美敦力 (MDT) 2009 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)

I will now turn the call over to Mr.

Jeff Warren, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Dennis.

Good morning and welcome to Medtronic's third-quarter conference call and webcast.

During the next hour, Bill Hawkins, Medtronic Chairman and Chief Executive Officer, and Gary Ellis, Chief Financial Officer, will provide comments on the results of our third quarter which ended January 23, 2009.

After our prepared remarks, we will be happy to take your questions.

A few logistical comments.

This call is being webcast via our website, www.medtronic.com.

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

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

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

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

Today's webcast includes statements regarding Medtronic's anticipated financial results, market growth, market share, acquisitions, divestitures, product acceptance, and capabilities, new products, cost savings, 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 date and we undertake no duty to update the information provided in this call.

And unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2008.

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

Good morning and thank you, Jeff.

Q3 was a solid quarter.

Revenue of $3.494 billion grew 6% after adjusting for $110 million unfavorable impact of foreign currency.

Net earnings in the third quarter were $723 million or $0.65 per diluted share.

After adjusting for in-process research and development charges of $72 million or $0.06 per share, non-GAAP net earnings and diluted earnings per share in the period were $795 million or $0.71 per diluted share, an increase of 12% and 13% respectively.

As we all know, these are challenging economic times across all industries.

The level of uncertainty, volatility, and unpredictability has never been higher.

Medtronic's fundamental business model is relatively resilient to macroeconomic downturns and while we have minimal exposure to slowdowns in elective procedures, we are not immune to the global economic turmoil affecting nearly everyone.

One of our strengths remains our technologically and therapeutically diverse business model.

Our results underscore that we are not overly dependent on any single business, product line, or geography.

Our balance sheet is well-capitalized with $3.9 billion in cash and investments.

We continue to generate significant free cash flow.

In fact, this quarter for the first time we had free cash flow of over $1 billion.

Looking ahead, our focus across all our businesses will be on extending our market share leadership, investing for market growth, and leveraging geographic expansion.

Although doing the right thing by halting shipments of our Fidelis leads a year and a half ago hurt us, today we are back on the offensive.

Made no mistake, in each of our businesses, we are playing to win.

Across all our businesses, competition has never been tougher.

At the same time, we have never been more committed to extending our market share leadership by leveraging every tool at our disposal.

In our CRDM business, we will lead with market exclusives like OptiVal and minimal ventricular pacing.

In spinal, we will leverage our innovative spine fusion technologies with unique navigation, sensor, and biologics capabilities.

In diabetes, we will differentiate ourselves with our sensor-augmented pumping.

We will lead by leveraging the unique breadth of Medtronic's portfolio to meet the needs of GPOs and IDNs in large hospital systems.

We will lead with innovations like INFUSE and MRI-safe products as well novel therapies using deep brain stimulation.

We will lead with best-in-class product quality, customer service, and sales support.

In short, we will lead in the future just as we have in the past.

In addition to our commitment to market leadership, we are also moving into new growth markets.

Our recent investments in two novel atrial fibrillation technology platforms position Medtronic to ultimately become the undisputed leader in one of the fastest-growing and most promising markets in med tech.

Our acquisition this month of Ablation Frontiers follows the recent acquisition of CryoCath last quarter, giving us two of the most exciting plays in AF.

As one AF thought leader told us recently, there are really only two technologies that physicians are talking about as potential real breakthroughs in AF ablation, and now Medtronic owns them both.

We are combining these two companies with our existing EP catheter business and our unique remote diagnostics technology called Reveal XT, which was recently launched in the US.

This novel subcutaneous diagnostic monitor allows physicians to monitor AF to better manage their patients.

With this combination of therapies and diagnostics, we intend to become the market leader in AF disease management by bringing breakthrough therapies that are simple, safe, effective, and offer more predictable procedure times than current treatment methods.

In short, our goal is to democratize AF.

Strong growth in the quarter across many of our international markets underscores our commitment and focus on geographic expansion.

After adjusting for the unfavorable impact of foreign exchange, revenue and markets outside the US grew 9%, over twice as fast as US revenue growth.

China, Central and Eastern Europe, Middle East and Africa, and Latin America all had constant currency growth rates in the mid-to high teens.

Business unit and product line standouts included ICDs, core spinal, neuromodulation, diabetes, and surgical technologies.

Our Weigao joint venture is up and running, marking an important milestone in our overall China strategy.

Although we continue to invest in our international infrastructure, earnings in these geographies continues to grow faster than revenues.

Beyond the revenue performance, during the quarter, we again made solid progress on driving meaningful operating leverage.

A key component of this overall operating leverage initiative is to reduce cost of goods sold by 25% 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.

We are also making good progress on several longer-term SG&A leverage initiatives which are designed to grow indirect selling and G&A expenses at 50% of revenue growth and direct selling and marketing expenses at 80% of revenue growth.

Looking ahead to the end of the fiscal year and beyond, we are confident that we can continue to generate double-digit growth in our earnings per share.

Before turning the call over to Gary who will take you through the detailed financial results, I would like to draw your attention to several highlights across some of our business units.

In CRDM after adjusting for the impact of foreign currency, growth in the global ICD market appears to have stabilized in the mid single digits.

Looking ahead, our focus will continue to be on protecting and growing profitable market share in an increasingly competitive marketplace by leveraging our market exclusives and recent product launches, which include the Vision 3D featuring pain-free shock reduction; minimal ventricular pacing; complete capture management, and OptiVol, for which physicians can now be reimbursed; the Attain StarFix left-ventricular lead; MRI Sure-Scan pacing technology in certain O-US markets; the four French left heart lead, Attain Ability; and new left heart lead delivery systems Attain Command; and the Reveal XT subcutaneous diagnostic Monitor.

Turning to our spinal business, overall revenue growth in the quarter was in line with our expectations.

We were encouraged to see some stability return to our core spinal business, reflecting positive momentum from several new or enhanced products including the Atlantis translational plate; CD Horizon Legacy peak rods; hydroxyapatite coated screws; and our pyramid plus four lumbar plate.

These products are examples of our efforts to revitalize our entire core spinal product pipeline over the next two years.

Although much work remains to return this business to market growth, we are beginning to see the impact of the rebuilding.

We were also encouraged to see the results in our biologics franchise stabilize after a challenging second quarter.

Although this business continues to be negatively impacted by several external factors, we did not see any further incremental contraction.

Overall, we continue to work on a number of fronts to regain momentum in this business.

Coronary vascular growth was fueled by the commercial launch of five angioplasty products on rapid exchange in the US.

Supply constraints during the quarter limited the penetration of Rx to just 50% of our account base.

However during the quarter, we saw steadily accelerating revenues and looking ahead, we believe we will be able to leverage increased supply of Rx products to increase our market share.

Our endovascular business posted another quarter of exceptional growth and is closing in on being a $500 million business.

Endovascular is currently the fastest growing business segment in the Company and one with considerable future potential.

Strong results in our neuromodulation business reflect strength across all major product lines.

Looking ahead, we continue to make good progress on advancing several new therapies.

During the quarter, we obtained an IDE for a randomized trial evaluating DBS for depression and we are currently working through IRB approvals and initial patient screening.

We were encouraged by the presentation in December of positive clinical data for the SANTE trial, demonstrating that DBS reduced the seizure rate in patients with severe epilepsy and we are currently working on a PMA submission for this claim.

We continue to prepare for the US approval and launch of InterStim therapy for the treatment of fecal incontinence early next fiscal year.

Quarterly performance in our diabetes business was highlighted by continuous glucose monitoring systems, which had another quarter of exceptional growth.

Particularly in the US, CGI momentum was fueled by positive results from the recent JDRF trial and the resulting expansion in covered lives.

Another highlight in our CGM business with the completion of enrollment in our 495-patient STAR 3 trial, and we expect results early in calendar year 2010.

Looking ahead, we remain confident in our plans to protect and extend our market leadership in diabetes via series of three new product launches over the next several quarters.

I will now turn the call over to Gary and he will take you through the detailed financial results and after his comments, I will conclude with some closing remarks.

Gary?

Thanks, Bill.

As mentioned earlier, third-quarter revenue of $3.494 billion grew 6% after adjusting for $110 million unfavorable impact of foreign currency.

Breaking this out geographically, revenue in the US was $2.176 billion, up 4%.

Outside the US, revenue of $1.318 billion increased 9% on a constant currency basis.

As expected, the significant strengthening of the dollar in Q3 versus the first half of FY '09 and the prior year had a tremendous impact on revenue.

In fact, we saw a $175 million swing from the impact of currency translation on revenues between Q2 and Q3.

However, as I will discuss in a moment, we were able to offset this impact with our hedging programs.

CRDM revenue of $1.169 billion decreased 1% after adjusting for a $38 million unfavorable impact of foreign currency.

Worldwide ICD revenue was $694 million, including a $22 million unfavorable impact of foreign currency.

As Bill mentioned, after taking into account the impact of currency, our data indicates that the global ICD market grew in the mid single digits in the quarter.

Furthermore, our analysis suggests the initial implant market in the US continues to be relatively flat.

As we have always stated, assessing quarterly market share movements is challenging and this is especially true this quarter, given the difference in selling days among competitors.

However, after normalizing for the number of selling days, our analysis indicates our ICD share remained stable from the prior quarter.

Pacing systems revenue of $457 million included a $14 million negative impact of currency.

After normalizing for selling days during the quarter, our worldwide pacing business performed roughly in line with the market.

Outside the US, a highlight of our pacing results was the initial positive acceptance of our MRI SureScan pacing technology.

Spinal revenue of $832 million grew 4% on a constant currency basis.

Core spinal revenue of $479 million grew 6% on a constant currency basis, reflecting increasing stability in this business and traction from a series of recent product introductions.

Biologics revenue of $205 million grew 1% on a constant currency basis and as Bill mentioned, this business continues to feel the pressure from several external factors.

However, relative to the second quarter, we were encouraged by the stability in this business which gives us confidence that we may have experienced the worst.

Kyphon revenue of $148 million grew 3% on a constant currency basis.

As we have said previously, growth in this business is not meeting our expectations.

I speak for the whole management team by assuring you we are continuing to focus on making the changes necessary to get things on track and we remain excited about the growth potential for these products.

On a positive note, synergies with the core spine have been higher than we planned, which is helping on the EBIT line.

Cardiovascular revenue of $565 million grew 16% on a constant currency basis.

The coronary stent revenue of $186 million grew 25% on a constant currency basis.

As Bill described, coronary stent growth was fueled by the commercial launch of five angioplasty products on rapid exchange in the US.

Although we were surprised by the decline in our MX2 business, demand for Endeavor on Rx exceeded our supply.

As a result, share bottomed out early in the quarter and then began to increase as our supply situation improved.

Excluding Japan, the Endeavor and Endeavor Resolute market share in markets outside the US remained stable in the high teens to about 20%.

The Endeavor launch in Japan is on track for the first half of fiscal 2010.

Endovascular revenue of $99 million grew 49% on a constant currency basis fueled by the recently launched Talent Abdominal and Thoracic stent grafts in the US.

Growth outside the US of 36% was driven by the launch of our next generation Endurant abdominal stent graft.

Neuromodulation revenue of $354 million increased 13% on a constant currency basis.

Pain stimulation revenue was $137 million and grew 14% constant currency, driven by continued strong market growth coupled with momentum from our RestoreULTRA spinal cord stimulator, still the thinnest pain stimulator on the market.

These factors were partially offset by a slowing replacement cycle and a competitive product launch.

Movement disorders revenue of $103 million grew 10% on a constant currency basis, fueled by growth in our Activa DBS therapy for Parkinson's disease and essential tremor particularly in markets outside the US.

Late in the quarter, JAMA published results from the largest randomized controlled study of DBS for Parkinson's disease.

This study adds to the growing body of evidence that demonstrates the superiority of DBS and we look forward to leveraging this data to expand utilization.

Gastro Uro revenue of $71 million grew over 20% on a constant currency basis, driven by another strong quarter from InterStim.

Diabetes revenue of $277 million grew 12% on a constant currency basis.

Diabetes growth was driven by strong sales of durable pump systems and continued strength in our CGM franchise, which is annualizing in almost $100 million in revenue.

These areas of strength helped partially offset several factors that continue to pressure our overall growth including the negative impact of the macroeconomic environment on new pump penetration, a negative replacement cycle, and intensified competition.

We are encouraged that the economy has not yet led to noticeable attrition in consumables revenue and we are pleased that patients still see sufficient value to stay on pump therapy.

Surgical Technologies revenue of $207 million grew 10% on a constant currency basis.

Growth was highlighted by the strong sales of the Fusion image guidance surgery system and the O-arm navigation system, coupled with strength in our service contracts.

We successfully closed the Influent Medical acquisition, which further enhances our sleep apnea product offering.

It is important to note that despite the strong growth this quarter, given the elective nature of the underlying procedures and the large capital equipment component of the business, surgical technologies has exposure to macroeconomic pressures that we are managing very closely.

Finally, Physio-Control revenue of $90 million grew 1% on a constant currency basis.

Results reflect a successful resolution of the product availability issues from last quarter.

We continue to work with the FDA to return to full shipments.

Turning to the rest of the income statement, the gross margin was 75.7%, compared to 74.4% in the third quarter of last year.

The prior year comparable period gross margin included a $34 million charge for the fair value adjustment of the acquired inventory of Kyphon that negatively impacted the gross margin by 100 basis points.

Compared to Q2 of FY '09, gross margin of 75.3%, foreign exchange had a 40 to 50 basis point unfavorable impact on the Q3 FY '09 gross margin, but our efforts to reduce product costs continued to pay dividends.

Looking ahead in the fourth quarter, we expect our gross margin to be slightly ahead above 76%.

As Bill mentioned, a key component of our overall operating leverage initiative is to reduce cost of goods sold by 25% by year fiscal 2012.

Some examples of initiatives that have annual savings in FY '09 include $40 million in savings from the application of Lean Sigma initiatives across CRDM; $15 million in savings from the outsourcing of CRDM wafer fabrications; and $30 million in savings from the work of various commodity teams to better leverage our global purchasing power.

Third-quarter R&D spending of $337 million represents 9.6% of revenue compared to $329 million last year.

Consistent with the prior three quarters, third-quarter results include a reclassification of approximately $11 million of certain legal and patent expenses from R&D to SG&A.

Before this reclassification, R&D would have been approximately 10% of revenue.

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 this ongoing reclassification.

Third-quarter SG&A expenditures are $1.257 billion, represented 36% of sales compared to 35.4% of sales in the third quarter last year.

Foreign exchange had a 20 basis point negative impact in SG&A.

The R&D reclassification I previously mentioned increased SG&A expense in the quarter by approximately 30 basis points.

Taking into account currency and the reclassification, SG&A would have been 35.5% of sales.

We expect SG&A for FY '09 will be less than 35% of sales including the R&D reclassification.

As we have discussed, we have several initiatives underway to further leverage our SG&A cost structure over the remainder of fiscal 2009 and beyond.

With the implementation in Asia, 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.

Some examples of initiatives that will contribute to savings include $20 million in savings over the next five years from outsourcing of logistics in our diabetes business; $20 million in FY '09 savings from optimizing IT procurement across businesses; and $10 million in FY '09 savings from the consolidation of data centers.

Looking ahead, we will continue to explore additional savings in many other areas including freight, car fleet spending, salesforce automation, and contract administration.

Despite our efforts to deliver meaningful operating leverage, I think it is important to not lose sight of the fact that today Medtronic's operating margins and productivity far exceeds that of our closest competitors and we intend to widen the gap further.

Our sales rep productivity, product costs, and revenue per employee are significantly better, which allows us to focus spending on innovation.

But we know we can do even better and are focused on numerous areas for efficiency to allow us to increase the returns to shareholders and increase our R&D investments.

Turning back to the P&L, net other expense for the quarter was $50 million compared to $119 million in the prior year.

The year-over-year decrease primarily as a result of the gains from our hedging programs, which were $31 million during the quarter compared to $41 in losses 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 $45 million to $50 million.

Taking this into account, we anticipate net other expense will be in the range of $50 million to $70 million in the fourth quarter.

Net interest income for the quarter was $2 million compared to income of $9 million in the prior year period.

This change from the prior year reflects an impairment charge on our marketable securities portfolio and lower interest rates, offset by a gain on sale of securities.

As of January 23, 2009, we had approximately $3.9 billion in cash and cash investments and debt of $6.7 billion.

We generated in excess of $1 billion in free cash flow this quarter defined as operating cash flow minus capital expenditures.

And 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 third quarter was 22.4%.

Excluding the tax impact of the IPR&D charges, our effective tax rate in the third quarter was 20.8%.

This rate includes a $12 million tax benefit related to the finalization of certain fiscal 2008 tax returns and adjustments to uncertain tax position reserves associated with international and state tax audits.

Excluding both this $12 million benefit and the tax impact of our IPR&D charges, our third-quarter effective tax rate would have been 22%.

Exclusive of one-time adjustments, we expect our fiscal year tax rate to be in the range of 21.5% to 22.5%.

Third-quarter weighted average shares outstanding on a diluted basis were 1.120 billion shares.

During the third quarter, we repurchased $90 million of our common stock or approximately 2.6 million shares.

As of January 23, 2009, we had remaining capacity to repurchase over 18.8 million shares under our Board-authorized stock repurchase plan.

During the quarter, we also paid out over $210 million in dividends, bringing our year-to-date dividend payments to over $630 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 this guidance more directional in nature.

Based upon our third-quarter results, we are tightening our previous revenue and earnings per share guidance ranges.

We currently forecast fiscal 2009 revenue in the range of $14.6 billion to $14.7 billion at today's foreign exchange rates.

The current Wall Street consensus estimate for Q4 revenue of $3.840 billion, which falls at the lower end of this range, appears reasonable at this time.

We currently anticipate our fiscal 2009 earnings per share to fall in the range of $2.91 to $2.95, which includes $0.02 of dilution from the AF acquisitions.

As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year.

A couple of final housekeeping items before I turn things back over to Bill, who will conclude our prepared remarks.

First, I want to provide a heads up that there will be an extra selling week in the first quarter of our fiscal year 2010 for a total of 14 weeks.

This anomaly is due to the way our fiscal years are structured with this catch-up week occurring once every six years.

Secondly, we will be hosting our annual institutional investor and analyst meeting again this year on Tuesday, June 2.

This year the meeting will be held at our world headquarters facility in Minneapolis.

Bill?

All right, before we begin our Q&A session, let me just close by reiterating what I said to begin with in that Q3 was a solid quarter.

Our growth reflects both internal challenges and a challenging environment.

We continue to balance our focus on driving innovation to fuel growth and on both shaping and executing across enterprise to generate efficiency and leverage to fund future opportunities.

I would now like to open things up for Q&A.

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, first question, please.

Mike Weinstein, JPMorgan.

Good morning, let me start with just one housekeeping item.

On the other income line, could you just give us some more detail on those pluses and minuses that you talked about?

Yes, Mike, this is Gary.

As I said, other income and expense line for the quarter was the $50 million kind of net number.

As you know, that includes currency gains and losses, royalty payments, royalty income, amortization of intangibles.

There's a lot of different items in that line item itself.

The major fluctuation from the prior year, which when the number was about $119 million, was in the foreign exchange contracts.

Last year we had a $41 million loss on our foreign exchange contracts.

This year was about over $30 million gain and as a result, there was $70 million swing year-on-year just related to the foreign exchange contracts themselves.

The rest of the items in there net-net were pretty offset.

But that was the major change.

Okay.

Thanks.

Let me just step back for a minute.

Bill, we went back to the conference last month.

You talked for the first time about a growth profile of the company suggesting organic growth of 5% to 8% top line and leveraging that to get to 10% or better on the bottom line.

Tell me, what do you do to deliver on the growth which is on the top line certainly where you were this quarter organically and you were at least that on the bottom line?

To do that longer term, what do you have to do in your view relative to your existing markets?

And then to do better than that, what would it require relative to your market share?

I guess part of what I am asking is everybody is aware that you've had challenges in some of your bigger markets and defending your market share in CRM and spine as well as some other spaces.

Can you continue to give up market share and deliver 5% of 8% top line growth or what do you assume for underlying market growth in your key areas?

So it's a combination of things, Mike.

It's a combination of market -- the stability in the markets and growth where we can and market growth.

And secondly in being able to defend and grow our market share.

If you look at the ICD market as we have suggested, we look at growth in that sort of mid-single digits.

And as I mentioned on this call, we are -- we had a set back a year and a half ago with Fidelis, but we are back on the offensive.

We feel very good about our product portfolio and we are in a mode of going back and stabilizing and gaining share.

So that's one of the assumptions.

Secondly on the spine business, that continues to be a good market.

We see still solid growth in that market in the around 10% range.

We have lost share to the smaller companies, but we see that stabilizing and our plans over the next couple of years are to get back into growing with the market and getting back into a position where we can actually regain share in that market.

Then the other thing that has been a bit of a tailwind for us has just been the strength of the neuromodulation business which we pioneered.

If you go back in time, the Medtronic -- we created the pain stem market as well as the whole movement disorder market and we have been -- we see good growth continuing in that business and we have a very strong product lineup, which we believe will enable us to continue to grow with that market, notwithstanding new competitors coming in.

On the diabetes business, there, too, we are -- that's a market and we think there's still a lot of headroom given the fact that the market is still under penetrated and with our -- the excitement that we have around the continuous glucose monitoring combined with the latest pump technology and the patch pump which will be coming out, we see that being a good tailwind for us going forward.

Then surgical technologies and cardiovascular are good, solid markets for us to be in and then we are investing in new areas.

The atrial fibrillation space we think is going to be one of the more exciting spaces in med tech and with the two acquisitions we just did, combine that with our existing EP business and our Reveal XT, I mean it is already close to a $200 million business for us and we see good growth coming out of that market.

So that's just again a recap of some of the things that we see that give us the confidence that we can grow in that mid-single digit range.

Let me just ask one follow-up as a short one.

Can you just spend a minute on Kyphon and build a strategy for getting that going in the right direction?

Kyphon, very candidly, has been a bit of a disappointment for us in terms of just some things that have happened since we acquired the business with just kind of the slowdown particularly in the lumbar spinal stenosis segment that was a part of Kyphon.

And we have had, as I mentioned in the previous conference call, is to kind of go back to sort of retrain and kind of make sure that we are positioning the product appropriately.

And we still see that as having a lot of headroom for growth, but we are in that kind of a rebuilding phase.

On the core BKP business, this quarter we did okay in the US.

We hit some speed bumps outside the US, but again if I look at the overall sort of fundamentals, we feel that there is a lot of headroom for growth and we've got some new products coming out in the first part of fiscal year '10.

So we are -- we think that we will be able to get this thing growing again and we see a lot of downstream, a lot of opportunities to leverage this platform more into the minimally invasive arena.

Thanks, I will let some others jump in.

Timothy Lee, Piper Jaffray.

Good morning, thanks for taking the question.

Just on the ICD side, you talked about your market share being flat sequentially.

I can't get there from my math.

Clearly you guys have some better numbers than I do.

So could you just kind of one, just tell us what you think your share was?

And I guess, Bill, to your point of getting profitable market share in CRM, just giving your profitability profile, isn't by definition if somebody comes in at their segment operating margin it's going to be less profitable for you?

So is that business that you are walking away from?

So if you can just kind of give us a better sense of that dynamic, please.

Tim, this is Gary.

Let me kind of respond to the first with respect to the market share sequential comment.

As I said in my comments, the issue you have is you have to be very, very careful taking a look at what is happening with currency and what happens with basically extra selling days that individuals have as you go quarter-to-quarter.

Even as we look at our quarter-to-quarter comparison there's extra selling days, which do have a significant impact on the results.

When we -- and in this situation this quarter, one of our competitors had an extra week sales and if you take those into consideration and if you look at the actual selling days that each company had, we come up to basically our margins for both last quarter and this quarter are right around that 47%, 47.5% area worldwide in ICDs.

So that's why we have said sequentially we are basically flat with where we were in the prior quarter.

Just to quickly respond to the question about profitable market share, we continue to sort of bring forth innovations that give us the opportunity to move the whole market up.

We did that with minimal ventricular pacing.

We've done that with the OptiVol and we are continuing to innovate that -- bring forth things like MRI safe systems, which we believe will enable us to generate a modest premium and to be able to gain share while protecting and if not growing our margins.

Then just one last one.

I mean just following up on the CRM share position, your other two competitors have been selectively adding to their sales infrastructure.

Any thoughts on Medtronic kind of reversing its course in terms of reallocating expenses on the CRM side?

Well, first of all, we have been reallocating expenses on the CRDM side.

If you look at where we are today, we reduced our worldwide headcount in the overall CRDM business about 20%.

So we have been very smart in reallocating resources, but at the same time protecting that competitive field force that we have had and today when you look at our enterprise and you combine our sales force and our clinical specialists, we feel that we are well positioned and well structured to be able to maintain and grow our market share going forward.

Just to add to Bill's comment, Tim, I mean we are obviously always focused on what is the right productivity that we need in our organizations.

And as I mentioned in my comments, we know that our sales force productivity and a lot of our productivity within our CRDM business is much higher than what the competition that we obviously are doing a good job of leveraging our overall expense structure and managing that.

And as Bill said, even within CRDM, we've shifted things out of CRDM, but we did it even within CRDM -- we've shifted resources to really focus on what services and what components do the customers and the patients really need versus what maybe has been historically.

So more clinical specialists etc.

versus even adding more sales reps, we just think we are focused on trying to make sure we deliver the basic services that the patients and the customers really need.

So we think we have a good expense profile at this point in time to continue to manage the business.

Great, thank you.

Tao Levy, Deutsche Bank.

Good morning.

I have a question on the pacemaker side, actually.

I mean if you look at the last few quarters in the US, you guys have declined and I know you commented that your shares stayed stable there.

Maybe you could comment just briefly on the market, what you are seeing there and were there any one offs that have led the last few quarters to be negative growth?

Well again, go back to Gary's comments, when you look at this issue of number of days, that plays into this whole equation.

But I go back and look at our product portfolio and with the recent launch of the MRI SureScan technology, some of the capabilities that we have with minimal ventricular pacing, we feel very good that we are -- have a very competitive product lineup and are vigorously defending and growing -- protecting our market share.

And the market in terms of just overall growth has been pretty much where it has been in that sort of low single digits.

So that's kind of where we are.

And just briefly, on the acquisition strategy front, you guys have made a couple of acquisitions over the last couple months and some media reports of maybe another one coming.

You look back at Kyphon and the issues that you face at Kyphon, is there any sort of lessons you've learned there that you think you can apply to what you might be doing going forward and, again, relative to the last two at least that have been publicly announced?

Well, it's interesting.

If you go back and look over time at where we've been maybe more successful in some respects, it's been in the smaller kind of tuck-in acquisitions.

When I look at what we did with AneuRx, the endovascular business, and how we have been able to grow that.

So we are looking for the unique sort of innovative proprietary technology that complement our current sort of distribution footprint that give us the opportunity to grow into attractive markets.

And the recent acquisitions in a fib, I think fit that very well.

Early technology gives us a chance to kind of come in and help to shape it and to build that market and be able to drive meaningful growth going forward.

So looking back, I would say we think that we can make a difference in these earlier stage technologies.

Just to add to Bill's comments, the other thing I would say we have done is we have looked our integration processes and have really improved or done some steps to try to improve in that area as we go forward.

We have dedicated integration teams that we've assigned to these acquisitions now.

So for example, on each of the acquisitions -- and we did kind of a follow-up here recently on the Kyphon acquisition on lessons learned, what went well, what didn't go so well.

And we expect to take those lessons learned and apply those into the AF acquisitions Bill just mentioned.

Okay, great.

Thanks.

Matthew Dodds, Citigroup.

Thanks, just a couple questions.

Bill, first for you back to the ICDs and market share, when you look at the US and OUS split, in the US it does look like he lost share sequentially.

I'm just wondering how much of that do you think has to do with this replacement argument where you said you don't think replacements are helping you that much where other companies have said they are still benefiting?

Just comment on that one more time.

I know you commented on it last quarter.

Yes, Matt, I think it clearly plays into the equation.

If you look at replacements today, they are roughly 30% plus of the total revenue market.

So it's not unimportant and not insignificant component of the overall sales make up.

And we are going through a phase right now where and I think you heard some of our competitors speak about it at their most recent conference calls, where they are in a cycle where it's going to be a bit of a tailwind for them.

And for us, it's a bit of a headwind.

So you've got to sort of factor that into this whole equation and when you look at that and we look and track very carefully our initial implants and what we are seeing is that we think we are being able to maintain if not marginally gain share of the initial implants, which will benefit us over the long run.

So just to follow up on that, with the devices you had to remove in '05, shouldn't the replacement cycle then have a second lag effect on you because of that?

Well, it did.

We didn't -- it certainly went against us because we basically replaced at no charge a number of those products that would have been in our replacement cycle.

So you are right, Matt.

That has -- that's been another sort of negative drag on us was the actions, the responsible actions we took with Marquis a few years ago.

But those will be -- my assumptions are those will be coming back though, because they are (multiple speakers) about a year or two are going to be replaced.

Yes, they will.

It's in our case since we have longer battery lives, it's going to be probably six or seven years.

Okay.

And then Gary on the SG&A, you said that FX was an impact.

I guess I assumed it would be a benefit depending on how you pay people internationally.

Just could you comment on that?

Then going forward, will FX given the current rates turn to a benefit in SG&A or will it remain negative?

Well, the issue you have on why foreign exchange is a negative is basically the selling part of the equation is pretty comparable and as a percentage of revenue in OUS areas, it's similar to the US, and so you don't have that much of an impact.

But obviously we have more G&A and more marketing dollars that are over in the US.

And so as a percentage, the reduction you get in the revenue from dollar strengthening is more than you obviously get an expense side.

So that's why there was a negative.

You obviously got a benefit in your selling expenses by translating them into the strengthened dollar, but the problems you have is as a percentage it is a lower percentage and so it actually has a negative impact on your overall SG&A percentage.

And as I mentioned, its 20 to 30 basis points here kind of in the quarter itself.

At today's FX rates, that would continue to be slightly negative for us as we go forward for this next several quarters comparing to the prior years, because that would -- again, that same impact would be there in the subsequent quarters.

Now we are seeing obviously the benefit however of some of our other spending reduction leverage plans as we go forward and as we have been talked about, as you get into Q4 again the problem we have in our Q3, we have fewer selling days.

The expenses are basically the same because you are paying everybody on obviously the monthly or quarterly basis.

But the fact of the matter is, you will have a higher SG&A percentage.

We always do in Q3 because we have fewer selling days.

That will -- as you go to Q4, you have more selling days and actually the SG&A percentage drops just because of the leverage components you get there.

The last comment I would add to the comment here, Matt, is even though I mentioned the SG&A percentage was -- it was negative on the SG&A itself.

As I mentioned, from a bottom-line perspective, we basically -- the hedging results and the hedging gains that I mentioned, we had a net basically zero benefit neutral benefit on the bottom line.

So basically we offset that entire revenue impact from currency on the bottom line.

All right.

Thanks, Gary.

Thanks, Bill.

Rick Wise, Leerink Swann.

Good morning, everyone.

This is Danielle Antalffy.

I am in for Rick today.

I just want to expand a bit more on your CRM comments.

First of all, broadly speaking given expanded new product offerings from St.

Jude and Boston Scientific and more likely to come in the next 12 months, can you expand on Medtronic's key new product offerings and highlight whether you think more aggressive pricing is a greater risk now given the narrowing product line differences?

We just launched a whole new platform, the Vision 3D over the last six months and complementing that we have a whole new family of leads, the Attain StarFix lead, which is getting a lot of very positive traction out there.

We just supplemented that with the Attain Command.

So then broad-based delivery systems in addition to the lead, so we have new delivery systems.

We have new leads.

We have a whole new platform.

We are about to bring forth an improved CareLink system.

So we have a pretty fresh new product line that we believe will give us the opportunity to really continue to protect and to gain profitable share.

Now we have -- so we feel very good about our product line.

Just to kind of add to what Bill mentioned overall as far as pricing, we don't think you will see pricing playing an issue as you get into some of the share discussions here.

But the reality is all of us are adding value to our products and that should maintain the pricing aspects as we go forward.

So we don't see that being a major component.

I think we will continue to compete on what the therapies we provide.

And for example, Medtronic products are right now the ICDs, we are the only ones to have some of the things Bill mentioned earlier, like OptiVol.

For example, we are the only one that has that feature and actually doctors are now being able to be reimbursed for monitoring of the OptiVol function.

So we think actually that will be an advantage for us in some of the features we do have in our products going forward and we are differentiated.

Okay, then if I could follow up a little bit more specifically, just a few weeks ago one of your competitors at their investor conference talked about having a pacer in CRTP devices with RF telemetry and remote follow-up capability later this year.

Is this something that is in Medtronic's pipeline and if so, when could we see that in the US?

Yes, it is, and I don't have the specific dates.

We can follow up with you on that, but we have obviously it's a central part of our ICD platform.

The wireless telemetry capabilities that we have and we have that technology that we are building into our pacemakers as well.

Great, thanks so much, guys.

Larry Biegelsen, Wachovia.

Thanks for taking my call.

One housekeeping question.

Endeavor sales in the quarter, I don't know if you mentioned that.

Endeavor for the worldwide, we recorded about $180 million in overall stents and for the Endeavor, we did about close to $130 million.

And the US portion?

It was around $50 million.

Thanks.

And Gary, for the fiscal 4Q '09, what is the FX impact you are expecting now?

And I'm sorry I didn't have a chance to do the math, but what does that imply for the constant currency growth rate for sales in the quarter?

By my math it looks like about 7% to 13%.

7% to 13% revenue growth?

Well, what is the FX impact for 4Q '09 that you are assuming now.

It was a little bit lighter in the third quarter than I think the initial guidance.

So what is the constant currency growth rate that your guidance assumes right now?

Basically our guidance would say that our growth in the fourth quarter would probably be similar to what we had here in Q3.

You know, of the 5% to 8% we've talked about, the last couple -- the last quarter here, it would be again at the lower end of that range based on what we see currently at a constant currency level.

Again, foreign exchange right now we expect would be at today's rates would be a little bit heavier impact in Q4 versus what you saw in Q1.

You could be -- at today's rates, you could be somewhere $150 million to $200 million of negative FX.

We will have to see how that plays out.

But at today's rates, that's what you would see.

You meant a little higher in the fourth quarter versus the third quarter, Gary?

That's correct, at today's rates.

Okay, and lastly spine.

Could you give us an update on Kyphon Japan, the KAVIAR trial, and when you plan to file the cervical indication and prestige LP?

Thanks.

Timing on that?

So on Kyphon Japan, we just submitted our shonin just this quarter and we are looking at early FY '11 probably when you factor in reimbursement and everything to be on the market.

So that's Kyphon.

What was the other?

The KAVIAR study and prestige LP and (multiple speakers)?

KAVIAR is moving along.

We are -- I can't member exactly the number that we've enrolled, but it's -- that study is out there still probably for a couple of years.

But it is -- we are actively enrolling in KAVIAR.

Then on the prestige LP, I am not sure I have -- we will get back to you on that.

I don't have that detail either.

We'll have to get back to you.

The filing for infused and cervical indications?

Sorry, that's the last one.

The filing for the infused cervical, we have the study underway and so again, I don't know the specifics of when -- but we have the amplified study for the posterior lateral and we have an ACDF study for both of those are studies that are sort of -- well, the posterior lateral study is done, but I think the ACDF study is underway.

Ben Andrew, William Blair.

Good morning.

Can you talk a little bit about kind of following on the spine topic, back on the construct side, when do you think you'll have a more competitive product lineup or is that the issue?

Because you did talk about a series of new product launches where you can get that business growing again back at the market rate.

Is that an FY 2010 timeframe?

Yes, we actually have in development a major new sort of product that will replace our kind of legacy system that will be starting to come into the market probably end of next -- of this fiscal year.

Okay?

Of next fiscal year, of FY '10.

And it's something we are very excited about.

It will completely replace our sort of legacy system, if you will.

So that's going to be sort of, if you will, the backbone of our spine offering.

And then on top of that, we continue to bring forth innovations in these translational plates.

We have a new system called the [XVBR] which is kind of a telescopic cage.

We have new cervical plates.

We have -- one of the things that we are continuing to do is to lead the way with new material sciences, these hydroxyapatite coated screws and then we are -- combine that with just, as I mentioned in my remarks, the capabilities that we have with biologics and with navigation, we feel like we are going to be in a very strong position as we come into FY '10 and going forward.

Just add to Bill's comments, I want to make it clear that this new product line we are talking about is a whole new platform, the legacy.

Our existing platform, or the legacy platform has been out there probably about six or seven years now and so those will be a brand new platform that will include instruments.

It will include all new products, etc.

I think there's over 5000 really parts and stuff to this, so it's not one product line.

This is a whole new platform on the spinal business that as Bill said, we are very excited about that we think will really help accelerate that business.

Thank you.

David Lewis, Morgan Stanley.

Good morning.

Bill, just a question, CDRM given your comments on profitable growth.

If I submit a statement that you are essentially staffing the CDRM business to minimize share losses as opposed to share gains and incremental share gains have to come from new products, is that kind of an accurate statement or no?

No.

I mean that we are not staffing to minimize share loss.

We are staffing to protect and to grow our business very clearly.

We are playing to win in this marketplace.

And it is a combination of products, it is a combination of service, it is a combination of having the right contracts with hospitals.

So on a broad based way we have -- we are playing to win.

Okay.

And then this commentary on the core fusion business, this new platform, are we to assume that this new platform will address nerve-sparing type procedures as well so some navigation or another augmentation to minimally invasive surgery?

That is a little bit separate from the new platform, but that is a direction where we are going.

We have some proprietary technologies for integrating nerve monitoring into some of our tools to be able to ensure a safe procedures.

So absolutely that is technology that we have leveraged from our ENT business that we are bringing over to our spine business and we believe that that again is going to help us to differentiate our technology.

Okay, and sorry, Bill, and that will be included in the new platform launch or it could be later than the existing launch?

It will be later.

It's a little bit separate from the new platform launch.

The new platform, by the way, one of the real elements of that is it is a smaller configuration of components that enable you to do these procedures even more minimally invasive going forward.

So again, that's the core value of this whole new platform that we are bringing on, bringing in is sort of the infrastructure.

And then on top of that, we will add sensor technology, navigation technologies that will further differentiate these products.

Okay.

Then just two more quick ones here.

One, just staying with spine, on the synergy comment that I believe Gary made, you are seeing higher synergies.

Is that just from a more rationalized sales channel or are there areas of synergies that we are missing here?

The primary synergies actually are not in the sales area.

As we have talked about the past, we basically just combine the sales rep organization, so there's really not a lot of synergies that we've experienced there.

It's more in the back-office types of activities, the customer service, the finance, etc.

There are some synergies on marketing, etc.

we've also achieved.

But overall -- and some on the R&D side.

But the sales side, it has not been as much on the sales side, a little bit on sales management but primarily the back-office has been where synergies have been at.

Okay, just last question and I'll jump back in queue.

Just on vascular given it the hard quarter given Rx supply constraints, is Rx going to be a share stabilizer or potentially a share gainer as we look forward the next couple of quarters?

Thank you.

It will be a share gainer.

We will leverage the Rx platform to incrementally gain share we believe quarter after quarter.

Okay, why don't we take one more question and wrap up the Q&A here.

Bob Hopkins, Banc of America.

Thanks, good morning, everybody.

A couple here.

Just first on spine, can you give us an update on Amplify and when you expect approval?

Well, let me get someone to help me here.

Mid FY '10, we should have Amplify.

Okay.

Then Bill, is the basic message on spine especially as it relates to biologics and Kyphon, that those businesses have now stabilized and that we have seen the lows from a quarterly revenue perspective or was this quarter just sort of nice stabilization but we could see some more bumps down before we head back up again?

No, I think it's fair to say that we are seeing both these businesses stabilized on the biologics side with INFUSE and then secondly on the Kyphon, yes.

So I think it's fair to say that they are both stable and we are going to be investing to grow them.

Okay, then Bill, one bigger picture question I wanted to ask you is that obviously the economy seems to be getting worse but most importantly, things are changing very quickly.

And so I am wondering if you could talk about what you have seen especially over just the last month or month and a half in your businesses such as spine or ICDs or pacemakers?

Are you noticing in the last month any change out there for your businesses that could be susceptible to a weaker economy, especially one of this nature?

I just want to get your latest thoughts on what you're seeing out there in the hospital marketplace over the course of that last month.

Well, when I talk to a few people that I'm close to that run large healthcare systems and take their pulse on kind of what they're seeing and combine that on what I'm seeing, I do think see in the whole elective procedure and that -- it comes back to what you define as elective, as being increasingly impacted.

And again, you go back to our comments in terms of businesses that we think are -- have more of an elective component, one is the diabetes with the patience perhaps not being in a position to afford the co-pay for a pump.

Secondly, in the surgical technologies business, there is a number of procedures particularly the ENT space that are arguably elective.

Thirdly, I do think that spine is -- could be somewhat vulnerable as patients will maybe endure our more pain to put off having a surgical procedure that takes them out of work or puts them at risk of their job.

And one thing, that is one comment that I have heard from talking to hospital CEOs is that their, if you will, their whole musculoskeletal sort of business has been down and spine is sort of figured into that a little bit.

So I think the spine.

I think surgical technology, possibly diabetes are the areas that are most susceptible to the economic turmoil.

Bob, just add to Bill's comments, I think the other thing I would add is kind of from an overall perspective obviously as these hospitals and countries try to figure out how they balance their budgets etc., we obviously have seen them trying to do some reductions in their own inventory levels, etc.

and trying to minimize their -- those levels.

So that is an area we are also keeping an eye on, do they start to lengthen receivables?

Do they start to do some of those things?

We haven't seen it yet, but that's the other area of focus where I think you could see the economy having some impact on us as we move ahead.

Okay, I think we are going to have to wrap it up here, so just again, on behalf of the management team, thanks for your interest and continued support and we will talk to you next quarter.

Thanks.

Ladies and gentlemen, this does conclude the Medtronic third-quarter earnings conference call.

You may now disconnect.