

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 the Securities and Exchange Commission. Please telephone Medtronic Investor Relations or Corporate Communications if you were unable to access the press release or the transcript.

Today's webcast includes statement 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 those 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 comparison we make today will be on an as-reported basis, not on a constant currency basis. References to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2007.

With that, I am now pleased to turn the call over to Medtronic President and Chief Executive Officer Bill Hawkins.

Good morning and thank you, Martha. This morning we released our fiscal year 2008 third-quarter financial results, revenue of $3.405 billion increased 12%, including a positive impact of $117 million from foreign currency. After adjusting for special charges, certain litigation charges and acquisition-related in-process research and development charges, third-quarter earnings and diluted earnings per share on a non-GAAP basis were $713 million and $0.63, respectively. GAAP earnings for the third-quarter were $77 million, or $0.07 per share, which reflects a number of significant charges, several of which were previously disclosed. Gary will take you through these in greater detail later in the call.

All things considered, I am pleased with the performance of our global organization. We have achieved a number of highlights since our last conference call. $726 million of ICD revenue, reflecting the resiliency of our CRDM organization and the widespread support we have received from customers regarding our focus on patient safety during the Fidelis field action. The successful close of the Kyphon acquisition in early November; double-digit revenue growth in the Spinal Neuromodulation, Diabetes and ENT businesses; over $750 million generated in free cash flow; O-U.S. growth of 20%; and the February announcement of the FDA approvals of the Endeavor drug-eluting stent and the RestoreULTRA neurostimulator.

Now, I will touch on each of these items in more detail as I discuss the segment results, beginning with our CRDM business. Now, this was a difficult quarter in our CRDM business. Given all that we had to do, I could not be more proud of the thousands of employees who worked tirelessly to serve the patients who have been our first priority from the very beginning. Given the business that we are in, these types of situations are always a possibility and they are never easy. How we respond is incredibly important to patients and customers. Our focus on serving patients, as stated in our Company's mission, was our ultimate guide, with the size, scale and dedication of our organization allowing us to minimize the impact of this event. Many of our senior leaders, including myself, have spent a lot of time in the field this last quarter and I must say I have been gratified by the strong support we have received from our customers for the courage we displayed in doing the right thing.

Third-quarter ICD revenue was $726 million, up 2% compared to the third-quarter of fiscal 2007 and up 14% sequentially. Overall, these results reflect the organization's focus on managing the Fidelis field action and, again, the resiliency of our business. Our performance in ICDs was stronger than anticipated, but we did experience a negative impact due in part to the priority we placed on assisting customers in reprogramming their patients' devices, versus focusing on new implants. Secondly, in Japan we did not have Quattro available until mid-January. Finally, the lack of a single-coil lead impacted lead sales and, in some cases, complete systems, particularly in certain Western European markets. We are on track to launch a single-coil Quattro lead in the first quarter of fiscal year 2009. Development work is also underway to reduce the size of our high-power leads while also assuring best-in-class reliability.

During the quarter, we did receive the benefit of approximately $20 million in ICD revenue related to both filling the backlog of Quattro lead orders from the second quarter and reversing a portion of Fidelis' returns reserve based on actual experience with Fidelis credits in the quarter. As you recall, at the time of the Fidelis announcement, our worldwide lead manufacturing capacity supported a product mix of approximately 75% for Fidelis and 25% for Quattro. Our inventory levels reflected this same general mix. Our ability to meet customer demand following the field action was the results of multiple actions we undertook to maintain supply subsequent to our announcement on Fidelis. We worked with our suppliers and our manufacturing operations in Puerto Rico to ramp up and transition manufacturing back to Quattro. We completely reengineered our physical distribution, effectively moving from a build-to-forecast model to a build-to-order model. Finally, United Parcel Service, or UPS, established operations with our Puerto Rico facility, enabling us to ship directly to our customers. As a result of these efforts, we were able to meet customer demand following the field action and by early January, we had reached more typical manufacturing and inventory levels.

A silver lining of this process has been the fact that our customers have come to better appreciate the value of CareLink, which has proven to be a useful tool in helping physicians manage their Fidelis patients. We added 40,000 patients to the CareLink network in the third quarter, which was a rate nearly 2.5 times faster than our closest competitor. CareLink is the largest remote patient management network in the industry, with more than 225,000 patients in over 2000 clinics and hospitals around the world.

So turning to pacing systems, our global revenue in the third quarter grew 4% to $478 million, while the market as a whole grew 8%. It is important to realize that a significant portion of our field organization's attention during the quarter was focused on serving Fidelis customers and patients. Although the implant rates in the first month following the field action were down significantly for both high-power and low-power, by the end of the quarter, they had recovered to pre-Fidelis levels.

Looking ahead, we expect our CRDM business will benefit from a robust pipeline of new products, extending what is the strongest device portfolio in the market. In the next 12 months, we expect to introduce 25 new products in the U.S. and Europe, which includes the Vision 3-D platform of high-power and low-power devices, along with two new left ventricular leads, a family of new delivery systems and an entirely new platform for CareLink. Additionally, early in the fourth quarter, we announced the start of the U.S. clinical trial to confirm the safety and efficacy of the EnRhythm MRI SureScan pacing system, the first ever pacemaker system designed for safe of use in MRI machines. We anticipate launching this new product in international markets this fall and in the U.S. in fiscal year 2010. Lastly, in Japan we intend to start our CareLink pilot this quarter.

Turning to our Spinal business, we saw 35% growth in the quarter, driven in large part by the addition of $147 million in Kyphon revenue. We closed the Kyphon acquisition at the end of the first week of the quarter, ahead of expectations. Taking into account that we had 12 selling weeks, versus the typical 13, we are pleased with the result. Since then, we have made solid progress on the integration and are on track to meet the previously-stated projections of 300 to $325 million of revenue in fiscal year 2008. We are very optimistic about the long-term potential of this new platform and the opportunity to compete in the aging spine market. Our teams are currently focusing their efforts on leveraging cross-selling opportunities and driving sales and cost synergies between the two organizations. Gary will take you through the Kyphon-related purchase accounting adjustments that impacted the quarter later in the call, but suffice it to say, they too are in line with expectations.

When you look at our Spinal business excluding Kyphon, revenue grew 11% in the third quarter, driven by strong double-digit performance in our worldwide Biologics business, along with solid growth in our core Spinal business outside the U.S. Taken together, Kyphon and Biologics helped to partially offset competitive pressures on our core spinal products in the U.S.

PRESTIGE results have been slower than we initially hoped due to longer-than-anticipated physician trialing and lack of widespread reimbursement coverage. We remained optimistic about the prospects of this product and expect updated toolsets, along with continued educational efforts, to increase therapy adoption. We remain confident that these implants will become a standard of care in the treatment of cervical degenerative disc disease, giving patients an alternative to traditional motion-limiting spinal fusions. We remain committed to our Spinal business strategy of raising the bar of competition through continuous innovation and supporting the safety, efficacy and cost-effectiveness of our products with robust clinical data.

During the quarter we announced our intention to enter into a joint venture with the Shandong Weigao Group to market therapies in the spine and orthopedics sector in the Chinese market. Upon the close of this transaction later this calendar year, Medtronic will have access to Weigao's broad orthopedic and trauma product line and will be able to generate synergies from Weigao's strong presence and reputation in China. This joint venture will expand our footprint in China. We expect that China will become our largest market outside the U.S. in the next 10 years.

So let me turn, now, to one of our biggest near-term opportunities, our CardioVascular business. Two weeks ago, we announced FDA approval and launch of Endeavor in the U.S. and we are pleased to report that we are off to a great start. Endeavor is the first new drug-eluting stent approved for use in the U.S. market in over four years and physicians are genuinely excited to have a safer and more deliverable alternative drug-eluting stent for their patients with coronary artery disease. Although it is clearly too early in the launch to share any specific metrics or results, customer reaction has been extremely positive. I spent last week visiting customers and I can report firsthand the excitement many have for this new product. Physicians appreciate that Endeavor offers the performance and efficacy of a first-generation drug-eluting stent while setting new standards for safety and deliverability. Physicians are telling us that Endeavor is clearly the most deliverable stent on the market. The multi-exchange, or MX, and over-the-wire systems have both received early praise and we are confident regarding Endeavor's performance in the U.S. market.

Longer-term, we remain committed to market leadership in the coronary stent space. With the strength of our portfolio, including Endeavor and Endeavor RESOLUTE, we continue to gain share outside the U.S. At the end of the fourth quarter on calendar year 2007, our overall DES unit share was approximately 20% and there were over 15 markets where it exceeded 30%. We're making great progress with our DES franchise and we look forward to sharing more specifics about the Endeavor launch during our fourth quarter earnings conference call.

Turning back to our third-quarter results in the CardioVascular business, revenue grew 7%, with strong coronary and endovascular sales offset by somewhat slower growth in our structural heart and revascularization businesses. Coronary growth of 8% was driven by $84 million in drug-eluting stent revenue, reflecting market share gains from Endeavor and the O-U.S. launch of Endeavor RESOLUTE, our second drug-eluting stent. Coronary revenue during the quarter also benefited from the CE Mark approval and launch of our Sprinter Legend balloon, with a revolutionary zero-fold technology, enabling an exceptionally low profile with no wrapped material and no balloon shoulders. Leveraging advanced materials sciences to bring this technology to market means our customers will be better able to treat their most difficult clinical challenges.

You know, our Endovascular business grew 9% in the quarter, driven by 24% growth of our thoracic products in O-U.S. markets. A new study published in the New England Journal of Medicine provides compelling evidence that endovascular intervention is the favorable choice for patients in need of AAA repair. The four-year, 23,000-patient study found that the short-term rates of death and complication were significantly lower, just 1.2% for endovascular repair, compared to 4.8% for patients who underwent open surgery. We expect continued growth in this market and we have the strongest endovascular product pipeline in the industry. In the U.S., during the quarter, we launched the AneuRx AAA Advantage stent graft on the new Xcelerant Hydro Delivery System, which features a hydrophilic coating designed to aid navigation of the device through tortuous arteries. During the quarter, we also announced that we filed the final PMA module for our Talent Abdominal Stent Graft system and we expect U.S. launch in the first half of calendar year 2008. This will be followed by the U.S. launch of our Talent Thoracic product in the second half of calendar year 2008. Availability of the two Talent systems in the U.S. market will accelerate Endovascular revenue in fiscal 2009 and beyond. Finally, the first human implant of the Endurant next-generation abdominal stent graft occurred in early November and we expect CE Mark and launch of this product in the O-U.S. markets by the end of calendar year 2008.

Now, turning to our Neuromodulation business, revenue grew 10% to $320 million. Adjusting for the impact of the previously-announced divestitures of our diagnostic-related product lines, Neuromodulation revenue grew 16% in the quarter. The overall pain market continued to show robust growth and our global pain revenue grew 13%. Our movement disorders productlines grew 18% in the quarter, driven by the adoption of our Activa therapy for Parkinson's disease. We are pursuing activities to help drive patient referrals, including strengthening neurologists' understanding of the growing body of compelling clinical evidence. Growth in [gastro-neuro] continued to be driven by revenue from our InterStim productline, which increased 26%.

Looking ahead in the Neuromodulation business, we anticipate accelerating growth during the fourth quarter and into fiscal year 2009 driven by the launch of RestoreULTRA. We announced FDA approval for this product early in the fourth quarter and expect the first commercial implants in the U.S. to take place later today. RestoreULTRA will be the smallest and thinnest 16-electrode rechargeable neurostimulator on the market and will offer patients the ability to customize their pain control. It offers compelling technology that is unmatched in the industry.

Our Diabetes business grew 14% on new insulin pump adoption, a robust uptake in continuous glucose sensors and strong growth in markets outside the U.S. Even without widespread reimbursement coverage, continuous glucose sensor revenue is currently annualizing at nearly $60 million and we are building on this market-leading franchise. For example, in the first week of this quarter, we received FDA approval and launched the CGMS iPro, a new physician-use diagnostic continuous glucose monitoring system designed to help uncover patterns and potential problems that often go undetected with standard glucose measurements.

Going forward, we leverage two comarketing meter agreements we entered into with Johnson & Johnson LifeScan and Bayer earlier this fiscal year. Joint sales calls, comarketing events and other initiatives targeting patients using multiple daily injections are beginning to generate positive referral momentum. Last week, we launched our codeveloped blood glucose meter with Bayer, starting with initial shipments in the German market and we are on track for launching the LifeScan meter in the U.S. market later this spring.

Our Ear, Nose and Throat business grew 15% in the third quarter, driven by the successful launch of Fusion, an advanced new Image Guidance Surgery System to facilitate sinus surgical procedures, along with strong growth of power systems and nerve monitoring disposables outside the U.S. Now, regarding Physio-Control, our team continues to work with the FDA on appropriate corrective actions and we hope to resume full U.S. shipments as soon as possible. Finally, in terms of our geographic performance, our growth outside the U.S. was 20%, or 9% on a constant currency basis. Strong growth in our Diabetes and Spinal businesses of more than 25% was offset by the impact of Fidelis, particularly in Japanese market. China revenue increased 24% in the quarter, led by CardioVascular. We will continue our focus on geographic expansion as it remains one of the most significant opportunities for us in the long-term.

So, now, I'll turn the call over to Gary and then I will conclude with a few closing remarks.

Thanks, Bill. As you heard earlier, third quarter revenue of $3.405 billion grew 12%. Breaking this out geographically, revenue in the U.S. was $2.098 billion, up 7%. Outside the U.S. revenue of $1.307 billion increased 20%, including a $117 million positive impact of foreign currency. Net earnings for the third quarter, after adjusting for special charges, certain litigation charges and in-process research and development charges, were $713 million and diluted earnings per share on a non-GAAP basis were $0.63. GAAP earnings and diluted earnings per share were $77 million and $0.07, respectively.

The various charges in required purchase accounting for the Kyphon acquisition complicate this quarter's income statement. I will first provide additional details on the three charges that impacted our quarterly results, each of which is listed as a separate line item on the income statement. Then I will discuss in greater detail the impact of the Kyphon purchase accounting before going through the rest of the income statement. First, we recorded the required purchase accounting IPR&D charges of $310 million, comprised primarily of $290 million charge related to the Kyphon acquisition. In addition, there was a charge of $20 million related to the purchase intellectual property from Setagon Inc. Second, we recorded certain litigation charges of $366 million. $123 million related to the settlement of certain lawsuits relating to our marquee line of ICDs, which we announced previously, and a $243 million charge related to reserve established for litigation with Cordis. The Cordis litigation originated in 1997 and pertains to a patent infringement claim on a previous generation of bare metal stents that are no longer on the market. In January, the federal appeals court made certain decisions that necessitated the recognition of an estimate for our expected liability in this case. Third, we recorded a special charge of $78 million relating to the impairment of intangible assets associated with our benign prostatic hyperplasia productline acquired in fiscal year 2002. After carefully evaluating the development of the market relative to our original assumptions and analyzing our estimated future cash flows utilizing this technology, we determined that the carrying value of these intangible assets was impaired and a write-down was necessary.

Collectively, these charges, including the respective tax impacts, had a $0.56 negative impact on our third-quarter diluted earnings per share. In addition to these charges, there were two purchase accounting adjustments related to the Kyphon acquisition that had an impact on our quarterly results. First, we recorded $996 million in various intangible assets, which will be amortized over an average life of 10.5 years. The impact of this amortization was recorded in net other expense beginning this quarter. Second, a $34 million inventory adjustment, consisting of the markup of finished goods and work-in-process inventory that is required for purchase accounting, was fully amortized to cost of goods sold during the third quarter. This item was a third-quarter event only and will have no impact on future quarters.

Excluding the impact of IPR&D, there was a $0.05 dilutive impact in the third quarter of fiscal 2008 from the closing of the Kyphon acquisition. We expect another $0.02 to $0.03 of dilution in this quarter, earnings neutral in fiscal year 2009 and accretive thereafter.

Let me now turn to the rest of the income statement. As previously discussed, this quarter's gross profit margin of 74.4% included the $34 million charge for the fair value adjustment of the acquired inventory of Kyphon. This charge negatively impacted the gross margin by approximately 100 basis points. Looking ahead, we would expect a gross margin in the fourth quarter closer to 76%, with the potential for further improvements in fiscal year 2009. Third-quarter R&D spending of $329 million represents 9.7% of revenue, up 12.3%, compared to $293 million in the prior year third quarter. We continue to be very committed to investing in new technologies to drive future growth.

SG&A expenditures of $1.207 billion represents 35.4% of sales. SG&A as a percentage of sales, excluding the Kyphon business, was 34.5%. In the fourth quarter, we expect SG&A as a percentage of sales to be approximately 33% as we further integrate Kyphon and as investments, such as the buildout of the sales organization and preparation for the U.S. Endeavor launch, begin to pay off. We have several additional initiatives underway to leverage this cost structure even more as we enter FY '09.

Net other expense for the quarter was $119 million compared to $44 million in the prior year third quarter. This change is primarily due to $41 million in currency losses from our hedging programs, amortization of intangible assets related to the Kyphon acquisition and the prior year inclusion of $26 million of accelerated deferred income. The currency losses on our hedging contracts reflect the fact that the weak U.S. dollar has benefited the translation of the rest of the income statement, but we have hedged at less favorable rates. Looking ahead to the fourth quarter, net other expense will be further impacted by an increase in Endeavor royalty expenses recognized upon the sale of units in the U.S. market.

Net interest income for the quarter was $9 million, a significant decline compared to the $36 million in the prior year period, reflecting the utilization of cash balances to finance the Kyphon acquisition. As of January 25, 2008, we had approximately $3.3 billion in cash and cash investments compared to debt of about $7 billion. We generated in excess of $750 million of free cash flow during the quarter, defined as operating cash flow minus capital expenditures. Looking ahead, we expect our cash to continue to increase, however lower interest rates will negatively impact our return on this cash.

Let's now turn to our tax rate. In the third quarter, our effective tax rate was 42.77%. Excluding the tax impact of special charges, certain litigation charges and the IPR&D charges, as identified on the income statement, our effective tax rate in the third quarter was 19.84%. This rate includes a $30 million tax benefit related to the finalization of certain fiscal 2007 tax returns and the reversal of reserves for uncertain tax positions. Excluding this $30 million benefit, our third quarter effective tax rate would have been 23.25%, consistent with the rate in the first and second quarters of FY '08. Exclusive of onetime adjustments, we expect our fiscal year 2008 tax rate to be in the range of 23 to 23.5%.

Third-quarter weighted average shares outstanding on a diluted basis were 1.135 billion shares. During the quarter, we repurchased $564 million of our common stock, which represents over 11.4 million shares. As of January 25, 2008, we had remaining capacity to repurchase over 39 million shares under our Board-authorized stock repurchase plan. Going forward, we remain committed to continuing to return capital to shareholders while insuring a sufficiently strong balance sheet to execute on our strategies. This will continue to include opportunistic, but disciplined stock repurchase inactivities.

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

Let me conclude by commenting on analysts' estimates for the full 2008 fiscal year. As you recall, at the beginning of fiscal year we decided to limit our guidance to one year at a time and keep our guidance more directional in nature. Keeping that in mind, while looking ahead to the remainder of fiscal year, it is important consider the following two factors. First, we expect Medtronic revenue growth to accelerate in the fourth quarter due to the stability and gradual strengthening of the global ICD market, coupled with our return to more normal sales operations as Fidelis-related activities subside; launch of Endeavor in the U.S., launch of the RestoreULTRA neurostimulator; and the contribution of the Kyphon revenue. Second, as I mentioned previously, although we expect the Kyphon transaction to be earnings neutral in fiscal year 2009, we estimate it will have a $0.07 to $0.08 dilutive impact in fiscal year 2008, the bulk of which was recognized in the third quarter.

Current Wall Street fiscal 2008 earnings per share consensus is $2.52. Taking into account the above factors and the fact that our third-quarter earnings per share of $0.63 was above the quarterly consensus of $0.61, we would not be surprised to see fiscal year 2008 earnings per share consensus increase by $0.02.

We have assumed Physio-Control is included for the remainder of fiscal year, although we are committed to the eventual spinoff of that business. As in the past, all of my comments and assessments do not include any unusual charges or gains that might occur.

I'll now turn things back over to Bill, who will conclude our prepared remarks.

Thanks, Gary. Before we open it up to Q&A, let me make just a few closing remarks. While my first full quarter as Medtronic's CEO was characterized by some unanticipated challenges, in no way do these events change our long-term outlook for the opportunities we have to deliver market-leading performance. We operate in a dynamic environment. Looking ahead, it is clear. We need to continue to adjust our business model in several areas, recognizing that some of our prior year's assumptions have changed. We will focus on reallocating investments to those markets we see strong growth and streamlining other areas where market conditions have slowed. The near-term prospects are bright, with the Endeavor launch, Kyphon integration, Diabetes and Neuro momentum, steady growth in ENT and an ongoing emphasis on our O-U.S. markets. The focus going forward will be on relentless execution.

I look forward to our next conference call and the opportunity to further update you on our journey ahead. I would now like to open up things for Q&A. As Martha mentioned at the beginning of the call, Michael DeMane and Pat Mackin have joined Gary and me to address your questions. So, operator, first question?

(OPERATOR INSTRUCTIONS) Bob Hopkins, Lehman Brothers.

A couple questions. First on the ICD side, you mentioned that you felt in the quarter there were about $20 million of positives from filling a backlog and reversing reserves and then you mentioned there are also some negatives in terms of folks being very focused on reprogramming and the like. Could you identify the number related to that negative? In other words, you had a $20 million positive, I'm just wondering what the offset in the quarter was on the negative side.

Pat, why don't you maybe --

Bob, we're not going to get into specific numbers. I think the best way to look at this is when we were -- back on October 15 when we announced the Fidelis recall, we obviously knew there were some headwinds. We knew that we weren't in Japan with our Quattro lead. We realized we didn't have full supply of Quattro. We knew our field force would have to go out and reprogram a significant number of patients. I think the best way to look at the situation now is that we got our lead in Japan faster than you expected. We're back in that market with a very complete portfolio. We reengineered our supply chain like you saw -- you heard Bill talk about. We have full supply of Quattro.

Bill commented in the remarks about early in quarter, the first month the quarter, we did see our business impacted because our field was out refocusing on -- really focusing on patients and reprogramming those patients. We saw those -- basically, the business returned to a much more normal level later in the quarter, so I think net-net, we've come out of this much better than most of you expected.

Absolutely. I'm just curious, though, the $726 million number, given that there were some puts and takes, I'm just curious how we should, in your view, be looking at this number. Is this a relatively clean number, then, from which it builds over the next couple of quarters or, again, are there a few more negatives or a few more positives? I am just trying to get a sense for how clean the $726 million number is in your opinion.

Bob, this is Bill. It is a clean number. Other than what we gave you in terms of the roughly $20 million, that compiled both the reversal of some of the Fidelis credits that we had estimated as well as some of the Quattro inventories that we needed to restock. So other than that, I think you should look at it as a very clean quarter. So we feel very good about where we are and we are focused on moving ahead.

Bob, this is Gary. Just to add-on what Bill said, even as Pat mentioned, it is clean from that perspective, plus then we will have a situation that we are going to some of the inventory both in Japan etc. as we go-ahead now that there will be a positive. And plus, as you know, we also in our fourth quarter end up, just because the holidays, etc., end up having about five extra selling days compared to the Q3. So we always see an uplift just within our Q4, but other than the $20 million we mentioned in our comments, we think, overall, the rest the quarter was pretty clean from the number that we reported.

Okay, great. Then just one quick follow-up on spine. Bill, just some comments there in terms of what's going on in the U.S. and the competitive structure and on the core spine business, do you expect to return to growth as we go forward over the next 12 months?

Michael, do you want to maybe address that?

Sure, this is Michael DeMane Clearly, there have been some competitive pressures in the U.S. I think if you look at the business overall, O-U.S. is growing exceptionally well and our Biologics business continues to perform exceedingly well, given that product performance. So really, we're talking about the U.S. core business and admittedly, we are refocusing in that area. I think the there -- perhaps the sales organization in the U.S. as we go through a pretty substantial integration, there might have been a little bit of a stutter step, but I am confident that is going to come back and we are going to do quite well going forward. And it will return to a higher level of growth in the U.S. on the core business.

All right, thanks very much.

Mike Weinstein, JPMorgan.

I want focus, if I could, Gary, just on your comments on the Kyphon impact on the cost of goods sold and SG&A lines, because I might have missed some of that. You didn't break it out in the press release. You said the inventory step up, just to be clear, was that 100 basis points on the first margin line?

That is correct.

Then the Kyphon impact on the SG&A line?

It's about 100 basis point if you take out Kyphon. Kyphon has a lot of -- their operating overhead, especially in SG&A, was very high as separate company coming in, so that has added 100 basis points to our overall SG&A. As we go forward with the integration and start to get some of the synergies, you should start to see that being leveraged, but at this point in time, it added about 100 basis points to this quarter.

Was there anything that was one time in there? Kyphon is not a onetime event, so just be clear that the 100 basis points you were talking of step-up, by adding Kyphon into the fold, this is a complete picture, but there's nothing you are saying is one-time in your SG&A line this quarter?

That is correct.

Given that, you do expect to get SG&A down to 33% of sales in the April quarter.

Yes, we do. As I mentioned in our comments, there's a couple things that obviously are impacting the SG&A more this quarter. One was just Kyphon, which we would expect to leverage and to get the synergies out. The other is, obviously, we had all the expenses in place, all the people, all the salesforce marketing, etc., related to Endeavor. Without being launched in the beginning of the fourth quarter and having no benefit of the revenue in the third quarter, that clearly, obviously, impacted the third quarter's percentages. As we get into fourth quarter, here, you'll start to see the leverage of that launch having an impact on the SG&A line. Plus we do have several other initiatives across the Company that we have put in place that we are going start to see some of the benefit as we get into the fourth quarter and into FY '09.

With that in mind, one thing you haven't touched on in a couple calls because there has been so much going on is the SAP system you put in place in the U.S. I think September 1. Could you just update on that and what type of impact that might have on margins going forward?

Yes, with respect to SAP, as we've talked about it and discussed it, I think even at the analyst meeting last year, we indicated that our IT costs as a total company had been -- actually had got to the point of being about 4% of revenue, which was above where you would normally expect to see a company like ourselves at.

A lot of that had to do with the investment we were making in SAP across the organization. We have now went live on SAP really in about 85% to 90% of our businesses, so that is all in place and working relatively well. As you can imagine with any new systems implementation, there continues to be a few issues here and there on reporting and some things that we are working through. But overall, we have not had any major business disruptions as a result of that.

It has increased our cost a little bit just from the standpoint of having to deal with the training and education and getting people up to speed and understanding the system. So we haven't got the productivity of the system yet from the standpoint of what it would do as far as reducing SG&A.

Going forward, we would expect our IT costs, as we've indicated, will start to drop. And we have a goal of getting the IT cost down to around -- actually, less than 3%, around 2.5% to 2.6% of revenue over the next year to 18 months. So there's a lot of steps in place, but the investment has been made. Now we need to see the payoff and the leverage.

Okay, last question and I will drop. Bill, you were not specific this time just on Physio-Control and the timing of the resumption of full shipments in the U.S. Do you know what the timing is now of the FDA inspection?

Well, we're still hoping that we can get this done by the end of the fiscal year. That is where we are working to, but in dealing with the FDA, you can't ever really pinpoint an exact timeframe, Mike, so that's why. We are moving forward, the FDA has come in recently for their inspections, so we are working through that right now and, as I said, hopefully we will be able to be back in full swing before the end of the fiscal year. But don't be kind of nailed down to that date, because, again, working with the FDA on this.

Understood, thank you.

Rick Wise, Bear Stearns.

Sorry for the scratchy voice here. Going back to Endeavor, can you helps understand a little bit the Endeavor/RESOLUTE mix O-U.S. and maybe a little more granularity on your Rx version as you are initially launching Endeavor in the U.S.

So you're talking about the O-U.S. sales, Rick?

O-U.S. first and then, again, just initially in the United States, are you see much use of your version of a rapid exchange? The MX(2) I think it's called, right?

Yes, that is correct. O-U.S., I believe our mix -- clearly in the Western European markets, we have both products available and we find it to be a really compelling value proposition. We would say two-third/one-third Endeavor/RESOLUTE in that area.

In terms of the rapid exchange, clearly we do have a slight impediment without the rapid exchange in the U.S. But we've found that our customers really do want the safety profile of Endeavor and they are adapting and adapting well. So we are still pretty optimistic.

One other thing, Rick, that we've found is that with the Endeavor, the advantages of the chromium cobalt driver platform and the deliverability of this really in many cases sort of offsets many of the issues that you have with maybe the MX in itself. So as I said, I was out last week traveling in many accounts and was very encouraged by what I am seeing. But again, is too early to really make any strong predictions, but we will see at the end of the fourth quarter.

Okay, just two other quick ones. Obviously it's important that you have a single-coil ICD catheter. Can you help us quantify in some kind of way how significant it is or what percentage of the U.S. market that that might be that you are, in a sense, sort of excluding from short-term? And on Neuro, you talked about -- obviously you grew 16%, very good number, and you talked about accelerating in the fourth quarter beyond, which I assume is the Restore impact. Does this -- does the business as it currently exists continue to grow at a midteens rate and Restore is on top of that? Maybe you could help us understand a little bit about the opportunity for Restore and what that could do incrementally? Thanks so much.

Rick, this is Pat. As far as the single-coil, the mix is less than 10% in the United States and typically, it's kind of a one-off situation. Whereas in Europe, it can run roughly 30% and as Bill made in his comments, we saw some system impact there. So clearly that's a high priority for us and we are planning to launch that product in the first quarter FY '09?

On the neuro front?

Real quickly on the Neuro front, the good news about Neuro, the pain stem state market, if you look at this quarter, again grew in excess of 20%. It is annualizing at over $1 billion, so in fact, if you look at our performance, which was not a bad performance, we actually lost a little bit his share this past quarter. So with the RestoreULTRA, we think that is going to give us the opportunity to recapture some share and if we can continue to grow the market at 20%, I think that bodes well for us.

Very helpful, thanks, Bill.

Glenn Reicin, Morgan Stanley.

Thanks for reporting in the morning. I really appreciate it. You talked a little bit about what happened sequentially with respect to reserve reversals and ICDs. Can you just give us a sense of what the change was sequentially due to bulk orders?

Glenn, this is Gary. Just real quickly, the bulk orders, basically, for the quarter returned -- they were above what we obviously had in Q2 where they had been significantly lower. They returned to kind of our historical levels and the inventory levels, then, as a result, in the field, in the hospitals, from what we can tell basically were basically pretty consistent with what we saw at the end of Q2.

Is there any way of quantifying it? Just be flexible. If you say, like, from a share perspective last quarter, share was depressed because of this. Obviously it was enhanced this quarter. If you want to give us a dollar number, just any way of quantifying it.

Well, I would argue that the share wasn't enhanced this quarter. It was obviously versus Q2. I think as we have said before, again, the inventory levels in the field are basically at the levels consistent where they were at in the Q2 and so we didn't see any benefit from that aspect in this quarter. But you obviously saw, as we have said before in our Q2 results, they were negatively impacted. Our margins -- our share was negatively impacted at that point in time, but at this point, I don't think there's any impact on share other than, as we tried to clarify, there was the $20 million of reserve reversal and Quattro inventory, lead inventory that we did build up here during the quarter. So that is the impact in the quarter from a share perspective from what we can tell.

Okay, I was just looking like at domestically, the $60 million of sequential increase, any way of just looking at that as being the bulk of -- is that mostly bulk orders or is that more having to do with the $20 million reversal?

Again, I think it depends on what -- if you're looking at sequential, you are comparing against a quarter, last quarter, where, as we talked about, we were not able to fill some of the bulk orders that we had at the end of the quarter because of the lack of Quattro supply at that point in time, so you are comparing against a quarter that was unusually low. If you compared against a normal quarter prior -- pre-Fidelis, basically what we saw in this quarter was consistent with what we would have normally seen from both bulk purchase orders and obviously implants during the quarter. Pat, you can add on --

I think, Glenn, there was obviously a lot of things happening in the quarter. I think the easiest way to look at this is that if you take the $20 million that Bill talked about, the two reversals we talked about, and move that back into Q2, and Gary's comment about inventory's really did change out there. So other than that, it is a pretty normal quarter.

Okay, crystal clear. Two other just follow-up questions here. Just conceptually, when do you think you're going to have a seven [French lead] back in the U.S.? Are we talking about three years from now, never, five years from now? Then on the Spinal side, maybe Mike can talk a little bit about this PRESTIGE. When do you start to reevaluate the potential for that product, given the slow start? And are you willing to size that up right now five years out?

This is Pat, I will take the first one. Obviously this is something we are working on a smaller body lead. We have obviously had a product in the market. We know a lot about the system. We've got a full team in place working on this now. I think the one thing we can't predict is what the regulatory environment is going to look like here in the U.S. We obviously want to make sure that our next product we come back has got the highest level performance and reliability. Our goal is targeting FY 10 for Europe and soon thereafter, later in the fiscal 10 timeframe for the U.S.

Glenn, this is Michael. On the PRESTIGE, clearly we are still fighting a reimbursement battle there and we have decided to do that on a case-by-case basis. That is -- reimbursement really is important in cervical arthroplasty. The reason being when patients present, they are in excruciating pain and they were really want to be fixed fast. They are debilitated and if there's a very long wait to get a reimbursement answer, sometimes the opt for the traditional procedure. So that is a really critical barrier for us and we've got to get over that and we have the resources in place. I think we have demonstrated in the past that we can do that and work through those barriers and we intend to do so.

Now, in terms of scoping it out long-term, just understand that we do look at cervical arthroplasty or motion-bearing in general as a continuum and this is not our only product. We have a next generation product on deck right now, which is the PRESTIGE LP, low-profile. We also have the [Brian] arthroplasty product that we expect to have within the next 12 months. So when you put it all together, we do see having a portfolio of products to address this and also having the reimbursement barriers removed so the patients can be treated with this advance rapidly.

Is it fair to say that without Kyphon the whole cervical spinal disk area will -- is expected to be -- or the largest growth driver will be that spinal disk area?

I think is hard to make that statement. I would say that I think there is an overarching trend towards non-fusion or motion sort of therapies and I think that would be correct. And it can be in lumbar, even though the lumbar options that are on the market now haven't met with great success for some of the reasons that I think you know quite well. I do think that we can address that market and between the cervical and lumbar and the use of therapies such as [Diom] and [next stop] I think we will have a pretty good motion portfolio that can move the ball forward.

Thank you.

Michael Jungling, Merrill Lynch.

I have three questions. Firstly, can you give us the constant currency growth rates for the third quarter in CIDM, Spine, excluding Kyphon, Neuromodulation and Diabetes? Secondly, what is your appetite for making another large acquisition? The third question is if I look at your valuation today, there appears to be a meaningful discount to companies in medical devices that have got inferior constant currency sales growth, inferior margins, but you trade at a discount? What do you think the market does not appreciate or not like about your business model? Thank you.

You had a lot in those three questions. First of all, let me kind of get to the first one with respect to the constant currency on the various business pieces. As we mentioned in our comments, the overall foreign currency impact was $117 million in the quarter and I don't have the details to break out by business where that is at and I don't know whether we were even providing that at this point in time as we went through it. So I don't have that in front of me to even give you the break out there.

Maybe I'll take the third question you had there, kind of on next and Bill can kind of respond to it also. What is the market missing? I think -- I agree with you. I think overall we continue to perform very, very well on the revenue growth and we have a lot in front of us from the product perspective and we are in some very good markets that provide some real opportunity to continue to grow this business on the top line. We do have the opportunity for some operating leverage. Now we have to have that come through and I think has been kind of complicated over the last couple of quarters as a result of the Fidelis and even the Kyphon acquisition kind of complicates what the income statement looks like. So I don't think people are realizing what that potential is as we move forward, but as we start to show that, I think you will start to see the investor base understand overall what our growth opportunities are not only in the top line, but overall in the bottomline. As we can show that we can execute against that overall plan. I think those are -- you're right. I think we're not getting the message out yet as far as what the real opportunities are and that is what we have to continue to focus on.

Let me just add, you asked specifically about acquisitions. You know, first, we feel very good about the lineup of our products and businesses right now, as we have tried to articulate in this call with, again, with Endeavor, with Kyphon, with the Neuromodulation business. So we have gone a lot to work on and as I said, our focus is going to be on relentless execution going forward.

In terms of acquisitions, we are -- we will continue to look to find those sort of tuck-in deals that could strengthen current franchises and we will be opportunistic in terms of anything that would be larger than that. Right now, our focus is very much on the relentless execution of the opportunities that we see with businesses I've talked about as well as we've got some internal things that we've talked about in previous calls that we continue to be excited about. The hep-C opportunity, the gabapentin opportunity, some of the things with post-op pain. So there is a lot to work on right here are in the walls of Medtronic.

I'm kind of bit concerned, so over the next 12 months, only bolt-on acquisitions, but nothing of a larger magnitude?

Again, I'm not going to be that specific. Again, I can tell you our focus is what I described and it is on the relentless execution of our current businesses.

Great, thank you.

Bruce Nudell, UBS.

First two questions just pertain to ICDs. Is it fair to assume that we won't expect any further revenue re-reversals, as it were, and just from your prospective absent a seven French lead, do you think there will be much share pressure over the next 12 months in the U.S. and O-U.S.?

Well, let me take the first one, as far as just revenue reversals, etc. that we might see in Q4. I don't think there will be anything of any significant, Bruce. There's still some things that we will be cleaning up with respect to the Fidelis credits and will have to see whether their Quattro inventory supply might go a little bit higher in some accounts, but it will be much less than the $20 million that mentioned this quarter. And so it is not going to be anything of any significance in Q4. I don't know what it would be at this point, but it would be much less than that going forward.

Bruce, this is Pat, regarding your question about share pressure. I think all of our competitors are interested in our position and I can tell you we're launching 25 products that we've been developing over the last several years. We've invested hundreds of millions of dollars in new devices, new delivery systems, new data systems. We're launching them as systems. We have phenomenal portfolio coming to the marketplace and we will aggressively defend our position and opportunistically go after share. So I guess we'll see.

Bill, I have a strategic question for you. I think the U.S. ICD market this year, assuming that all the reversals netted out this quarter was down 2%, the O-U.S., constant currency, I think was 13%, down from 22% the year before. The stent market, not speaking of your place within it, is kind of more of -- when you look the product portfolios you have across a very wide range of businesses, do you think with kind of the businesses you've got in hand that you could grow the top line at 10% sustainably? And just as a little twist to that, it looks like you're dipping your toe into orthopedics in China. Is this an area that is an eight to 10% market. Is that a market worldwide that might be of interest you?

First, in regards to the question about growth, yes, we do think we have the portfolio that would enable us to grow in that, if you will, high single digits, low double digits, that nine to 11% kind of a range. Okay, we got -- the CRDM market is still a very important business for us and we have -- what we have said in the past and I think it's still valid going forward is that we think the market to grow in sort of the mid to high single digits, somewhat like we've seen in the pacemaker business.

And then on the vascular or the CardioVascular space, look, we've got some stair steps left in that market with the U.S., which is our focus now, but then Japan next year or so, so -- and who knows what's going to happen beyond that. So this is a very dynamic market and we are all looking for ways to extend the benefits that you get with minimally-invasive vascular intervention.

So I wouldn't write off any of those markets, but -- the other one is endo, the whole endovascular business, which is kind of a little bit of a sleeper, is we've been quietly building that market. Now with the Talent AAA and the Talent Thoracic, we have I think some legs left to go there. So I think overall, Bruce, we feel very good about the internal forces that we have that can enable us to deliver market-leading performance and we think that is in that sort of around 10% kind of a range.

On the orthopedics question, we are excited about the opportunity to learn more about that business outside of the U.S. and China and we think it's going to strengthen or Spinal franchise and give us a chance to really present ourselves as more of a local company. Again, as I said, we think that China could be the biggest market outside the U.S. in the next ten years, so we're taking the appropriate steps to position ourselves in that regard.

I guess structurally the orthopedics, major reconstructive, any 7 to 10% market, is that simply kind of below what you would need to see in this space to get interested in it?

I don't think that would be the reason we wouldn't get into it. I think there's -- it has been a solid performer for a long period of time and if you look out going forward with the demographics, the aging of the population, the fact that it's got a fairly good value proposition and its less subject to people deciding that clinical trials would tell you that you should put a hip in. I think people are going to be putting hips in and knees in for a long time to come. So I think it's a good market for those who are in it.

Thanks so much.

Joanne Wuensch, BMO Capital Markets.

In terms of Endeavor outside the United States, you commented that your volume share was 20%. Can you give us a feel for what you think your dollar share is?

That was the -- it was more of the dollar share.

So you think the dollar share is --? Let me ask the question a different way, then. What is your volume share?

We're not going to -- I'm not going to go there, but if you look today and combine bare metal and drug-eluting stents, I would submit that we are close, if not the market leader, outside the U.S.

Okay, in the United States, can you give us an idea of where you were pricing and how you're thinking of selling the Endeavor and your initial marketing plans for that?

Well, as we all know, in the U.S. it is a highly-competitive market and I would say that we have a good product. We are confident of the product and we are going in aggressively. We need to get into a lot of accounts. I can't say we are going in as the, if you will, the value leader. On the other hand, we are going to be very competitive in all the accounts. So I wouldn't say that we are going in at a particular price point, but we are remaining flexible in order to gain entry to large accounts.

I also need to say that we are off to an exceptionally strong start, as Bill mentioned in his introductory comments. I think our customers are finding the product to be, in addition to the safety profile, superb deliverability and that is allowing us to take those accounts.

Yes, operator, we will take one more call. I want to be mindful of the time, so one more call.

Tao Levy, Deutsche Bank.

A couple questions. One, I was wondering if maybe you could comment on the pricing trends in the U.S. ICD market and also if you could just venture to give us a sense of how you felt the ICD markets grew both in the U.S. and internationally in sort of the calendar fourth quarter now that you've seen the other companies reports.

Yes, first on the pricing on the U.S. ICD markets, fairly stable as we reported last quarter. Really not a lot of movement. As far as the market growth, again notwithstanding the comment, if you don't make any adjustment for $20 million that Bill alluded to that should probably be back in Q2, the U.S. market grew at about 2.5% and the international markets grew at over 20%

Did you expect those to continue at similar rates?

I think we've seen -- I've seen in U.S. -- I think we've seen a couple quarters in a row of low single-digit growth in the U.S. and outside the U.S., we've seen in the 15 to 20 range.

Just for Gary, a quick clarification. On your guidance, does that include the tax benefit that you had this past quarter?

Yes, it would. It would include that. From the standpoint, obviously, not relate to the onetime items, but, yes, the tax benefit would be included in that numbers.

Okay, just lastly, the situation in France, is Xience still enjoying there and would that also have an impact on [promise] just because Boston had made a comment on their earnings call that they expect to launch promise in France in the near future?

As you know, we've been in court with our evYsio patent in France. We do think that Xience does infringe. We have heard that there may be a design around, but we have yet to see [and site] the product at this time. So we need to simply hold judgment on that until we see it and make an assessment, but we feel that our patent coverage is broad, so we look forward to that assessment.

Okay, maybe just a couple comments. While, as I have said in the past, there are many moving parts in a company of our size, the sum total of those parts is poised to do what we do best, and that is to serve more patients. We are confident that the ingredients are in place for us to deliver top-tier performance in the years ahead and our heightened efforts to identify pan-Medtronic cost synergies will allow us to fund new product opportunities that are essential to serving more patients while generating leveraged earnings growth.

So now, on behalf of our entire management team, many thanks again for your interest and continued support. Stay tuned. We will look forward to seeing you at the end of our fiscal year.

Ladies and gentlemen, that does conclude our conference today. You may all disconnect and thank you for participating.