美敦力 (MDT) 2010 Q1 法說會逐字稿

Good morning.

My name is Regina and I will be your conference operator today.

At this time I would like to welcome everyone to the Medtronic first-quarter earnings release 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 would now like to turn the call over to Jeff Warren, Vice President of Investor Relations.

Mr.

Warren, you may begin your conference.

Thanks, Regina.

Good morning and welcome to Medtronic's first-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 fiscal year 2010 first quarter which ended July 31, 2009.

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

A few logistical comments.

Earlier this morning we issued a press release containing our financial statements and revenue by business summary.

You should also note that some of the statements made during this call may be considered forward-looking statements and that actual results might differ materially from those projected in the forward-looking statement.

Additional information concerning factors that could cause actual results to differ are contained in our 10-K for fiscal year 2009 and we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the Investor Relations portion of the Medtronic website.

Finally, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the first quarter of fiscal year 2009.

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.

This morning we reported first-quarter revenue of $3.9 billion, which represents a 10% increase over the prior year after adjusting for a $145 million unfavorable impact from foreign currency.

Non-GAAP earnings and diluted earnings per share for the quarter were $883 million and $0.79, respectively.

These results include an $18 million revenue reversal which resulted in a negative $0.01 EPS impact associated with the buyout of our CardioVascular distributor in Japan.

Q1 results reflect the solid progress we are making on driving our ONE Medtronic initiatives.

The focus of our entire management team continues to be driving solid, consistent execution to deliver operating results that meet or exceed our financial commitments, to develop innovative products for our pipeline, and improve margins through a continued focus on operating leverage.

As highlighted at our analyst meeting in June our goal is to extend our market leadership in large part by increasing our focus on innovation.

While I am pleased with the progress we are making, this is a journey.

Last quarter we launched a number of new products including the Veo low glucose suspend insulin pump outside the United States, the Activa PC and RC generation of deep brain stimulators, and our Endeavor drug-eluting stent in Japan.

We have had good success integrating our atrial fibrillation and transcatheter valve acquisitions, which are both off to a strong start exceeding our expectations.

In the coming quarters we expect to introduce an arsenal of new products with first-to-market features that will continue to extend our market-leading positions.

Also this quarter we continue to make solid progress on driving operating leverage.

Our gross profit remained steady as cost saving initiatives continued to offset modest pricing pressures.

SG&A margins showed improvement year-over-year even as we continue to invest in our sales force.

Since Q1 of FY '09 we have added over 400 sales representatives globally.

Now let's turn to some key highlights within our businesses, starting with Cardiac Rhythm and Disease Management.

The global ICD market grew in the mid-single digits on a constant currency basis.

We believe that penetration of international markets will continue to drive worldwide growth in the mid-single digits.

We are also cautiously optimistic about the benefits of our REVERSE study and the recently announced success of MADIT-CRT and what they will have on the market.

Our overall CRDM market share this quarter was stable marking several quarters in a row where we have maintained share.

Physicians continue to view Medtronic as the clear technology leader with key differentiating features like Optivol fluid monitoring, MVP or managed ventricular pacing, and pain-free shock reduction.

Our new family of left-heart leads and lead delivery systems has clearly made a difference in our heart failure business where we continue to gain momentum.

And in pacing the overall performance was solid as we continue to gain traction with first-to-market MRI-safe pacemakers and CareLink.

In fact, we are the only company to offer comprehensive, remote monitoring coverage for all of our pacemakers.

Furthermore, we continue to make progress towards commercializing first-to-market products in technologies like the Advisa MRI-safe place marker, the Protecta total shock reduction ICD, and our next-generation Optivol.

We are excited about the many innovative products in our pipeline and remain on track to deliver them over the coming 24 months.

In our AF solutions business we are making significant progress in becoming the undisputed leader in one of the fastest-growing and most promising areas of med tech.

The integration of CryoCath and Ablation Frontiers continues to track very well in Q1 as the integrated sales forces delivered on their targets during the first quarter as a combined unit.

We also announced the completion of the 12-month follow-ups in the STOP-AF clinical trial.

This study evaluates our Arctic Front CryoAblation catheter system in treating for paroxysmal atrial fibrillation.

We remain on track to submit the PMA for Arctic Front in the coming months which keeps us on target to gain FDA approval in early FY '11.

Similarly the IDE clinical trial for Ablation Frontiers remains on track which positions us well for reaching the market by the end of the next fiscal year.

With our investments in these two technologies and the appropriate clinical evidence we could become the only company to have labeled indications for all stages of AF.

Our intent to enable physicians to treat patients faster, safer, easier and with more predictable procedure times has never been closer.

So turning to our Spinal and Biologics.

The results this quarter were in line with our expectations as we continue to work towards reinvigorating the business.

The overall spinal and biologics market remains robust growing in the 10% range.

In Biologics we remain confident about the businesses performance and continue to drive initiatives to capture the long-term value of this franchise.

For example, we are increasing our investment in clinical trials to expand indications for BMP.

AMPLIFY, our BMP solution for posterolateral fusions, continues to move forward and we hope to receive FDA approval later this fiscal year.

Additionally, we are making great progress in expanding our portfolio of alternative bone grafting solutions with products like Progenix Plus, the unique demineralized bone matrix.

In Core Spine our team continues to track towards re-establishing our innovation leadership by enhancing the most comprehensive line of products on the market with innovations like the G5 platform, which we have branded Solera, and the Vertex cervical fixation system, and the next-generation balloon kyphoplasty system.

Let me say one thing before continuing on, Medtronic has and will vigorously defend its intellectual property rights in all of our markets, including balloon kyphoplasty.

We are very happy to have achieved a number of recent positive legal developments including victories regarding lawsuits with AGA Medical, DFine Europe, and Globus Medical.

We also resolved substantially all intellectual property litigation affecting the design and delivery of our bare metal and drug eluting stents.

So that brings me to our CardioVascular business which delivered strong growth driven by continued momentum in our Coronary franchise, exceptional growth in our Endovascular business, and a seamless integration of our CoreValve acquisition.

With sales of greater than $700 million after adjusting for a revenue reversal associated with the distributor buyout in Japan, Medtronic's cardiovascular division is one of the largest and fastest growing businesses in the cardiovascular space.

In Coronary, international stent revenue grew in the double digits on a constant currency basis with momentum coming from the launch of Endeavor in Japan where physicians have been quick to embrace and Endeavor's deliverability and unique safety profile.

We estimate that our worldwide market share for all coronary stents is now above 20%.

Our Endovascular business continues to deliver exceptional growth and is well on its way towards becoming a $500 million business.

The integration of CoreValve continues to progress extremely well as the business delivered strong results in Q1.

The transcatheter valve market is now annualizing at roughly $200 million and we continue to command half of the market.

The breadth and capacity of our global cardiovascular infrastructure has greatly enhanced CoreValve's ability to meet the growing demand for its products by accelerating the development and scalability of the CoreValve operations.

In fact, our Santa Ana valve manufacturing facility in California played a critical role in CoreValve's impressive performance this quarter.

I would also like to highlight that during the quarter our Melody transcatheter pulmonic valve became the first transcatheter valve to go before an FDA panel and gain recommendation for a humanitarian device exemption approval.

We are very proud of this accomplishment and hope to launch the product in the second half of the fiscal year.

Moving to Neuromodulation.

Results this quarter were driven by our deep brain stimulation therapy for Parkinson's disease and our InterStim therapy for incontinence, both of which grew faster than 20% on a constant currency basis.

Both of these markets continue to perform extremely well as we have worked closely with physicians to develop the infrastructure for continued growth through patient education and referral channel development.

The pain stim market continues to grow at a healthy rate as well.

And while our franchise experienced some market pressure, market share pressure as competitors dramatically invested to expand their sales organizations, we are confident actions we have underway will enable us to recapture our position in future quarters.

Additionally, I believe our product portfolio and pipeline is the strongest in the industry and will help us to extend our leadership position over the long haul.

In Diabetes the business delivered solid, double-digit results on a constant currently basis despite the economic headwinds.

These results also reflect the team's great work in successfully managing the Quick-set field action.

We reached over 158,000 patients with replacement product within the first few days of the recall.

Additionally, the continued success of continuous glucose monitoring and solid insulin pump sales in this economic environment further validated the value of our market-leading technology.

This quarter we also extended our lead as the only company with a proprietary CGM sensor-augmented pump on the market by launching the Veo insulin pump in the UK and Ireland.

Veo is a significant step forward as the first semi-closed loop project which features a low glucose suspend function that automatically shuts down insulin delivery when a patient's glucose levels are trending dangerously low.

We are planning to launch it in most international markets later this quarter.

In the US we are also very excited about our pipeline and remain on target with plans to launch our Revel insulin pump later this year and our patch and next-generation durable pumps in fiscal 2011.

These innovations will extend the most complete and comprehensive line of sensor-augmented therapy options available on the market.

And, lastly, our Surgical Technologies business continues to deliver solid growth.

As we have mentioned previously, we have kept a close watch on this business given its larger proportion of elective procedure and capital equipment revenue.

We were particularly encouraged during the quarter to see a rebound in the capital equipment portions of this business and remain optimistic as we look at the remainder of the year.

Looking at our business from a geographical perspective, our international operations delivered very solid, double-digit growth in the quarter on a constant currency basis.

Our markets outside the US remain significantly under penetrated and we expect international revenues to pace our growth going forward.

As such we remain steadfast in our commitment and focus on geographic expansion.

As I mentioned earlier, we were very excited to see the initial traction of Endeavor in Japan and the success of our AF and transcatheter valve products in the international markets.

Additional international highlights include the continued penetration of our Endurant AAA stent graft, strong demand for our O-Arm navigation system which we launched in Japan during the first quarter.

Overall, I am pleased with the solid first-quarter results and the progress this represents towards fulfilling our full-year commitments.

I remain confident in our FY '10 commitments and the strides we are taking on our pipeline to ensure sustained growth in FY '11 and beyond.

We remain resolute on our objectives of the 5% to 8% revenue and double-digit earnings per share growth for the foreseeable future.

Finally, before I turn the call over to Gary I would just like to briefly address some of the key macro issues confronting our industry.

The debate on healthcare reform in the US continues and we remain very active in the ongoing discussions.

I am spending an increasing amount of my time meeting with key legislators, thought leaders to help shape a solution that continues to allow for appropriate investment and innovation while providing patients with access to therapies when they require them.

Despite the wide range of options being discussed, I firmly believe that no matter what direction reform takes the medical technology industry will be part of the solution to the challenges our country and other economies are facing with rising costs in healthcare.

Medtronic will continue to take a leadership role in enabling better healthcare.

We have led the way with outcomes-based medicine and are leading the way with enabling technologies like CareLink and unique diagnostic tools to reduce unnecessary visits to clinics or hospital.

Our therapies are designed to help restore people to health and to enable them to return to a more productive level in society.

On the subject of pre-emption, we continue to believe that the FDA is the appropriate governing body for determining device safety and effectiveness and we are opposed to any legislation that would undermine the FDA's authority.

Lastly, let me briefly address the recent media coverage surrounding our physician relationships and collaboration with industry.

Appropriate physician collaboration is vital for medical device innovation.

The well accepted of 'from bedside to bench to bedside' recognizes that the people best suited to innovate and evaluate the most useful and revolutionary products are the physicians who use these products every day.

That said, it is clear that there is much work to be done in this area.

Medtronic, as the industry leader, has played a strong and ongoing part in working to create new standards for financial transparency and conflict of interest disclosure, and we will continue to do so.

In February of this year we announced our voluntary decision to disclose all payments to US doctors beginning in 2010.

In the end, we strongly support our physicians and are amazed on a daily basis by their innovation, passion, and unique insights into patient solutions.

With the aging of the population, the changing demographics, and the growing burden of chronic disease there is a great opportunity for Medtronic and our physician partners to make an impact.

No one is better positioned than Medtronic to lead the industry in developing the standards that ensure that the industry and physician collaboration continues to bring innovative life-saving medical technology to market.

I will now turn the call over to Gary who will take you through the financial results.

After his comments I will conclude with some closing remarks.

Thanks, Bill.

As mentioned earlier, first-quarter revenue of $3.933 billion grew 10% after adjusting for a $145 million unfavorable impact of foreign currency.

Breaking this out geographically revenue in the US was $2.391 billion, up 6%, while sales outside the US were $1.542 billion increasing 16% on a constant currency basis.

As expected the significant strengthening of the dollar in Q1 versus a year ago period created a large foreign exchange headwind.

However, as I will discuss in a moment, unlike many companies we were able to offset much of the bottom-line impact through our hedging programs.

After adjusting for restructuring, certain litigation charges, and the non-cash charge to interest expense due to the changing accounting rules governing convertible debt first-quarter earnings and diluted earnings per share on a non-GAAP basis were $883 million and $0.79, respectively.

GAAP earnings and diluted earnings per share were $445 million and $0.40, respectively.

The first quarter of fiscal 2010 was impacted by number of items that we have reconciled for our non-GAAP results.

First, as initially discussed in our fourth-quarter call, we recorded a net $69 million restructuring charge in the first quarter related to the initiative to realign and delayer the organization starting in the fourth quarter of 2009.

Second, we recorded $444 million in certain litigation charges for the settlement of all outstanding intellectual property litigation with Abbott Laboratories.

Lastly, $43 million of non-cash interest expense was recorded in the first quarter in accordance with our adoption of the new convertible debt accounting rules.

In addition, there are several unusual items that impacted our first-quarter earnings results.

First, a $16 million charge related to the supplier-related Quick-set field action in our diabetes business which Bill talked about, which translates into a $0.01 negative impact on our earnings per share.

We are currently in discussions with our supplier and are working with them to recover substantially all costs associated with this field action.

Second, as Bill mentioned, we reversed $18 million in revenue relating to the buyout of our cardiovascular distributor in Japan which serviced 40% of all accounts in the country.

Our cardiovascular business will now be completely direct.

The transaction negatively impacted earnings per share by $0.01 in Q1, but is expected to be recovered in the back half of FY '10.

Third, and our first-quarter results included an extra week due to our 52/53 week fiscal year which had a favorable impact on our results.

The exact benefit of the extra week is difficult to estimate.

However, based on our analysis we calculated it added approximately 500 basis points to growth in the first quarter which would translate into 100 to 150 basis points of revenue growth for the full year.

Moving on to a more detailed analysis of our businesses, CRDM revenue of $1.337 billion increased 7% on a constant currency basis.

Worldwide ICD revenue of $775 million grew 5% on a constant currency basis.

The US ICD market grew in the low- to mid-single digits and the global ICD market grew in the mid-single digits after taking into account the impact of currency.

Pacing revenue of $536 million grew 7% on a constant currency basis.

Spinal and Biologics revenue of $915 million grew 8% on a constant currency basis.

The core spinal revenue of $696 million grew 11% constant currency reflecting continued stability in this business and traction from a series of recent product introductions.

Kyphon grew modestly in the first quarter driven mainly by the BKP procedural growth.

International core spine revenue growth of 24% on a constant currency basis reflects solid performance across all geographies.

It was also aided somewhat by the revenue reversal recorded last year relating to our distributor buyout resulting from the initiation of our joint venture with Weigao.

Biologics revenue of $219 million was flat for the prior year on a constant currency basis.

Although this business continues to feel pressure from several external factors, we were encouraged by the continued stability in the US and double-digit growth outside the US on a constant currency basis.

It should also be noted that Q1 was the last quarter of difficult comparables for the Biologics business as the physician health notification that impacted InFuse sales was published in July of 2008.

Cardiovascular revenue of $689 million grew 15% on a constant currency basis.

Excluding the impact of our distributor buyback CardioVascular revenue would have been up 18%.

Coronary revenue of $353 million increased 8% constant currency, reflecting the strength of our Endeavor launch in Japan which contributed over $30 million in revenue this quarter as physicians rapidly initiated product evaluations.

Looking ahead we would expect our share levels in Japan to remain stable for the remainder of the calendar year as the frequency of cath lab evaluations begins to normalize.

Our worldwide coronary stent share is now estimated at over 20%.

Endovascular revenue of $118 million grew 41% on a constant currency basis.

US growth of over 44% was fueled by the continued success of our Talent abdominal and thoracic stent grafts in the US.

Equally impressive, constant currency growth outside the US of nearly 40% was driven by the ongoing success of our next-generation Endurant abdominal stent grafts.

We continued to advance evidence-based medicine in this growing market by launching three post-market clinical trials last quarter.

Neuromodulation revenue of $373 million increased 11% on a constant currency basis driven by the continued strength in deep brain stimulation and gastro/uro.

Revenue in our DBS business grew in the mid-20% range constant currency.

The launch of our next-generation DBS system, Activa PC and RC, contributed to the ongoing momentum in that business.

Gastro/Uro revenue grew well above the 20% level on a constant currency basis driven by another strong quarter from InterStim.

Our pain stim and infusion pump businesses grew in the low-single digits.

Diabetes revenue of $295 million grew 15% on a constant currency basis, driven by the continued strength in our CGM franchise which is annualizing at almost $120 million.

We were also encouraged to see that despite a challenging economic environment and increased competition, insulin pump systems still achieved double-digit growth on a constant currency basis.

Surgical technologies revenue of $227 million grew 16% constant currency.

Growth was driven by international revenue, which increased 23% on a constant currency basis.

This was driven by strong O-Arm sales as our teams focused on international markets including Western Europe and launched the system in Japan.

The market for the O-Arm remains well under-penetrated, both domestically and internationally.

We also saw strong sales in fusion image-guided surgery systems, nerve monitoring products, power disposables, and in our service business.

I think it's also important to note that given the elective nature of some of the underlying procedures and the large capital equipment component of the business Surgical Technologies performed well in this environment.

Finally, Physio Control revenue of $97 million increased 7% on a constant currency basis.

Results were driven by the growth of our recently launched LIFEPAK 15 monitor/defibrillator.

We continued to be focused on all remaining FDA-related questions so that we can return to full shipping to all customers.

Turning to the rest of the income statement, the gross profit margin was 76% after excluding the previously discussed $16 million charge for the infusion set recall and the $7 million of restructuring charges recorded in cost of goods sold.

Gross profit in the first quarter of last year was 76.9%.

Foreign exchange had a 90 basis point negative impact on gross margins this quarter.

We continue to see the benefits of the broad portfolio initiatives we have under way to reach our cost of goods sold by $1 billion by fiscal year 2012.

First-quarter R&D spending of $370 million represents approximately 9.4% of revenue compared to $324 million or 8.7% of revenue in the first quarter of 2009.

We remain committed to investing in the new technologies to drive future growth.

First-quarter SG&A expenditures of $1.368 billion represented 34.8% of sales compared to 35.6% of sales in the first quarter of last year.

SG&A expense benefited from our ongoing SG&A initiatives to leverage our facilities and IT expenses.

Additionally, our realignment and restructuring efforts from both fiscal year 2008 and 2009 provided some tailwind in reducing expenditures.

Net other expense for the quarter was $96 million compared to $151 million in the prior year.

The year-over-year decrease primarily is a result of the gains from our hedging programs which were $31 million during the quarter compared to $67 million 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.

Net interest expense for the quarter was $66 million, which includes $43 million of non-cash interest expense related to the new convertible debt accounting rules.

As of July 31, 2009, we had approximately $4 billion in cash and cash investments.

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.

As reported, our effective tax rate was 20.7%.

Excluding the tax impact of the restructuring and certain litigation charges and a $7 million foreign R&D tax credit, our non-GAAP nominal tax rate in the first quarter was 21%.

We expect our fiscal year 2010 tax rate, exclusive of one-time adjustments, to be in the range of 21% to 22%.

First quarter weighted average shares outstanding on a diluted business were 1.115 billion shares.

During the first quarter we repurchased $344 million of our common stock.

As of July 31, 2009, we had remaining capacity to repurchase approximately 67 million shares under our Board authorized stock repurchase plan.

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 providing an update on our 2010 fiscal year guidance.

As you know, we limit our guidance to one year at a time and try to keep it more directional in nature.

In fiscal 2009 we saw significant fluctuations in currency exchange rates and continue to see movement in the first quarter.

It remains difficult to predict exchange rates; therefore, we continue to provide revenue growth guidance on a constant currency basis.

We believe that constant currency revenue growth of 5% to 8% provided on our fourth-quarter call remains reasonable for the remainder of FY '10 we continue to execute on our product pipeline and monitor the economy and healthcare reform.

While we are not trying to predict the impact of currency movements, to give you a sense of the FX impact if exchange rates were to remain similar to yesterday for the remainder of the year then our revenue for the full year would be possibly impacted by $75 million to $100 million as the impact from currency turns positive and offsets the headwinds we experienced here in the first quarter and the $30 million to $40 million of negative impact expected in the second quarter.

This compares to the negative $220 million to negative $240 million estimate provided on our Q4 conference call for the full year.

Turning to guidance on the bottom line.

We were encouraged by the solid performance in Q1, but want to remind everyone that Q2 historically tends to be the most difficult quarter for us to predict.

As a result, we believe it is still reasonable to model earnings per share in the range of $3.10 to $3.20, excluding the impact of the non-cash charge to interest expense due to the change in accounting rules governing convertible debt, as previously commented on during our Q4 conference call.

This guidance represents earnings per share growth of 8% to 12% after adjusting for approximately $0.06 to $0.07 of dilution from our AEF and transcatheter valve acquisitions.

As in the past, my comments on guidance do not include any unusual charges or gains that might occur during the fiscal year, nor do they include the impact of the new accounting method for recognizing non-cash interest expense on convertible debt.

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

Thank you, Gary.

Before we begin our Q&A session, just let me close by reiterating what I said to begin with, that Q1 was a solid quarter.

If I look across the Company, I am pleased with the progress being made in aligning the organization towards one Medtronic.

These changes are having a positive impact on driving innovation, achieving operational excellence, and ultimately unlocking many of the strategic synergies that are innately part of the Company.

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

Looking forward, we are focused on delivering on our commitments for the remainder of the year and preparing for the future.

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

In the interest of getting to as many questions as possible, we would really respectfully request that each caller limit themselves to one question with one follow-up.

So, operator, first question.

Ben Andrew, William Blair.

Good morning, gentlemen.

Just wanted to follow up on the operating margin discussion.

I mean, there is a couple of one-time items in there this quarter, but you did mention some modest pricing pressure Gary.

Is that changing versus what you had seen or -- and is this across the businesses?

Maybe just talk and little bit further about that.

Ben, I would say that the pricing pressure that we are seeing has been pretty consistent with what we really have seen over the last year or two, so I don't think it has dramatically changed.

And it is across probably all businesses that we are seeing some of that as the hospitals try to get through this economic downturn they have been experiencing.

But I don't think it was anything unusual here in the first quarter versus what we have seen really over the last year or two.

Okay.

And then just focusing on Spine briefly.

You talked about a little bit of better performance there and obviously there was some developments on the MiniMed side on the clinical front in the quarter.

Can you talk about the trajectory of sales in that business in particular coming away from that data and what you might expect the next several quarters?

Thanks.

Let me make sure I am sure clear, was it spine or diabetes that you were --?

I am sorry, I meant Kyphon.

Oh, on the Kyphon, okay.

Okay, sorry.

The Kyphon in terms of the business it has been consistent in the last couple of quarters in terms of the growth and we continue to think there is a lot of headroom for this therapy.

We just launched a new [adoflurofield] delivery system called the [Natrix], which we are encouraged by, and we have got a lot of products in the pipeline.

So this is a business that we are investing in and we think there is good opportunities for sustainable growth.

So do you expect an impact from Kyphon from the developments on the clinical side?

Have you seen any change in the trajectory of business?

Well, the free study -- there has been a couple of studies obviously.

The one that is getting a lot of press with the New England Journal of Medicine, which I will remind people that was a vertebroplasty study versus kyphoplasty.

The free study that we had that looks at kyphoplasty versus optical medical therapy had a very good outcome and we should have the two-year data on that by the end of the calendar year.

So we are continuing to be very bullish on the role that kyphoplasty will play.

Okay, thanks.

Tao Levy, Deutsche Bank.

Good morning.

Again, just quickly on the pricing front, I don't know who could best answer this question.

What type of visibility do you have heading into any given quarter as to how pricing is going to develop given that I see you probably have some long-term contracts out there?

Tao, this is Bill.

We track pricing very carefully across all of our businesses.

Obviously, we can't predict the future other than just looking at what happened in the recent past.

We look at quarter-to-quarter changes and we are negotiating contracts all the time and we try to anticipate if there is going to be any inflection because of the direction the contracts are going.

But as Gary said, we see the pricing as pretty stable actually in terms of what we built into our models for kind of a modest price decrease.

And then I say modest and that is in the low-single digits.

Okay.

On the Arctic Front product are you still maintaining the timeline for submission?

Did that hit the primary end point and when will we see the data?

We don't know the data yet.

We will be submitting -- the clinical has done and the data should be tabulated as we speak.

I am not quite sure when we are going to show it publicly.

Jeff can get back to you on that, but we are on track for submitting to the FDA and remain on track for the whole PMA.

Okay, great.

Thanks.

Bob Hopkins, Bank of America.

Thanks.

Good morning.

Two questions.

First, I appreciate you giving us your estimation of the impact of the extra week on the entire business of that 500 basis points.

But just digging one level deeper, was it roughly the same impact across all businesses or are there any anomalies that are worth pointing out in any of the key businesses where it was less or more than that 500 basis points?

Bob, this is Gary.

That you said the 500 basis point impact is our estimate for the total company as far as we evaluated.

It will vary by business.

It gets back to which businesses might be more procedural in nature and consignment sales.

For example, business is like Physio Control or some of those other ones where you might maybe have more bulk purchases.

Some of even our CardioVascular businesses or even in CRDM in some cases where there is bulk purchases that obviously isn't impacted necessarily by the extra week.

And so as a result it will vary by business as far as the impact.

So we haven't got down the details of that.

The 500 basis points for the total company is kind of our best guess at this.

It is very difficult to estimate it because it is impacted by procedures.

But clearly it's also impacted by how much they are buying and what their inventory levels they might be maintaining.

Okay, so I will follow up off-line with maybe some point estimates business by business.

But the second question is just on SG&A over the course of the year and how the restructuring will impact that SG&A level, because obviously to meet your targets it will need to come down from here throughout the course of the year.

So could you just talk about the restructuring that you were speaking of on the last quarter in terms of the net adds versus the offsets from the restructuring and how that plays out throughout the course of the year?

You mentioned you have 400 adds year-over-year.

How many more ads are we talking about?

And then what about -- I can't remember the exact number -- roughly 1,300 layoffs or early retirements that you talked about.

Just talk about the cadence of that throughout the year.

Well, as we indicated in our fourth-quarter call we have approximately 1,500 positions that we are going to be eliminating and we are including in this restructuring charge we just talked about.

About one-third of those really were already eliminated as we went through Q1.

The majority of the rest of them are really -- will be completed here early in Q2 and so you will see the full impact of that as we go through the remainder -- as you go through Q2 and for the remainder of the year.

As we have been indicated, eliminating those positions obviously would have helped us in achieving our SG&A percentage, but it also allows us to make the investments that we still feel are important to drive the Company's growth.

And as we indicated in our comments we have added 400 positions over the last year.

I am not going to get into predicting how many we are going to be adding as we go forward, but you can assume that we will continue to be adding sales positions as the Company continues to grow around the world, especially internationally.

Whereas we have talked about our growth rate has been very high and we were very pleased to see that the double-digit growth there internationally this year.

So we will continue to make investments where we see the opportunities for growth, but we will also continue to realign the organization as we have done here in this restructuring charge in Q4/Q1 and really the effect rolling into Q2 going forward.

We understand that we will have to bring down the SG&A percentage.

As we have talked about, it's not just the restructuring efforts that will bring down our percentage.

It is leverage in the rest of the infrastructure and there is many other initiatives we have underway to make sure that we can achieve our objectives on improving the overall operating margins of the organization.

You are still comfortable with the 80 to 100 basis points in SG&A year-over-year?

Yes, that was what we indicated at the beginning of the year and we feel comfortable about that.

But I want to highlight to everyone our focus is on achieving the operating margin improvement that we have talked about.

And we are going to get that both in gross margin and SG&A percentages.

But the thing 80 basis points to 100 basis points is what we communicated at the beginning of the year and we feel good about that.

But I want to make sure everyone understands, we are trying to leverage the entire P&L as we go forward.

And so if I can get opportunities in gross margin we will do that and so we are trying to make sure that the bottom line is the piece that we are actually leveraging.

Thanks very much.

Tim Lee, Piper Jaffray.

Good morning and thank you for taking the question.

Bill, I think in your prepared comments you had mentioned the potential impact from [MADIT-CRT] and REVERSE.

Just give a sense of what your thoughts are on that front.

And you had filed for indication for reverse, is the indication really necessary to really drive the growth on that front?

Well, we look at what made MADIT-CRT and REVERSE will do -- they add evidence for cardiac (inaudible) or mildly symptomatic heart failure patients.

And I think both studies are good for the industry.

There is worldwide 22 million heart failure patients; in the US there are 5 million.

So if REVERSE is like MADIT-CRT is aimed at expanding the benefits of [asymptomatic] heart failure patients.

So we think it's going to be a positive and we think that Boston will more than likely file for the expanded indication and that will benefit everybody.

Would you care to quantify the magnitude of how positive it could be?

No, I can't.

I mean that is hard to estimate to be honest with you, Tim.

Okay, fair enough.

And just one real quick on the neuro side, you had mentioned that the pain business is under some competitive pressures.

What turns that around and how quickly does that turn around?

Thank you.

Well, as I mentioned we have a very rich pipeline in the pain stem business with Restore sensor and the recently launched RC and PC.

So a lot of it's going to be technology.

We are adding to the sales force selectively here as well.

So I think the combination of focus on making sure that we have the right coverage, the continued focus on innovation, the combination is going to enable us to continue to drive growth in that business.

Great.

Thank you very much.

Mike Weinstein, JPMorgan.

Gary, you elected not to raise guidance for the full year.

Is that just because it's the first quarter out of the box and you wanted to see how the year progresses?

You did have a relatively good quarter; you beat where the Street was at.

Your tax rate is coming in a little bit lower, but you didn't raise.

Maybe just want to comment on it?

Mike, I think that is a good way to look at it.

I mean, obviously, as you said and as we have indicated in our comments, we think we had a very solid Q1 and did beat expectations.

As I also indicated in my comment, however, Q2 it tends to be a very difficult quarter for us to kind of predict just because of the summer months, especially internationally, etc.

So as a result we are just saying this is one quarter, but let us continue to go through the year.

Obviously, it's a good start and that is what we want to see.

But we are not at this point in time going to be raising guidance until we see us continuing to deliver these kind of very strong results.

Okay.

Two operational questions for Bill.

Bill, I mentioned in tracking how the pacemaker launches are going outside the US for the MRI compatible system.

Have you started to launch that yet?

And if so, do you have any feedback or is that really all still in front of you?

Well, we have and --

I am talking about [Advisa], not the --.

We have and we have had some very good results in certain segments of the marketplace.

The real opportunity for us is on the Advisa MRI pacemaker and that we haven't launched as of yet.

So we continue to be very optimistic about the overall opportunity for our differentiated products in that segment.

Is the Advisa launch that is upcoming this quarter, right?

Or has that changed?

Advisa is coming this quarter in Europe and EnRhythm MRI at the end of the fiscal year in the US.

Right.

I recognize, obviously, Advisa is the more important product.

Correct.

And then the other operational question I wanted to ask you, you had some issues at your plant where you manufacture SynchroMed that also has some impact, I believe, on your diabetes business.

I just wanted to check to see whether that would have any impact on the timelines for the products you have upcoming in diabetes.

You do have some important products coming out in the next 12 months.

Thanks.

No, Mike, it's not going to have any impact.

Okay, perfect.

Thank you, guys.

Matthew Dodds, Citigroup.

Good morning.

On the core spine, Bill, it looks like when you back out Kyphon and you back out the 500 basis points roughly from the extra week it looks like the core business grew mid-single digits.

I know you said it did strengthen a little bit, but you really haven't rolled out the core new systems in lumbar and cervical yet.

So I am wondering sort what do you think is striving it big picture already since we had mid-single-digit rates.

Is it share or is it market strengthening?

Well, the market has been pretty robust.

The procedures we think are up a little bit; mix has been favorable for us.

Pricing is -- we already talked about it -- there has been a modest impact on pricing.

But I think really what is driving it is the procedure growth.

And for us outside the US we have seen very strong growth, 24% roughly -- well, greater than 20% growth outside the US.

And when do you really seen a lot of the launch for the new lumbar and cervical, I guess the G5 and or Solera?

And then also in cervical, when do you have at least -- you have critical mass for the new rollout?

That will be in early FY '11.

Okay.

And then just one quick follow-up.

On the pacing side it looks like there, even if again you back out the extra selling week, you gain share in that market for the first time in a while.

How is that one changing differently from ICDs where it doesn't look like the share gains have really come back yet?

Is there something different going on there versus ICDs?

Well, Matt, it's always hard to look at one quarter.

You really have to look at a kind of a trend line and we feel very good about the competitiveness of our brady product line as we do with our ICD product line.

Yes, we feel good about what we did this quarter, but it represents we think the strength that we have in the marketplace.

And we think ICDs will -- we are moving in the right direction with ICDs.

Right.

But on pacing again there has been no refocus on pacing or no major product to highlight in this quarter?

Well, the MRI.

And we had -- to be candid, we had some reasonably good comps from last year which helped us.

Thanks, Bill.

David Lewis, Morgan Stanley.

Good morning.

Gary, just want to clarify commentary.

You had talked about you are going to take margins where you see the opportunities, whether it be SG&A or gross margin.

I think historically I guess our view is that you found that gross margin opportunities going forward were going to be less robust than middle of the income statement opportunities.

Is there some change that has happened the last three to six months or that was more of a broader statement?

It was just more of a broader statement, David.

If you look at it and what I am trying to get to is last year obviously we had an improvement of 110 basis points in our operating margins and a lot of that obviously came through the gross margin.

As you indicated, going forward we think there is probably more opportunity for us in SG&A versus gross margin.

But it was just a broader statement to say that we are focused on leveraging both the product cost and the SG&A category, and that there is no one focus for us that is going to drive that operating margin improvement.

We have several different levers that we are trying to pull to make sure that we can deliver the operating leverage improvement that we have talked about.

Great, very helpful.

And then, Bill, you mentioned CoreValve.

When you talked about the $200 million market and you have 50%, I am assuming you mean on a revenue basis, not on a per unit basis.

That is right.

Okay.

And then, Bill, the clinical catalyst either at TCT or an updated timeline for the ID process with CoreValve, can you provide that?

Well, we are on track for the middle of next year and things are going well.

Okay.

And then lastly, Bill, you talked about selling infrastructure and sort of where you are investing across the reps that you mentioned.

Versus your revenue base is there any area where you are investing on an outsized basis versus where your revenue would imply?

No, I can't think off the top of my head that there is any place that it would be for more competitive reasons than for market reasons.

Yes, I would say -- just to add to Bill's comments, this is Gary.

As I mention in my comments, a lot of it has obviously been international where we have seen a lot of the growth.

So most of it has been in markets whether it's to some extent diabetes or in neuro, for example, where the markets are still going very, very strong or international that is where we are making the investments to drive -- to basically match what those markets are reflecting, the procedural growth and the need for additional coverage.

Okay.

Bill, last question and I will jump back in the queue, just in terms of your strategy for the global stent franchise.

You have seen some stabilization here over the last couple of quarters.

In terms of how you are investing with either R&D dollars or sales and marketing infrastructure is the strategy for the broader stent franchise to grow market share or to sustain market share?

And are you investing accordingly depending on what the outcome there is?

We are investing in technology to grow market share.

Resolute, which is doing very well outside the US, we are investing that here in the US.

We are well on track to completing the IDE clinical study here in the US and on track for launch in a couple of years in the US.

We believe that the combination of Resolute and Endeavor is going to give us the strongest, if you will, technology platform that will enable us to grow market share.

Great.

Thank you very much.

Rick Wise, Leerink Swann.

Good morning, Bill.

Good morning, Gary.

Let me start with something you said, Bill.

You talked about Medtronic's international business [some more sense of] pacing future growth.

I don't know how to adjust for the extra week, but international ex-currency grew three times the domestic business.

Is this the pattern we should expect to see going forward?

And maybe you could give us a little more color on how sustainable that strong double-digit growth is for international relative to marketing or products or as you discussed before the sales?

Thanks.

Rick, we have said pretty consistently that we think that the international markets will outpace the growth of the Company.

We have in the past, I think, said that two to three percentage points faster than what we see in the US.

This was a particularly good quarter for us as we had 16% growth on a constant currency basis versus 6% here in the US, but going forward it is an area that we think represents big opportunity.

Markets are largely under-penetrated.

There is some strategic markets like China; we are investing now more in India.

We think there is some real upside in Latin America and Brazil.

So I would say going forward, yes, we think there is good opportunities to have the OUS grow much faster than the US.

The other thing I would add to Bill's comments, Rick, is that outside the US obviously is where these new products -- on the AF side trans catheter valves, etc.

-- where we are seeing those new products come into the marketplace obviously first and so you are seeing those actually help accelerate the growth rates.

Obviously that gives us a lot of comfort even as we go into the US markets -- when those products hit the US market it will even help accelerate here in the US.

So it's the new products also in addition to the fact just that the markets themselves have more opportunity.

And Endeavor in Japan this quarter was very helpful.

So if you add Endeavor Japan, the transcatheter valves, the atrial fibrillation products; that was all very helpful to our growth outside the US.

Right.

And just a couple of quick follow-ups.

Biologic revenues, I think if I saw it correctly were flat.

Just give us the perspective on when you think that they are going to start to grow and maybe depending on trial outcomes -- unless, Bill, maybe you could just give us some perspective on the billion-dollar cost reduction program by 2012?

Where are we now, are we halfway through?

And maybe what is left to be done?

Thanks so much.

First of all on the Biologics, as I mentioned in my remarks, we are investing heavily to expand the indications for BMP.

The biggest near-term is the AMPLIFY, which is the posterior lateral indication which we are on track for at the beginning of FY '11.

We have several indications approved right now -- one for trauma and two for the oral maxillofacial, which we have seen very good growth coming out of that sector.

It's a small part of our business now, but we think it has the potential to be a $250 million to$500 million market.

And then beyond that there are other areas that we are expanding indications, we are investing to expand indications with BMP.

So this is a category that we think has long-term very solid growth fundamentals.

Rick, this is Gary.

Just to answer your question on the cost savings objective on the product cost or reducing the product cost by $1 billion by FY '12 that we have laid out is we are about halfway through that process right at this point in time.

We are close to it.

As we indicated through the first two fiscal years we saved almost $400 million and we clearly have seen savings here as we have even entered this fiscal year '10.

So we are probably halfway through the process.

The real things that are going to continue to -- really start to have an impact on, help us achieve that objective as we go forward is just as some of these new products come into the marketplace, because we have put in this design for manufacturing a few years ago.

And that is starting to have impacts now as some of these new products get rolled out that you are getting products that have fewer piece parts, basically lower cycle times through production, etc.

So that will start to have an impact on the overall product cost in addition to our ongoing programs on reducing supplier cost and consolidating manufacturing.

So we are about halfway through this process.

It's tracking right in line with what we would expect and we still see that $1 billion by FY '12.

Appreciate that.

Thanks.

Raj Denhoy, Thomas Weisel Partners.

Good morning.

Wonder if I could follow up a little bit on the biologics question.

I guess as Rick mentioned it was flat in the quarter, but if you back out the extra selling week it was actually down 5%.

With continued scrutiny on that business is it really wise to expect that to do much until next year or should we expect that to continue to slide here over the balance of the year?

This is Gary.

Let me just add a little bit to what Bill mentioned earlier.

First of all, as far as the extra week, this is one of the businesses that you can't necessarily do the exact calculation like we talked about.

The other thing I would remind everyone is we are comparing against, as I mentioned in my comments, we are comparing against the Q1 last year right before the physician notification came into effect.

So if you look at the sequential amounts and where we are at this is tracking relatively consistent with where we have been for the last two or three quarters as far as the absolute revenues, even with the extra days in there from that perspective.

So it's down because we are comparing it to the toughest period we had last year as far as where the revenue was at.

As Bill mentioned going forward, we will have easier comps, but more importantly as we start to see some of these new indications start to take impact we do see the growth potential.

Okay.

This is also within spine as well.

Kyphon, you gave the number, the cost of currency growth there, but could you give me a little bit of clarity on how St.

Francis is doing within that business?

NO, it's consistent with what we have said in the past.

This is an area that we are continuing to invest to build, to really develop that market.

We continue to believe that lumbar spinal stenosis is a large unmet clinical need and we have had to go back and do some things to really help to build the market here.

But that is --.

Okay.

And then just lastly in the diabetes franchise, any updates on the timing of the patch pump coming to market?

We are on track.

We are on track for the beginning of FY '11.

It's movign along very well.

Okay, thank you.

Larry Biegelsen, Wells Fargo.

Good morning.

Thanks for fitting me in.

One on ICDs and one on valves.

For the ICD market we have positive data from three studies this year -- REVERSE 24 months, MADIT II at eight years, and MADIT-CRT, and then potentially a fourth study next year with your RAF study.

Replacement growth, it seems, should continue to be strong through 2010 because initial implants were strong through 2005.

And as you know there were a number of explants in early '05 that need to start being replaced in 2010.

Given these factors why wouldn't the growth rate of the ICD market improve over the next 12 to 18 months?

In other words, would you be disappointed if it didn't accelerate from this quarter's mid-single-digit growth?

Thanks.

Well, first, the market is recovering a little bit from where it was.

If you look back the last couple of years it was in that very low single digits.

In fact, a couple of quarters it was actually negative.

Now I think we are seeing some of what you have already articulated in that mid to high single-digit growth.

Obviously, as we have indicated, we have been watching this market for the last two or three years.

As Bill said in his comments, we are optimistic, cautiously optimistic about what some of these studies could mean for us.

But we are going to wait and see the actual results before we get too excited about what they could mean to the overall growth in the marketplace.

Okay, that is fair.

Then on valves, just to clarify, the $200 million market that it's annualizing at, the transcatheter valves, is that excluding the distributor margin?

And then could you give us -- would you be willing to give us the implant numbers this quarter?

For example, your implant numbers for CoreValve in Europe.

And just lastly, any color on the uptake through this quarter?

Has it continued to be strong, the implant volume?

Thanks.

I will start with the last.

Yes, the uptake is and the demand is very strong.

In fact, it's as I mentioned had it not been for the difficulties we had in our Santa Ana operation we wouldn't have gotten to the numbers that we got to.

And I can tell you there is even more demand than what we were able to supply, so that is the good news.

In terms of the dollar volume, in terms of the distributor aspect, we are moving towards being direct in most of the markets we are in.

So it's really not much of an impact on the distributor.

And then we are not going to get into the unit or implant numbers going forward.

Thank you very much.

Okay.

Well, thank you and on behalf of the entire management team thanks for your interest and our continued support.

As you can see, we feel good about the quarter.

It's a strong quarter.

And as Gary indicated, Q2 is always kind of a challenging quarter for us, but we are doing the things that we think are going to enable us to deliver on the commitment we have for the fiscal year.

So thank you and we will talk to you next quarter.

This concludes today's conference.

Thank you all for participating.

You may now disconnect.