美敦力 (MDT) 2009 Q2 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 second-quarter fiscal 2009 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). I will now turn the call over to Mr. Jeff Warren, Vice President of Investor Relations. Please go ahead, sir.

Thanks, Dennis. Good morning and welcome to Medtronic's second-quarter conference call and webcast. During the next hour, Bill Hawkins, Medtronic's Chairman and Chief Executive Officer and Gary Ellis, Chief Financial Officer, will provide comments on the results of our second quarter, which ended October 24, 2008. After our prepared remarks, we will be happy to take your questions.

A few logistical comments. This call is being webcast by 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 25, 2008 filed with the Securities and Exchange Commission. We encourage you to review this carefully. All statements are made as of today's data 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 second quarter fiscal year 2008. And with that, I am now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Bill Hawkins.

Well, good morning and thank you, Jeff. Let me begin by acknowledging upfront that our second quarter was unusually turbulent on several fronts as we dealt with a number of factors that affected our overall performance. Public health notice issued on the use of bone morph genetic protein and the cervical setting, along with the related negative press coverage and payer pushback created some significant new hurdles. Competitive launches resulted in some share loss and macroeconomic pressures also negatively impacted some of our businesses. Internally, we have production issues in both neuro and physio. Finally, our financial results this quarter were complicated by a number of puts and takes up and down the P&L.

On the positive side, our diversified global portfolio enabled us to partially offset many of the challenges as reflected in our revenue growth and operating leverage. Our diversified portfolio is unique in the industry and continues to differentiate us in the market. Revenue growth of 14% during the quarter was driven by the launch and ongoing success of a series of new products across our portfolio. We also continued to see strong growth in our OUS market. In these challenging economic times, healthcare remains resilient, stable and viable and the fundamental health of our business remains strong. Very few of our therapies are used in elective procedures. Our balance sheet is well-capitalized with $3.6 billion in cash and investments and we continue to generate significant free cash flow.

Turning to the income statement. Although revenue fell short of our expectations, we continue to deliver meaningful operating leverage. Looking ahead to the back half of the fiscal year, we are confident that by executing across our globally diversified portfolio, we can continue to generate strong double-digit earnings per share growth.

Turning to our financial results. Second-quarter revenue of $3.570 billion increased 14%. Earnings and diluted earnings per share on a non-GAAP basis were $758 million $0.67, growing 14% and 16% respectively. It is important to note that these results include a $40 million, or $0.03 earnings per share charge for inventory made obsolete by the launch of Rapid Exchange products in the US. Excluding this obsolescence charge, non-GAAP EPS would have been $0.70. On a non-GAAP basis, we were encouraged to achieve operating income growth of 25%, reflecting the ongoing impact of our operating leverage initiatives.

Now for more color on each of our business units starting with CRDM. Global ICD revenue grew 13% to $724 million, consisting of US growth of 9% and OUS growth of 23%, including a $14 million positive impact of foreign currency. After adjusting for the impact of Fidelis in the prior year comparable period, our data suggests market growth in the US continues to fall at that low end of what we would have expected to see by now. However, we are investing in market development activity and remain committed to doing the things necessary to return solid growth to this important market.

Additionally, the first major product launch in several years from one of our competitors created modest share pressure early in the quarter as some customers chose to evaluate the new product. Although replacements continue to provide some tailwind for our ICD business, the impact is gradually weakening.

Looking ahead, our focus will continue to be on relentless execution to protect and grow our marketshare. Net net, we still believe the worldwide ICD market will continue to grow in the mid to high single digits.

Turning to pacing systems, worldwide revenue in the second quarter grew 2% to $506 million. The US market was essentially flat; although our revenue was down slightly year-over-year. OUS pacing revenue grew 8%, slightly slower than market growth. Global ASPs were down modestly in the quarter, consistent with historical trends.

Looking ahead to the remainder of the fiscal year, a number of new product launches will increase momentum across our CRDM portfolio, including the Vision 3D and the Attain StarFix left ventricular lead, a single coil Quattro lead in markets outside the US, the Lead Integrity Alert software, a new CareLink user interface, the MRI SureScan pacing technology in certain OUS markets and contribution from the recently closed CryoCath Technologies acquisition.

Now turning to our Spinal business, revenue of $829 million grew 26%, including $146 million in revenue from Kyphon. Excluding Kyphon, Spinal growth in the quarter was 3%, well below our expectations. The biggest miss was Kyphon where softness in the quarter was driven primarily by execution issues on our balloon kyphoplasty sales and marketing initiatives, compounded by new competitive pressures. We are executing on a number of actions to immediately turn this around, including implementing more aggressive management oversight around sales performance, refocusing market development and position training programs, launching a new cement delivery system, which will be a major enhancement to our existing BKP productline and more aggressively leveraging cross-selling opportunities between the Kyphon and CoreSpine field organizations.

Turning to X-STOP. On a sequential basis, US revenue grew 14%, returning to pre-acquisition levels. These results reflect the progress we are making on a number of initiatives related to relaunching the X-STOP, including developing sales tools to help surgeons better select patients and optimize their procedural technique, leveraging five-year clinical data presented at NAS, capitalizing on the launch of Aperius in Western Europe and launching X-STOP PEEK in the US. The revenue in CoreSpine of $485 million grew 5%. This growth was consistent with what we had previously forecast.

As we have discussed, Steve La Neve and his team are executing on our planned strategies to address the challenges we face in this segment of the business. Although there are no silver bullets or quick fixes, we continue to make good incremental progress.

The biggest surprise in the quarter was the result in our biologics business where revenue of $198 million was flat. These results reflected the impact of several external factors, including the FDA public health notice regarding the cervical use of bone morph genetic protein, several negative stories from the news media and a recent whistleblower lawsuit filed against a number of spine surgeons. These issues are unfolding against a broader backdrop of increased scrutiny regarding off-label use of medical devices in general. In fact, we recently received a subpoena from the Department of Justice looking into off-label use of INFUSE. For years, Medtronic has had strict guidelines in place on appropriate promotion of products according to labeled indications. We are complying appropriately with the DOJ's request.

Overall, we are working on a number of fronts to try to minimize the impact of these factors, including marketing two recently approved, smaller kit sizes of INFUSE for use in approved oral maxillofacial indications, exploring alternate distribution channels to further accelerate growth in OMF and trauma, investing in our global infrastructure to fuel international growth and advancing several clinical trials that are designed to expand the indications for INFUSE to post (inaudible) lateral, cervical and multiple level fusions.

Our CardioVascular business delivered solid results, growing 22% on revenue of $596 million. Coronary and peripheral product growth of 29% was fueled by $151 million in DES revenue, including $57 million in the US. Average Endeavor marketshare in the US during the quarter was approximately 12%, reflecting pressure from launch activities associated with two new competitive products.

On October 29, the injunction preventing our use of the Rapid Exchange delivery system terminated as ordered by the federal court in San Francisco. As a result, we have announced the commercial launch of five new angioplasty products on Rapid Exchange in the US, including Endeavor Sprint, which incorporates a new tip design, a new balloon material and an enhanced [chas] design to offer unsurpassed deliverability. We expect that the commercial launch of Rapid Exchange angioplasty products will increase our marketshare in the US.

Our Endovascular business had another strong quarter with revenues of $95 million and growth of 36%. Growth in the US of 38% was fueled by the recently launched Talent Abdominal and Thoracic Stent Grafts. Growth outside the US of 33% was driven by the launch of our next generation Endurant abdominal stent graft. Structural heart disease revenue of $74 million grew 6% driven by growth in tissue valves in our OUS markets and strong growth in our AF technologies business.

Revenue in our revascularization business grew 7% driven by a series of new product introductions and OUS growth of 15%. Neuromodulation growth of 7% was slower than expected, reflecting the impact of a process-related issue in the manufacturing of our drug pumps, which affected our pain and intrathecal spasticity businesses worldwide. We addressed this issue late in the second quarter and we are in the process of returning to normal production rates and field inventory levels.

The worldwide market for pain management continues to show strong growth. Pain stim revenue growth of 9% was highlighted by continued momentum from our RestoreULTRA spinal cord stimulator, still the thinnest pain stimulator in the market in our 565 surgical lead. Movement disorder productlines grew 12% in the quarter, 0driven by 20% growth in our Activa DBS therapy for Parkinson's disease and essential tremor. Strength in Activa was offset by softness in our intrathecal baclofen productline related to the previously discussed drug pump manufacturing issue.

Revenue from gastro/uro products grew more than 25%, driven by another strong quarter from InterStim. During the quarter, we announced the submission of our PMA for InterStim therapy for the treatment of fecal incontinence, a condition affecting over 5.5 million Americans. Fecal incontinence currently makes up approximately 50% of our InterStim sales in Western Europe and promises to be an important avenue of growth for this business going forward. We anticipate the US launch of this therapy early next fiscal year.

As we have stated, we have increased our investment in R&D in neuromodulation and are making good progress on advancing several new therapies. Later this quarter, we anticipate obtaining a humanitarian device exemption for deep brain stimulation to treat obsessive-compulsive disorder, commencing our randomized trial evaluating DBS for depression and sponsoring the presentation of data from the SANTE trial evaluating DBS for treatment of epilepsy at the American Epilepsy Society meeting in December.

Diabetes revenue of $272 million grew 11%. Durable pump systems, consisting of both pumps and consumables, grew 7%, driven by strong performance in many markets outside the US where we've continued to gain marketshare.

CGM Systems had another quarter of exceptional growth. These areas of strength helped to partially offset several factors that pressured our overall growth during the quarter. First, given the relative importance of consumer pay to new pump placements, the stronger than anticipated economic downturn negatively impacted new pump growth.

Second, as we have previously discussed, our pump business is currently in a negative replacement cycle. Finally, although we are facing intensified competition in the US, we remain confident in our plan to protect our market position and further strengthen it via new product launches.

Looking ahead, we continue to leverage three new product introductions in the remainder of the fiscal year to drive growth in diabetes, including the iPro physician use continuous glucose monitoring and diagnostic system, the [X23] pump in the US and the [X54] pump outside the US. Our Surgical Technologies productlines once again had a very good quarter as revenues grew 15% to $213 million. Growth was highlighted by the fusion image-guided surgery system, nerve monitoring and strong sales of the [OR] Navigation System coupled with strength in service contracts in international.

Physio-Control revenue in the quarter of $75 million was impacted by a product availability issue that negatively impacted revenue by $15 million to $20 million. Although we have addressed this issue, we will remain somewhat supply-constrained for much of the third quarter. In the meantime, we continue to make progress working with the FDA towards resuming full shipments. Our intent to spin off this business remains unchanged.

Now turning to our international performance, we had a strong growth in the quarter across many of our international markets. Revenue from markets outside the US grew 18%, or 12% on a constant currency basis. Growth was led by the exceptional performance from many emerging markets, including China, Central and Eastern Europe, Middle East and Africa and Latin America, which all had revenue growth of more than 20%.

Productline standouts include endovascular revenue growth of 33% and ICD revenue growth of 23%. The successful start of commercial operations within our Weigao joint venture in China represented another highlight of our international results.

[Beyond] the revenue performance for the second quarter running, we made solid progress on driving meaningful operating leverage in order to achieve our stated financial objective of EPS growth of 11% to 14%. Non-GAAP operating income growth of 25% clearly reflects this progress. A key component of our overall operating leverage initiative is to reduce cost of goods sold by $1 billion by fiscal year 2012. We achieved $175 million of savings in FY '08 and we are on pace to deliver an additional $180 million of savings towards this goal in FY '09.

Some examples of initiatives that have contributed to these savings include transferring more diabetes and spine production to Puerto Rico, outsourcing a wafer fabrication production line, leveraging our collective purchasing power via targeted commodity teams, vertically integrating several suppliers, driving lean manufacturing initiatives, most notably in our coronary stent production lines where we have saved nearly $70 million and outsourcing diabetes logistics operations.

Looking forward, we will continue to drive savings and cost of goods sold using lean sigma and design for manufacturability. We are also identifying additional strategic manufacturing locations that will advance our long-term leverage goals. For example, we recently began development of a new manufacturing site in Singapore, which will help drive global operating efficiencies while providing an increased strategic presence in Asia.

We are also progressing with SG&A leverage initiatives, many of which take advantage of our SAP platform. With the implementation in Asia during the quarter, SAP is now fully implemented across the enterprise and we can now begin assessing many of our core functional activities to identify opportunities to reduce costs and create operating leverage. SAP provides the foundation to leverage our existing cost infrastructure via more efficient sourcing and procurement functions, increased standardization of global supply chain functions and implementation of more robust guidelines governing many aspects of discretionary spending. I will now turn the call over to Gary and after his comments, I will conclude with a few close closing remarks.

Thanks, Bill. As mentioned earlier, the second-quarter revenue of $3.570 billion grew 14%. Breaking this out geographically, revenue in the US was $2.196 billion, up 12%. Outside the US, revenue of $1.374 billion increased 18%, including a $65 million positive impact of foreign currency.

This quarter's financial results are complicated by several one-time charges and unusual items. I will try to reconcile some of these items to provide a better understanding of our true operating results. GAAP earnings and diluted earnings per share of $571 million and $0.51 respectively. After adjusting for certain litigation, after-tax charges of $176 million, or $0.15 per share and in-process research and development after-tax charges of $11 million, or $0.01 per share, second-quarter earnings and diluted earnings per share on a non-GAAP basis were $758 million, and $0.67 respectively. On a non-GAAP basis, earnings and earnings per share grew 14% and 16%.

As Bill mentioned, it is important to note that these results include a $40 million or $0.03 earnings per share charge for the writeoff of CardioVascular inventory. Excluding this obsolescence charge, non-GAAP earnings per share would have been $0.70. I will provide additional details on the two charges that impacted our quarterly results, each of which is listed as a separate income statement line item.

First, we recorded certain litigation pretax charges of $266 million. Of this, $229 million related to final judgment in litigation with Cordis pertaining to a patent infringement claim on a previous generation of bare metal stents that are no longer on the market. The charge this quarter is in addition to the $243 million reserve recorded in the third quarter of fiscal year 2008 related to this same litigation and the total of $472 million was paid in the second quarter. The balance of certain litigation charges this quarter is a $37 million pretax charge for the settlement of litigation related to our royalty agreement dispute in our spine business.

Second, we recorded an IPR&D pretax charge of $18 million that represents the purchase of certain intellectual property for use in our spine business.

Before turning to the rest of the income statement, there are four additional items not broken out specifically on the income statement that impacted our quarterly results. First, as discussed, we wrote off $40 million of inventory in our CardioVascular business made obsolete by our launch of angioplasty products on a Rapid Exchange delivery system in the United States. This writeoff resulted in a $0.03 earnings per share charge and was recorded in cost of goods sold.

Second, we recorded a permanent impairment charge of $18 million on our $3.6 billion marketable securities investment portfolio due to the decline in the current market conditions. This $0.01 after-tax charge was included within net interest expense. To date, we have effectively managed the exposure of our investment portfolio to the financial crisis and we will continue to manage this closely.

Third, the previously discussed production issues in neuromodulation and Physio-Control each had a negative impact of approximately $0.01 on the quarterly results. And lastly, in October, the US Congress retroactively extended the research and development credit, which resulted in a $16 million cumulative catch-up benefit that was recorded in the second quarter. This $0.01 benefit was included within the provision for income taxes.

Turning to the rest of the income statement, the gross profit margin was 75.3% compared to 73.1% in the second quarter last year. Gross margin was positively impacted by favorable foreign currency, overall efficiencies in manufacturing of product due to increased volume, ongoing initiatives to reduce costs and a benefit of approximately 60 basis points for the impact of Kyphon. The writeoff of CardioVascular inventory negatively impacted the gross margins by over 100 basis points.

In the comparable period last year, the Fidelis field action negatively impacted the gross margin by approximately 150 basis points. We continue to expect our gross margin to be slightly above 76% for the remainder of FY '09 as we continue to see the benefits of the broad portfolio of initiatives that we have underway to reduce our cost of goods sold by $1 billion by fiscal year 2012.

Second-quarter R&D spending of $326 million increased 9.4% compared to $298 million last year and represents 9.1% of revenue. Consistent with the first quarter, second-quarter results includes a reclassification of approximately $12 million of certain legal and patent expenses from R&D to SG&A. Before this reclassification, R&D would have been approximately 9.5% of revenue, up 13%. We remain committed to investing in new technologies to drive future growth and going forward, we anticipate R&D spending will approximate 9.5% of revenue, including the ongoing reclassification.

Second-quarter SG&A expenditures of $1.263 billion represented 35.4% of sales, similar to last year. Kyphon had a 60 basis point negative impact on the current quarter and SG&A without Kyphon would have been 34.8%. In addition, the R&D reclassification I previously mentioned increased SG&A expense in the quarter by approximately 40 basis points. SG&A without Kyphon and the reclassification would have been 34.4%. As we outlined at our institutional investor and analyst meeting on June 2, we have several initiatives underway to further leverage this cost structure over the remainder of the fiscal 2009 and into the future.

Net other expense for the quarter was $143 million compared to $72 million in the prior year. The year-over-year increase primarily reflects the amortization of intangible assets related to the Kyphon acquisition, as well as increased Endeavor royalty expense recognized on US sales. Also included are currency losses from our hedging program, which were $41 million during the quarter compared to a $15 million amount in the comparable period last year.

As you know, we hedge our operating results so that during time periods when the dollar is strengthening significantly, lower translated revenues will for the most part be offset by currency hedging gains. Accordingly, at current FX rates, we anticipate hedging gains over the remainder of the fiscal year somewhere in the range of $40 million to $50 million per quarter. Taking this into account, we anticipate net other expense will be in the range of $80 million to $90 million per quarter during the remainder of the fiscal year.

Net interest expense for the quarter was $10 million compared to income of $61 million in the prior year period. This change from the prior year reflects the impact of cash used to finance the Kyphon acquisition, lower interest rates and the previously mentioned $18 million impairment charge on our marketable securities portfolio.

As of October 24, 2008, we had approximately $3.587 billion in cash and cash investments and debt of $6.541 billion. After adjusting for the impact of certain litigation payments and gains in foreign currency contracts, we continue to generate in excess of $750 million of free cash flow per 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. Our effective tax rate in the second quarter was 13.7%. Excluding the tax impact of certain litigation charges and IPRD charges, the effective tax rate in the second quarter was 19.8%. As previously mentioned, the US Congress retroactively extended the research and development credit, which resulted in a $16 million catch-up benefit that was recorded in the second quarter. Excluding this $16 million benefit, our second-quarter effective tax rate would have been 21.5%, bringing our year-to-date tax rate exclusive of one-time items to 22%. Exclusive of one-time adjustments, we expect our tax rate in the back half of the year to be in the range of 21.5% to 22.5%, which reflects the ongoing benefit of the R&D tax credit.

Second-quarter weighted average shares outstanding on a diluted basis were 1.128 billion shares. During the second quarter, we repurchased $464 million of our common stock, which represents over 9.5 million shares. As of October 24, 2008, we had remaining capacity to repurchase over 21 million shares under our Board authorized stock repurchase plan. During the quarter, we also paid out over $200 million in dividends, bringing our year-to-date dividend payments to over $400 million.

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 the full 2009 fiscal year guidance. As you know, we limit our guidance to one year at a time and keep our guidance more directional in nature. Based upon our second-quarter results and an anticipated $300 million to $400 million negative revenue impact from foreign currency, we are revising our fiscal year 2009 revenue guidance. We now anticipate our fiscal 2009 revenue to fall in the range of $14.6 billion to $15 billion at today's foreign exchange rates, down from our previous guidance of $15 billion to $15.5 billion.

We are comfortable with the midpoint of this range, which implies a constant currency revenue growth rate in the back half of the fiscal year of mid to high single digits.

As we have discussed, our previous fiscal 2009 earnings per share guidance of $2.94 to $3.02 did not contemplate the $0.03 after-tax charge associated with the write-off of inventory in CardioVascular or the acquisition of CryoCath and the resulting $0.01 dilution. Taking these factors into account, we are revising our fiscal year 2009 earnings per share guidance to $2.90 to $2.98. We are comfortable with the midpoint of that range.

As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year. I will now turn things back over to Bill who will conclude our prepared remarks.

Thanks, Gary. Before we begin our Q&A session, let me just close by reiterating that although the second quarter was a challenge, looking ahead to the back half of the fiscal year we are confident that by executing across our globally diversified portfolio, we can continue to generate strong double-digit earnings per share growth.

I would like to now open things up for Q&A, and in the interest of getting to as many questions as possible, we would like to respectfully request that each caller limit themselves to one question with one follow-up. So operator, please initiate the calls.

(Operator Instructions). Bob Hopkins, Bank of America.

Thanks and good morning. Can you hear me okay?

Yes, we can, Bob.

Great, thank you. Bill, I would like to if you don't mind start with kind of a big picture question, in light of all the cross currents that you are experiencing here in this quarter. Going back to June and the analyst day, you obviously gave guidance for 2009, but then you gave some longer term I guess aspirational goals of compounding top-line growth at 9% to 11%. And if you kind of look at the new guidance here for fiscal '09 coming down, that would mean you would need to grow well in excess of 9% going forward to be able to achieve those long-term goals.

So I am just curious if you could kind of talk about Medtronic from a big picture perspective and a long-term growth perspective in light of everything that is going on right now, and are you still comfortable with that kind of top-line growth that you talked about previously?

Well first, Bob, let me just comment on where I see Medtronic today. As I said, we are I think unique in our globally diversified portfolio. We have a strong position in many of the attractive markets in the medical device sector, whether that is in the cardio equipment space, the cardiovascular space, the diabetes space, the neuromodulation. So I like very much our portfolio, and I think we're well-positioned with market leading, technology leading, leadership leading kind of positions.

Clearly, this was a tough quarter and the environment is changed a bit. We have seen some things that we didn't anticipate come about in the last three months or six months. So as you heard from Gary, we have -- in terms of -- for the back half of this year, and then I think it is unfair to suggest that perhaps, at least going into FY '10, that the guidance that Gary has given you, which kind of in the mid to high single digits, is probably a good way to think about growth for the next year or so.

Okay. All right. That's very helpful. Thank you for that clarification. And then I also just wanted to ask about spine. Obviously, something people have been talking about for quite some time now as it regards to Medtronic. What was new on this call though was the Department of Justice investigation relative to INFUSE. So I was wondering if you could just go into that just in a little bit more detail in terms of what specifically they are requesting, how long you think it will play out and impact on the business? Thank you.

Well, I am not going to go into any details. The only thing I would say, Bob, is look, we are aware that there are just stepped-up efforts in general on the area of -- on the topic of off-label use of drugs and devices. And as being the kind of largest device maker in the world, it is not a real surprise that we would have received a subpoena related to this subject. And as I said in my remarks, we take very seriously the whole notion of appropriate promotion for on-label use. So we will comply with the DOJ's request and move forward.

Do you expect that this might broaden out to the larger base of spine business or CoreSpine business or do you think this will remain focused on INFUSE?

Bob, I can't answer that question. I don't really know. It is very focused on INFUSE.

Okay. Thanks very much.

Mike Weinstein, JPMorgan.

Thanks for taking the questions. Good morning. Let me just follow up, Gary, with the final comments you made there about the back half of the year. There would seem to be two different quarters in front of you. You have the January quarter, we still have some contribution from the comparisons on Endeavor, as well as the closing of the Kyphon transaction. And then you have got the April quarter where you have your first true year-over-year comparison. So the constant currency commentary would seem to be a mixture of those two quarters. Can you give us your thoughts on -- rather than just talk about the back half of the year, how growth will look once you anniversary those two events -- the Endeavor launch in the US and the Kyphon acquisition?

Yes, Mike. We don't obviously give quarterly guidance and so I am not going to get real specific on this, but overall, we actually see that -- the comments I made on mid to high single-digit growth in the back half of the year we would actually see as relatively consistent between the two quarters, not a dramatic difference between the two. The things that you are talking about -- the Kyphon anniversary really has already occurred. If you recall, Kyphon was -- it was only about five days here in the third quarter that really was not comparable. So overall, that is already in effect anniversaried and shouldn't have much impact really on the back half of the year guidance I gave.

With respect to Endeavor, as you indicated, that was clear. That was in the fourth quarter and so we will have still some comparison benefit here in Q3. The advantage we also have though in Q4 of this year is we still are expecting that we could see some launch of Endeavor towards the end of the fiscal year in Japan and so could we see some benefit from that that would offset some of that DES benefit we had last year. There is some benefit there, plus we have some of the new products that are coming out. Bill mentioned some of the new diabetes products, etc. that we would start to see some benefit from that side.

So overall, balanced it. We would expect to see the quarters relatively consistent in that growth rate as we go forward for the rest of the year. But you are right. There is some anniversarying where Q3 will get a little bit more benefit than we will have in Q4.

Okay. That's interesting. The Spine business, I just want to focus on it again. The performance by the kyphoplasty business and obviously, the big drop-off we are seeing in INFUSE, would be very interested in getting your thoughts on direction of those businesses over the next several quarters.

Well, Mike, this is Bill. On Kyphon, as I said, I am disappointed in the performance of the BKP portion of that business in the most recent quarter and really this is mostly a US issue. Okay? Outside the US, we had good growth. It was in the US where we had some execution issues and I am not going to make any excuses here. We know what we need to do and I can tell you we are in the midst of getting things turned around. I still feel very good about the market opportunity for BKP, not just here in the US, but on a worldwide basis.

On the X-STOP component of that, as I mentioned, I am encouraged to see the sequential growth that we had of 14% and I think this further demonstrates when we focus and when we do a broad array of things regarding market development, things happen. And so, look, I feel very, very good about the outlook for Kyphon. In terms of what can you expect next quarter, I think you'll see an improvement. Okay? I am not going to get any more specific than that, but I think you'll see things improve on Kyphon going forward.

On biologics, okay, again, as I mentioned, it was kind of the perfect storm with the PHN and then with just the negative news and then the fact that a whistleblower sued a number of people in the industry or in the clinical community had an unanticipated backlash on us. Again, having said that, when I look at the opportunity for this product on labeled indications, there is tremendous headroom. We are just scratching the surface outside the US. In fact, our business outside the US grew about 40% off a small base, but there is a lot of upside there for INFUSE. It is still a unique product in the industry. There is no other kind of substitute for INFUSE. So we are going -- we have got our heads down. We are working hard and I feel optimistic about the outlook for that product category as well.

Okay. I will let some others jump in here. Thanks.

David Lewis, Morgan Stanley.

Good morning. Bill, you talked about several things post the Analyst Day that have affected growth that were sort of unanticipated. I wonder if you could just sort of, from a macro perspective, talk about those things and what you view are transitory and what you think are more structural in nature.

Yes. Well, as I mentioned, the economy is having a modest impact today and it is unclear what may happen say a year from now or two years from now not just here in the US, but in other markets outside the US with the turbulence in the overall global economy. And you can paint a scenario that a year from now the budgets could be even tighter than they are today.

The good news is that we are well-positioned mostly in strong chronic disease areas where there is a strong demand for what we do and the other tailwind that we have is with the aging of the population. So I feel very good about kind of how we are positioned in the therapy that we are in and the opportunities that are in front of us, notwithstanding just the economic challenges that we are all going to face. Okay?

Now a couple transitory things that have happened that we are addressing. As I mentioned, I am not happy with it, but we lost share in some of our businesses this last quarter, particularly with a modest amount on the ICD. We lost about a point and a half to two points here in the US. On a worldwide basis, we lost a little bit less than a point, but that is on the back of the first quarter where we lost a bit. So we are addressing those issues. We have got I think the right product portfolio there, the launch of the StarFix Attain, the Vision 3D, the new CareLink, the new SureScan MRI technology outside the US. Look, we have got the most competitive productline. So we are addressing that.

On the neuromodulation, I mentioned that was a transitory issue as it related to an in-process manufacturing issue that, although it was specific to pumps, it kind of had a spillover effect on the pain stim side and here too, I will put my product, the RestoreULTRA and the 565 against anybody and we have got the best field organization, the best clinical group and that market -- the good news is that market is growing. It is growing in the close to 20% range and so we are optimistic that that business -- you will see higher growth going forward.

On the Diabetes business, there too. There are strong fundamentals in that business. We have -- again, I know it is hard for you all to model, but we have these cycles in our business where the replacements can be a tailwind or they can be a little bit of a headwind and this is a situation where we are facing a little bit of a headwind on the replacement cycle, but as we come out with new products, that is going to be a big tailwind. So I think fundamentally, we have got some real opportunities in the Diabetes business.

On the CardioVascular business, you know my view there. I am very bullish on our product portfolio and the fact that we have now Rapid Exchange here in the US. While we saw, obviously, an impact this quarter with our marketshare going from 19% or so to 12%, we are going to work hard to regain a lot of that with the launch of Rapid Exchange.

So I think there is a combination of things, David and I think most of them are transitory, okay? And I am not diminishing some of the structural that has to do with just the impact of sort of the tough economic times. I think that will impact everybody to some degree, but on a relative basis, I think it is going to have less impact on Medtronic.

All right, Bill. Thank you very much. Just one quick one here on ICDs, you mentioned new competitive inter-trialing. Are you trying to signal there that you do not expect that marketshare to be particularly sticky and in your comment on replacement market, am I assuming that your comments on the replacement market are still sort of in line with your broader thoughts of what was going to happen with the replacement market over the next six to 12 months?

On the competitive question, I feel very good about our product portfolio and I think what you saw in the August timeframe was, again, some people wanted to try the new product and I feel very good that we will prevail and that we will regain the little bit of lost share that we saw in August as we go forward given the overall strength of our organization and our productline.

On the question about replacements, as I mentioned, this is one again where we are in a cycle where we have had the benefit, to some degree, of replacements being a bit of a tailwind. This quarter, they were not a tailwind and going -- as much a tailwind and we see that gradually even weakening going forward. So again, I think you're going to have to think through that when you look at overall real marketshare numbers going forward because of the benefit that maybe others will have with replacements. And I don't have visibility into that, but that is something you have got to think through.

Great. Well, thank you. I will jump back in queue.

Rick Wise, Leerink Swann.

Good morning, Bill. Let me start off with Kyphon again. It's clearly still not on track. Maybe you can help us better understand your optimism about what turns it around and when. You highlighted new products and some changed marketing strategies, but why are you so confident now that the worst is over?

Well, let me step back here. First of all, I want to make the comment that maybe it is not very transparent to you. While we are obviously not where I want to be on the top line, I will tell you, on the bottom line, we are doing well. We are not really off of what we had in our acquisition economics and so don't assume that we are just -- it's flowing right down to the bottom line. So I will tell you, I feel very good about what we have been able to do on an earnings piece of that.

On the top line, there are a couple things. As I mentioned, we just launched a very important new cement delivery system that really addresses quite honestly an issue that we had with how you delivered the cement and in many cases, the operator had to be right in the fluoro field and this enabled them to kind of get out of the fluoro field. So it is a big advantage now for what we have versus even some of the new -- a couple of new competitors that we see on the horizon. So that is one thing. We also have a very strong pipeline in this area to further reduce the size and make it even more minimally invasive kind of going forward.

On the X-STOP, we just launched the PEEK version of X-STOP, which is a very important product opportunity for us. We have launched in Europe the next generation Aperius. We have -- outside the US, we have Aperius, we have DIAM, we have X-STOP. There is a very strong offering. In the US, we only have X-STOP, but we are -- as you know, we are well along our way in the clinical trial with DIAM, similarly with Aperius. So we have got a strong pipeline in that area and that area, by the way, is one of the areas where we see we have the most headroom for growth. It is in the whole lumbar spinal stenosis area.

So look, it is product and then the last thing I would just mention, it has taken us a little time, I have to admit, to try to really get the sort of interaction between the CoreSpine people and the Kyphon people. But that is starting to click and we track, if you will, the number of sort of cases that a spine or spine surgeon sort of generates on the Kyphon side and vice versa. And while I have not going to share with you those numbers, I will tell you, it is on a rapid ramp-up.

That's very helpful. Thank you. And as a follow-up, maybe turning back to ICDs, Bill. I appreciate your candor in talk about marketshare and some of the factors, but when I look at it, this is one of the weakest pacer growth quarters I have seen in several years. ICD growth rates obviously weak despite the weak comp year-over-year with Fidelis. Maybe on each side, help us understand -- is it a specific product like in pacemakers, does MRI compatible pacers turn it around? On ICDs, where does share go from here and why in your opinion? Thank you so much.

Well, on the Brady side, Rick, let me just comment in this way. It is always hard, and I know for you all on the outside looking in, but the dynamics we see kind of quarter-to-quarter -- there are things that happen that I think really make the point that you got to take a longer-view look. You have got to look at like on a 12-month rolling average. And if you look at that, our Brady business has been very stable with US Brady share in that 51% to 53% range on a 12-month rolling average and currently it is around 51%, okay? On the OUS, similarly, it has remained stable in that 47% to 50% range and it is at that kind of 50% level right now. And we have got, again, a terrific product portfolio with the launch of the products that we launched and then we will be launching in FY '10 the new Vision 3D platform of pacers.

So look, we've got good products in the pipeline, we've got great parts out there today. We have got, again, the strongest global distribution of anybody out there. The SureScan MRI compatible pacemaker I think, again, reinforces our leadership in the technology area. So I am not happy about what happened this quarter, but I am very confident that you will see that the trends of what you see in a 12-month rolling average continue.

Thanks, Bill.

Matthew Dodds, Citigroup.

Great, thanks. A couple questions. Gary, first for you, when you look at the EPS guidance, you lowered it $0.04 and it seems like pretty much all of it came from the fiscal Q2 result. I am just wondering if, A, that is the way you are looking at it? Because if you look at the second half of the year, it seems like you have lowered the constant currency sales growth. You never gave specifics, but mid to high single digits does seem a little lower than your plan. And then also with foreign exchange, I have to assume there has got to be some EPS impact because you can't hedge all these currencies perfectly. So I am wondering kind of what your view on the earnings in the back half is, if that is correct and if, in fact, foreign exchange is going to have a little bit of an impact, the top line is going to have a little bit of an impact? Are you actually saying that you are going to make some of this up with cost leverage? That is the first question.

Yes, Matt. Just real quickly overall, the $0.04 that we were talking about as far as changing the range is primarily all related to what happened here in the quarter related to the CardioVascular obsolescence and obviously, the CryoCath piece, that $0.01 is really more in the back half of the year. So that piece is not in this quarter, but more in the back half of the year.

As far as are on the currency side, you are correct that we, for the most part, we are hedged even with that reduction in revenue. We don't hedge every currency, so there are some currencies that will have an impact on the bottom line and so you have a slight negative. Obviously from our perspective, if the currency rates stay where they are at at this point, you would have a slight negative on the bottom line, but for the most part, and again a high percentage of that is hedged and so you should see very little impact on the bottom line, but there will be some negative.

And you are absolutely correct. What we are assuming is that, through cost reductions that we are going to continue to focus both in product costs and in SG&A, that we can continue to offset whatever shortfall we might have with respect to foreign exchange or any shortfall that might come from just revenue being slightly softer in the back half than what we originally assumed.

On the other hand, we are not putting any additional benefit in for the fact that we launched now Endeavor on Rapid Exchange and so even though we are taking a negative related to the obsolescence, the fact of the matter is we will have to see how much share we can gain back by that Rapid Exchange platform. Could that be a slight upside that helps give us confidence in the back half of the year? The answer is yes. That is another thing that we are looking at overall.

And then one follow-up on neuro stim since that hasn't been hit yet. You had a big quarter last quarter. This quarter, it did tail off a lot even though it still sounds like it grew double digit. Was that just last quarter an aberration from the launch of Restore or did the competitive launch this quarter impact you in that business?

No, Matt, this is Bill. As I mentioned, it was a little bit skewed because of the pain pump issue and some of our contracts actually involve both the pump, as well as the pain stim. So that was -- that had a bit of an impact. I don't really think that the launch of the third competitor's product had much impact because, in fact, I don't think they really -- it was launched until the end of the quarter. So I feel this is a business I feel good about and that we will be able to bump things up in the quarters going forward.

If anything, Matt, just to add to what Bill's comment is. Again, when you are in an inventory shortage issue on the pump, it takes the focus off of the sales organization, etc. to try to make sure they are moving their inventory around to where as much as they can to where the implants are occurring, which takes your -- that same group is obviously going to take their focus off a little bit on the stim side. So that is where there is a little bit more of an impact.

Can you just say how much the pump business was down in the quarter, specifically the pump business?

I don't have that detail. You would have to get that from Jeff and the team afterward. I don't have that.

Okay. Thanks Gary, thanks Bill.

Okay. We have got time for two more questions.

Bruce Nudell, UBS.

Good morning. Thanks for taking the question. Bill, the INFUSE was approved for isolated anterior inter-body fusion. The vast majority of it, according to our assessment, is outside of that narrow application. What is the chance for a very aggressive retrenchment in the use of INFUSE and does the current climate really increase the importance of the AMPLIFY product and approval for that and do you have any comment as to where that stands?

Well, there is three indications for INFUSE -- the anterior interbody diffusion; secondly, the trauma and thirdly, for OMF. So that is kind of the current landscape right now and there is a number of clinical trials, as you know, on cervical, as well as posterior lateral to expand indications.

Now Bruce, in this case, which is not similar to any other medical procedure, physicians have the right to use products where they feel it clinically and medically necessary. I will tell you, we are not promoting it for off-label use, but the fact of the matter is I think physicians have determined that this is the best therapy for their patients as opposed to the autograft procedure where you have to harvest iliac crest, which is a very painful and a hard thing to do. So anyway, look, I can't forecast what is going to happen. I will tell you that things are stable and we will see how things turn out going forward.

Now in terms of the question specifically on AMPLIFY, we are looking at that indication. We are looking at FDA approval in the FY '10 timeframe.

Okay. And my follow-up pertains back to the ICD market. In our models at least, unit growth has really dominated by replacements for the market as a whole and I know different companies have had different installed bases and that reflects -- that impacts their first time versus replacement mix. But for the market as a whole, what do you foresee as like of unit growth for first-time implants versus replacements?

In the US, our sense is that the market has been flat to maybe slightly negative, okay?

On initial implants.

On initial implants, that's what I said, on initial implants. And then you add the replacements and that is kind of how you get to that sort of 2% to 4% and then you combine that with the outside growth and that is where we get the guidance of 5% to 7% for the CRDM market. And clearly we have got a lot underway, Bruce, to try to reaccelerate the market here in the US with the pathways and protocols initiative, the improved HF study, expanding indications with perceived HF. There is a lot that we are doing to try to reduce HF and block HF. There are a lot of things we have underway. So we are not backing away from our commitment to this marketplace, but again, the answer to your question is, right now, our best estimate for the US market is that the takeout replacements is flat to a declining slightly marketplace.

Thanks so much.

Last question.

Joanne Wuensch, BMO Capital Markets.

Thank you so much for taking my question. I appreciate it. I know we have spent a fair amount of time today talking about INFUSE and off-label use, but can we go back to your CoreSpine business? Two questions. Kyphon sales organization, how different is it today than it was when you purchased the organization a year ago and what about the CoreSpine business in terms of just simple screws, plates, fusion cages and things of that nature? How do we stop the bleeding on both of those fronts? Thank you.

Well, okay, first, let me answer the Kyphon. Here's the thing on Kyphon, we have done actually a really good job at keeping that organization, that field organization intact. In fact, when we acquired the company, we made a decision to have the Kyphon salesforce kind of stay intact, the CoreSpine people stay intact, but they come up through a common, if you will, Vice President of Management organizational structure to facilitate the interaction between the two groups. But we kept the organization kind of intact and to be honest with you, we have not lost hardly anybody on the Kyphon side. And so I feel good that this is not a question of well, we come in, we acquire the company and everybody leaves. That is not happening. Now we have made some changes in Sunnyvale, which I think were the appropriate changes, but the core field organization here in the US is intact.

On the CoreSpine business, again, we pointed people to the fact that, looking out for a couple of quarters as we kind of do a little bit of rebuilding internally and kind of refreshing the pipeline, that we are going to bump along a little bit here. This quarter, quite honestly, I was okay with our performance given the environment we are in and the fact that there are a lot of small kind of physician-owned companies that are out there that are very, very aggressive. But when you look at it, we grew our CoreSpine business roughly in that 5% kind of a range and when you look at it in terms of our size and scale in terms of absolute dollars, it is not -- it was not a disappointing performance for us relative to what we have seen in the past.

Now, again, the good news is, if you look at the spine business in the aggregate, it is still growing. The market, not just Medtronic, but the whole market continues to grow in that 10% to kind of 14% kind of range. So it is a good market to be in.

Okay and then squeeze one more in. Your Physio-Control and neuro manufacturing and supply issues, are those complete or are we going to see a gradual dig-out from that?

On the neuro side, as I pointed to you -- as I said in my commentary, it is pretty much done, okay? We are back into the building inventory mode on the neuro side. On the physio, it has got a little bit more of a tail to it. It is probably going to take us through this quarter.

Okay, so let me just maybe conclude and I want to kind of bring it back and just make, again, a comment about kind of how I see Medtronic positioned today. Clearly, this was a tough quarter and there are some things that I am not happy about in terms of our share loss, but in no way does this change the outlook in terms of how we see the opportunities ahead of us and particularly, when you think about it relative to what other kind of industries are going through.

Healthcare continues to be a very important and a very strong business overall and I feel very good about where we are positioned with our globally diversified portfolio, with the market-leading technologies, with exceptionally strong distribution. And I can tell you people internally I feel like I have got a very strong leadership team. People are not happy with what happened this quarter and we are going to continue to learn from what we experienced and we are going to get better and better and I feel good about where we are going downstream.

So with that, thank you for listening and Jeff and the group will be happy to take your calls off-line.

Thank you.

Ladies and gentlemen, this does conclude the Medtronic second-quarter fiscal 2009 conference call. You may now disconnect.