美敦力 (MDT) 2011 Q2 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to the Medtronic's second-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)

Thank you.

Mr.

Jeff Warren, Vice President of Investor Relations, you may begin your conference.

Thanks, Jessica.

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

During the next hour Bill Hawkins, Medtronic's Chairman and Chief Executive Officer, and Gary Ellis, Chief Financial Officer, will provide comments on the results of our fiscal year 2011 second quarter, which ended October 29, 2010.

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

First, a few logistical comments.

Earlier this morning we issued a press release containing our financial statements and a 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 any forward-looking statement.

Additional information concerning factors that could cause actual results to differ is contained in our periodic reports filed with the SEC.

Therefore, we do not undertake to update any forward-looking statement.

In addition, the reconciliations of any non-GAAP financial measures are available on the Investors' portion of our website at Medtronic.com.

Finally, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the second quarter of fiscal year 2010, and all growth rates are given on a constant currency basis.

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

Well, good morning and thank you, Jeff.

This morning we reported second-quarter revenue of $3.9 billion which represents growth of 1.7% as reported, or 2.4% on a constant currency basis.

Q2 non-GAAP earnings of $887 million and diluted earnings-per-share of $0.82 increased 4% and 6%, respectively.

Our Q2 growth reflects relative stability in a challenging market environment.

During this time when many of the world's economies are experiencing softer growth, we are striving to control the controllable while executing on our strategies to deliver sustainable market-leading growth across our broad portfolio of businesses.

Our Q2 revenue growth was in line with the med-tech market and reflects overall market conditions that were relatively stable from July through October.

We remain confident that as the global macroeconomic environment rebounds, so too will our markets, as the underlying demand for innovative medical solutions is only going to increase.

Despite current market conditions, Medtronic remains focused on extending our leadership position across the large, diverse, and profitable chronic disease markets that we serve.

New products are clearly making a difference in several of our markets.

We gained share sequentially in Spine, pacemakers, ICDs, drug-eluting stents, transcatheter valves, surgical valves, and insulin pumps.

In Spine, we saw sequential growth driven by recent product launches.

In CRDM, I was encouraged by our sequential share improvements in the international CRDM market.

In diabetes, our new products in the US and international markets are delivering meaningful growth and taking share, as we continue to extend our leadership as the only company with sensor augmented pumps.

A major area of focus for Medtronic over the last few years has been in reallocating resources to drive growth.

Looking ahead, we will continue to invest in emerging therapies and emerging markets, which will be an increasingly important driver of our growth.

Our emerging therapies grew over 20% in Q2 and are now annualizing at $1.7 billion, driven by strong performances in transcatheter valves, FA, InterStim, and subcu diagnostics.

We expect our revenue mix from emerging therapies to double over the next five years.

Our strategy for making smart, disciplined, and opportunistic acquisitions is also working.

In Q2 we closed on our ATS Medical acquisition and just last week closed on our acquisition of Osteotech.

The strategic tuck-ins that we have made since FY '09 are expected to contribute over $0.5 billion to Medtronic this fiscal year.

As you saw last night we were excited to announce our intent to acquire Ardian, an impressive company with innovative catheter-based technologies to treat hypertension.

This strategic acquisition gives us a considerable head start on a multibillion-dollar opportunity in one of the biggest markets in medicine.

Hypertension is a significant and growing global healthcare problem and a disease that many cannot control with existing drug therapy.

The compelling data presented at the American Heart Association and published in Lancet showed Ardian's Simplicity catheter significantly reduces these patients' blood pressures.

We believe the Simplicity catheter shows strong potential to be a highly effective treatment for uncontrolled hypertension.

We further believe that this novel therapy can play a role in reducing the estimated $500 billion annual direct costs to the global healthcare system by avoiding catastrophic downstream cardiovascular events that are highly associated with uncontrolled hypertension.

Ardian is the perfect example of the type of strategic acquisition we consider attractive in a changing healthcare landscape.

This therapy addresses a major unmet need in a large, growing, and underserved global population of patients while leveraging our existing customers.

It also leverages our global distribution scale as well as our considerable core competancies in operations, RF and catheter R&D, and our proven market development capabilities.

In addition, our decision to purchase Ardian at this point in their technology cycle allows us to apply our clinical, regulatory, and reimbursement expertise to help maximize the overall market potential.

Over the coming years, we expect Ardian to be an important growth driver in our emerging therapy portfolio.

In addition to our emerging therapies, we have been aggressively investing in large, fast-growing, emerging markets such as China, India, and Brazil, where healthcare is a growing national priority.

Medtronic is clearly leading our competition in this area.

Q2 growth in emerging markets was 19% and these geographies are now annualizing at $1.4 billion with strong results in China, India, Latin America, and the Middle East and Africa.

Our revenue mix from emerging markets is expected to triple over the next five years.

Medtronic has had major operations in China for 15 years, and four years ago we accelerated our investment and created a separate China business unit.

Since making those changes, our China business has grown over 20% each year and is currently annualizing at nearly $0.5 billion.

Even with our leading presence we continue to increase our investment in China.

In Q2, we opened our new patient care center in Beijing, a unique facility that allows us to engage directly with patients, enabling us to break down the barriers between patient referral and technology adoption.

Later this fiscal year we will open our new China headquarters in Shanghai.

This impressive facility will feature a state-of-the-art physician training center which will give us the capacity to train 15,000 healthcare providers annually.

This year we are leveraging the success of our China strategy and expanding it to our entire emerging markets organization.

Through this effort we are placing more autonomy at the local level to ensure that we are making the necessary investments to realize each market's full growth potential.

To support the increased demand for our products in emerging markets, we are investing in our new Singapore manufacturing facility, which is on track to begin commercial production by the end of this fiscal year.

Underlying our growth strategies in emerging markets and emerging therapies is a continued focus on innovation, which remains our principal strategy for growth.

In Q2 we continued to make progress on advancing our pipeline and producing meaningful clinical evidence to accelerate reimbursement and insure therapy adoption.

We invested nearly 12% of revenue on innovation in Q2, which includes R&D as well as amortization from our technology acquisitions.

We launched a number of new, innovative products this past quarter.

In CRDM we introduced our new CareLink Network for heart failure, a unique solution that allows clinicians to remotely monitor their heart failure patients and ultimately reduce overall healthcare costs.

In coronary we launched the Driver Sprint bare metal stent in Japan; the Integrity bare metal stent in the US; and the Resolute Integrity DES in Europe, which early on has resulted in meaningful share gains.

In endovascular, we launched the Talent Captiva thoracic stent graph in the US.

In transcatheter valves, we received CE Mark for a new CoreValve delivery system featuring our AccuTrak stability layer.

In Spine we received the first pediatric scoliosis indication for pedicle screws.

In Neuromodulation we received CE Mark for our DBS therapy for epilepsy.

And in Diabetes we received Health Canada approval for our Veo low-glucose suspend insulin pump.

Our pipeline is one of the most robust in our Company's history.

Over the coming quarters we are preparing for the US launches of the Arctic Front cryo-balloon, Resolute DES, Endurant AAA, and RestoreSensor spinal cord stimulator.

We are also preparing for the global launches of our Solera spinal system in Q3 as well as our [Enlite] next-generation glucose sensor over the coming quarters.

We are diligently working with the FDA to resolve outstanding warning letters so that we are able to launch Protecta, the Revo MRI, and InterStim bowel in the US and bring these important new therapies to patients.

We are also extending our leadership in the area of generating meaningful clinical evidence, which is critical to expanding our markets, accelerating adoption to our therapies, differentiating our competitive position, and creating new markets.

Our RAFT trial is a perfect example of a study designed to drive market expansion.

The compelling results from this landmark heart failure study presented at AHA and published in the New England Journal of Medicine showed CRT-D therapy reduced mortality in mildly symptomatic heart failure patients.

In September, results from our CARISMA study, designed to accelerate adoption of our subcu diagnostics, were published in the journal Circulation.

These results clearly demonstrate how Reveal Plus successfully monitors and detects arrhythmias in post-MI patients.

In the area of competitive differentiation, data from our Resolute international study were presented at TCT in September, highlighting Resolute's low target lesion failure and stent thrombosis rates.

We are also investing in clinical studies for new growth opportunities.

In October we received IDE approval to begin our CoreValve US pivotal study.

In drug-eluting balloons, encouraging early data from our Invatec clinical program was presented at TCT.

Finally, earlier this month the CHDI Foundation announced they would join our clinical program with Alnylam to advance potential treatments for Huntington's disease.

Looking ahead, I believe the convergence of innovation across industries and disciplines will dramatically change the way we treat chronic disease.

Recently in a keynote address I delivered at the Cleveland Clinic Medical Innovations Summit, I noted that medical innovation is poised like never before to provide better solutions to physicians, better value to healthcare payers, and better outcomes for patients around the world.

At Medtronic, we have all the critical building blocks necessary to deliver on these aspirations.

As the industry leader we are committed to leading the charge to ensure medical technology is part of the solution to managing chronic disease.

Finally I would like to comment on Medtronic's unparalleled financial strength, which gives us the flexibility to both return significant cash to shareholders and make disciplined investments to drive sustainable growth.

We also remain focused on improving our industry-leading operating margins.

Earlier this month we opened a new state-of-the-art East Coast distribution center, an important step in our initiative to consolidate distribution, which is expected to deliver $60 million in savings over the next five years.

In Q2, we also continued our track record of delivering significant free cash flow, returning nearly 50% of this to shareholders in the form of dividends and share repurchases.

Through the first half of this fiscal year, we have returned over $1.2 billion to shareholders.

At the same time, we continue to invest in areas with significant growth potential through internal R&D programs and strategic tuck-in acquisitions.

In the new and changing healthcare environment, Medtronic's size and scale will be the key to winning.

Our market-leading technologies and the breadth of our portfolio puts us in a position of strength when serving our customers around the globe.

In addition our world-class capabilities and deep bench of talent across all functions provides us with a significant competitive advantage in med tech.

We remain committed to executing on our long-term growth strategies and delivering sustainable market-leading performance even during this period of softer market growth.

Gary will now take you through a more detailed look at our quarterly results.

Thanks, Bill.

Second-quarter revenue of $3,903,000,000 increased 1.7% as reported, or 2.4% after adjusting for a $29 million unfavorable effect of foreign currency.

Breaking this out geographically, revenue in the US of $2,295,000,000 was flat while sales outside the US of $1,608,000,000 increased 6%.

Q2 international revenue growth by region was as follows.

Greater China grew 24%.

Growth in Middle East and Africa was 19%.

Latin America also grew 19%.

Growth in Other Asia was 11%.

Canada grew 7%.

Europe and Central Asia growth was 5%.

And Japan declined 8%.

After adjusting for certain litigation charges, primarily related to our settlement of the US Fidelis lawsuits, and certain acquisition-related costs as well as a non-cash charge to interest expense due to the accounting rules governing convertible debt, second-quarter earnings and diluted earnings per share on a non-GAAP basis were $887 million and $0.82, respectively.

GAAP earnings including earnings-per-share were $566 million and $0.52, respectively.

In our Cardiac and Vascular Group, revenue of $2.095 billion grew 2%.

Growth was driven by strong international results from our AF solutions, CoreValve, Endovascular, and Invatec businesses as well as solid US growth from Physio-Control.

This was offset by modest declines in CRDM implantables.

CRDM revenue of $1.248 billion declined 1%, in line with our estimate of the worldwide CRDM market growth rate.

Looking ahead we would expect similar market declines through the remainder of our fiscal year.

Although we would expect to be in line with the market, it is important to note that our Q4 CRDM growth rate will be negatively impacted by a competitor's stop shipment last year, which will have an approximate 500 basis point negative impact.

Worldwide ICD revenue of $745 million declined 1%.

Our US ICD business declined 2%, and the US ICD market declined in the low single digits.

Initial implant volumes remain under pressure due to macroeconomic factors, private insurers requiring pre-authorizations, and the increasing trend of hospitals acquiring private cardiology practices.

US ICD pricing pressure increased this quarter to the mid-single digits due in part to a delay in new products as we await Protecta.

Our international ICD business grew 2%, and international ICD market grew in the mid-single digits.

Excluding Japan our international ICD revenue grew 5%.

While our Japan year-over-year comparisons continue to be unfavorable, we were pleased to see our high-power unit share grow sequentially driven by the launch of Attain Command.

We intend to launch Protecta XT in Japan later this fiscal year which should further aid our rebound in the Japanese high power market.

Pacing revenue of $472 million declined 4%, while the market declined in the mid-single digits.

Our US pacing business declined 5%, in line with the market.

Pricing remained stable with low to mid single-digit declines.

We continue to work with the FDA to bring the Revo MRI SureScan pacemaker to the US market, which we believe will improve pricing and drive share.

Our international pacing business declined 3% and the market continued to decline in the mid-single digits.

The international pacing market decline was driven again this quarter by Japan, where procedures were down in the negative to low to mid single digits.

In addition Japan ASPs declined in the low teens driven by this year's R-Zone and foreign reference pricing adjustments.

Our Japan pacing share remained stable, bolstered by the market acceptance of our Advisa DR.

Our AF solutions business continues to post growth in excess of 20% driven by the adoption of our Arctic Front cryo-balloon in markets outside the United States.

We continue to work with the FDA to bring Arctic Front to the US market, and we are optimistic we will be able to launch this important product in the second half of this fiscal year.

Cardiovascular revenue of $738 million grew 7%, including 12% growth in international markets.

Coronary & Peripheral revenue of $379 million grew 3%.

Worldwide drug-eluting stent revenue in the quarter was $173 million, including $51 million in the US and $20 million in Japan.

Our US total stent share increased by 180 basis points sequentially driven by the strong results from Endeavor and the successful launch of our Integrity BMS.

Our international stent share increased by 100 basis points sequentially due to new product launches.

In Europe, we launched our Resolute Integrity DES toward the end of the quarter.

This product has been very well received and we are starting to see wins in large accounts.

Structural Heart revenue of $237 million increased 17%, and it included for the first time revenue from our ATS Medical acquisition, which closed in the second week of Q2.

The ATS integration activities are going very well.

Structural Heart growth was driven by the solid international results of CoreValve.

CoreValve revenue continues to nearly double year-over-year and our share remained stable at approximately 50%.

We were pleased to recently announce the approval of our US pivotal trial.

We are focused on getting all 40 clinical sites up and running and expect the first implant in the coming weeks.

Endovascular revenue of $122 million grew 3% with strong mid teens growth in international markets driven by the continued adoption of the Endurant abdominal and Valiant-Captiva thoracic stent grafts.

In the US we continue to see procedural slowdown as less screenings are occurring and patients are electing to wait longer for their procedures.

Physio-Control revenue of $109 million grew 18% driven by solid growth in the US.

We resolved a supplier constraint issue early in the quarter and order backlogs returned to the normal levels.

We gained share in the quarter in the pre-hospital market on the strength of LIFEPAK 15.

The US hospital market rebounded in the quarter with robust sales of LIFEPAK 20.

The AED market continues to experience softness due to the macroeconomic conditions.

Now turning to our Restorative Therapies Group.

Revenue of $1.808 billion grew 3%.

Growth was driven by strong performances in Diabetes and Surgical Technologies.

Spinal revenue of $850 million declined 1%.

We believe the global Spine market remained stable throughout the quarter, with market growth remaining in the range of 3% to 4%.

In Europe, the Spine market continues to be affected by funding cutbacks.

In the US, soft economic conditions and higher co-pays continue to affect the number of patients seeking treatment.

Pricing pressure in the US Spine market remained similar to last quarter with low single-digit declines.

Procedures drove US Spine market growth with a slight mix benefit due to new product launches.

Core Spinal revenue of $634 million declined 1%.

Metal constructs revenue was flat although we did see areas of solid growth from new product launches in our minimally invasive portfolio.

Solera, our next-generation posterior fixation system, remains in its limited release phase.

In US accounts with Solera, sales of CD Horizon legacy and Solera were up over 20%.

We plan to launch Solera globally by the end of Q3.

Our recently launched TSRH 3Dx system is also performing well.

We also continue to take share in the direct lateral segment.

CLYDESDALE, our interbody implant for DLIF, had solid unit growth of over 35%.

We will continue to differentiate ourselves in the direct lateral market when we launch our navigated DLIF procedure early next fiscal year.

In cervical we saw strength in the posterior segment with VERTEX SELECT growing over 12%.

Kyphon revenue declined 5% as the BKP market remained soft.

We continued to strengthen our leadership position in BKP with several product launches.

We launched the Express curette and received approval for the Xpander II balloon in the US as well as a new cement delivery system in Europe.

Biologics revenue of $216 million decline 2%.

In the US, INFUSE sales declined in the mid-single digits due to a combination of fewer procedures and a mix shift to smaller kits.

Nonhospital sales of INFUSE were up approximately 45%.

Our Other biologics segment had another successful quarter with global growth over 20% as our Progenix DBM continued to take share.

In Q3, the addition of Osteotech's products will further bolster our Other product -- Other biologics offering.

Our overall Spinal business continues to perform to our expectations relative to the market, as we are making progress toward returning the business to market growth by the end of FY '11.

We believe it is reasonable to model low single-digit constant currency growth in our Spinal business for the second half of the fiscal year.

Neuromodulation revenue of $388 million increased 2%, or increased 3% after adjusting for the divestiture of our Bravo pH monitoring business.

Results were driven by double-digit growth in InterStim and mid single-digit growth in DBS, partially offset by a decline in drug pumps.

We were pleased that our US pain stim share remained stable sequentially again this quarter, as well as the fact that we saw solid high single-digit initial procedural growth.

In Europe, our RestoreSensor neurostimulator continues to perform very well.

Diabetes revenue of $326 million grew 11% driven by a solid quarter in international, which posted strong high teens growth.

Insulin pumps had a strong quarter with mid teens worldwide growth.

We continue to be the only company with sensor augmented pumps.

Our Revel pump is holding share in the US and our Veo pump with low-glucose suspend is taking share in international markets.

Surgical Technologies revenue of $244 million grew 9%, or 11% after adjusting for the fiscal year 2010 divestiture of our ophthalmic business.

The strong performance was driven by growth in navigation, monitoring, power, and image-guided surgery as the business saw a thawing of US hospital capital budgets and customers upgraded to our new technology.

Turning to the rest of the income statement, the gross profit margin was 75.4%.

Gross margin in the second quarter of last year was 76%.

Sequentially our gross margin was a bit lower than we had expected due to some one-time items including inventory write-offs.

Our gross margin was also affected by negative mix from our tuck-in acquisitions.

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

We continue to expect gross margins in the range of 75.5% to 76% for fiscal year 2011.

Second-quarter R&D spending of $373 million was 9.6% of revenue.

We remain committed to investing in new technologies to drive future growth and expect R&D spending of approximately 9.5% for fiscal 2011.

Second-quarter SG&A expenditures of $1.371 billion represented 35.1% of sales compared to 34.5% of sales in the second quarter last year.

SG&A was negatively affected by the recent acquisitions and additional bad debt reserves increase in Russia, as well as the deliberate investments we are making ahead of anticipated product launches.

We continue to expect FY '11 SG&A to be in the range of 34% plus or minus 25 basis points.

This reflects our continued focus on initiatives to drive leverage, partially offset by the effect of the acquisitions and the deliberate investments we are making in FY '11 to support the new product launches and drive growth.

Net other expense for the quarter was $76 million compared to $130 million in the prior year.

The year-over-year decrease is primarily a result of higher gains from our hedging programs which were $48 million during the quarter, compared to $3 million in losses in the comparable period last year.

As you know, we hedge our operating results to reduce volatility in our earnings.

Looking ahead, based on the current FX rates, we anticipate hedging losses of $10 million to $20 million per quarter over the remainder of the fiscal year.

Taking this into account we anticipate net other expense will be in the range of $120 million to $140 million per quarter during the remainder of the fiscal year.

Net interest expense for the quarter was $67 million.

Excluding the $43 million non-cash charge to interest expense due to the accounting rules governing convertible debt, net interest expense on a non-GAAP basis was $24 million.

As of October 29, 2010, we had approximately $9 billion in cash and cash investments.

In Q2 we repaid $400 million of senior notes that were issued in September 2005.

We also have $2.2 billion of debt repayment occurring later this fiscal year.

Looking ahead we expect our cash to continue to increase.

However, low interest rates will negatively impact -- affect our return on this cash.

For fiscal 2011 we anticipate non-GAAP net interest expense in the range of $100 million to $110 million, which includes the carrying cost of pre-funding existing debt in FY '10.

Let's now turn to our tax rate.

Our effective tax rate as reported was 24.7%.

Our adjusted non-GAAP nominal tax rate was 19.2%.

Included in our tax rate for the quarter is a $35 million net benefit associated with foreign dividend distributions and the finalization of certain tax returns.

We would expect our nominal tax rate for the second half of fiscal 2011 to be in the range of 20.5% to 21.5%.

However, we currently expect that the US R&D tax credit will be extended in our fiscal year.

If the credit is extended in Q3 we would receive an approximate $30 million catch-up tax benefit in Q3.

Second-quarter weighted average shares outstanding on a diluted basis were 1.084 billion shares.

During the second quarter, we repurchased $120 million of our common stock.

As of October 29, 2010, we had remaining capacity to repurchase approximately 32 million shares under our Board authorized stock repurchase plan.

For fiscal 2011 we anticipate diluted weighted average shares outstanding of 1.083 billion shares.

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 the additional financial details.

Let me conclude by providing an update to our 2011 fiscal year revenue outlook and earnings-per-share guidance.

Our Q2 market growth, while relatively stable, was more in the range of 2% to 3% versus the 3% to 4% we discussed last quarter.

Given the slightly softer markets and the continued wait for certain new products in the United States, we are setting our constant currency revenue growth outlook at 2% to 4% for the second half of fiscal 2011.

While we can't predict the effect of currency movements, to give you a sense of the potential FX impact if exchange rates were to remain similar to yesterday for the remainder of the year, then our FY '11 revenue would be affected by approximately a negative $20 million to a positive $20 million, including a flat to negative $20 million impact in Q3.

It is important to note that although our constant currency revenue growth outlook is lower than what we gave in August, when you take into account the positive change in our foreign currency expectation since August we believe current revenue consensus for Q3 and Q4 appears reasonable.

Taking all this into account we are adjusting our fiscal year earnings per share guidance to $3.38 to $3.44, which includes approximately a $0.05 of dilution from the acquisitions of Invatec and ATS Medical but does not take into account any impact from the pending acquisition of Ardian.

Excluding the impact of the acquisition dilution as well as the estimated $0.05 benefit of the extra week in FY '10, FY '11 earnings per share growth is expected to be in the range of 8% to 10%.

While we work diligently to resolve the CRDM Mounds View warning letter and focus on returning our Spine business to market growth, until we see the positive impact of these actions reflected in our financial results, we believe current earnings per share consensus for the full year appears reasonable.

While we don't provide quarterly guidance, we would not be surprised to see a couple pennies shifted from Q3 to Q4 due to quarterly gating.

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 effects of the non-cash charged interest expense due to the accounting rules governing convertible debt.

While my outlook and guidance comments did not take into account the impact from our pending acquisition of Ardian, I would like to close by offering some financial comments on this exciting multibillion-dollar opportunity.

Medtronic was an 11% owner of Ardian, so we will recognize a sizable one-time gain at the time of the close, which we estimate will occur in Q3.

Due to this gain the deal is accretive in FY '11.

Looking ahead to FY '12 and FY '13, we estimate the deal will be $0.04 to $0.06 dilutive each year.

This dilution will cover amortization of intangibles, foregone interest, and considerable market development and clinical expense.

With that, Bill and I would now like to open things up for Q&A.

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

Operator, first question, please.

Matthew Dodds, Citi.

Good morning.

When you look at the top-line results, the obvious one that stands out is the Spine market and your spinal number.

So when we look at the core construct number it sounds, Bill, like some of the other products outside of the lumbar system and Solera, like 3Dx cervical CLYDESDALE, they are starting to drive the business; yet Solera is too small to do it.

So is that the right way to think about it, is that you are still waiting for Solera in the core lumbar business, but some of the other products that maybe are a little smaller in terms of your launch are already starting to have an effect?

Exactly.

Our new products are clearly gaining traction.

The TSHR (sic) 3Dx as we talked about had about 8% growth; the VERTEX SELECT around 12%; and our DLIF grew -- the CLYDESDALE grew 35%.

So they're beginning to get some momentum.

And Solera as we discussed is in a limited number of accounts, is showing very strong acceptance and growth.

So we look to the back half of this year with Solera to enable us to move towards that market growth by the end of the year.

Great.

Then just one quick follow-up for Gary.

This quarter, a couple other areas on the revenue side sounded like you gave some color that the US is having an impact on them.

Endovascular, a couple of the indications in Neuromod.

So has that gotten worse this last quarter in terms of delays or reimbursement issues in those businesses too?

I would say, Matt, overall as we indicated in our comments the market overall was relatively stable this quarter versus our Q1.

But it was somewhat softer in a few markets and that is why we saw 2% to 3% versus maybe 3% to 4% we saw last quarter.

The markets you are talking about are the ones that we saw a little bit more softness than what we saw in Q1.

Endovascular, there a little bit more pressure on procedures.

Also on our Neuromod, the markets were somewhat softer than what we saw in Q1.

We saw little bit more pricing pressure on ICDs in the US than what we saw in Q1.

Otherwise I would say everything else was relatively consistent with what we had in Q1.

But you are right, in those couple markets it was a little softer than what we had even seen in Q1.

Great, all right.

Thanks, Gary.

Thanks, Bill.

Kristen Stewart, Deutsche Bank.

Just wanted to dive a little bit more into the commentary around the warning letters and just in terms of what you are including or not including for this fiscal year related to product contributions from Revo, Protecta, and then the bowel simulation.

So as we indicated, we are still waiting to hear back from the FDA so we can't really estimate the timing.

But we -- in our assumptions is -- we are not going to -- we don't have Revo MRI, the InterStim bowel really nor Protecta.

So they are pretty much out of the numbers that we have given.

So to the extent that they are approved then that could represent some upside?

Yes.

Correct.

And any update on Amplify?

No, not at this point.

I mean we obviously were encouraged.

We thought that the panel got it right, but we haven't heard anything back yet.

Okay, thank you.

Bob Hopkins, Bank of America.

Sure, thank you.

Gary, did you say how accretive Ardian would be in fiscal 2011?

No, we haven't, Bob.

It will be accretive, but obviously we have got to go through a lot of the accounting aspects of this.

It depends on when the deal closes; there is going to be transaction cost that obviously are one-time costs related to that, that will offset that gain.

So we haven't exactly verified that, and so I don't want to go out on a limb on that number at this point in time.

By the time we close the transaction we will obviously have that worked out and understand what the accounting implications are.

We will let you know at that point.

It is a gain, but at this point in time we just don't know the magnitude.

Hard to imagine it is more than a penny or two.

Correct?

Well, again, we own 11% of it.

From the standpoint of how the accounting rules work now, we have to recognize our gain associated with that.

So again it gets back to what the basis of our investment is; but no, it could be higher than that.

Is that part of your guidance?

Or no, would that be --?

No, no.

That is not reflected in that guidance as we tried to clarify.

None of our guidance reflects anything related to Ardian at this point.

Okay.

Then just one quick one on Spine for Bill.

Your guidance seems to suggest that the market will stabilize in the back half of this year.

I am curious given that the noise level on insurance company pushback only seems to be increasing.

What are you seeing that gives you the confidence that this market will stabilize in that low single-digit range?

Well, as I said, we did see some relative stability.

We are seeing July and October.

Then secondly, we do have Osteotech that is now contributing to our numbers, so that's to help us a little bit.

But as I said, we see stability in the overall market.

I mean it clearly took a dip in the summer.

But from what we can see in the last couple of months, we think it is in that low single digits, that 3% to 4% range.

So the insurance company pushback that has been visible out over the last couple of weeks is not something that you see making this market take another dip or get worse?

Some of the recent issues around the payer has been on a -- more on the lumbar, the DDD, the degenerative disc disease, the lumbar fusion without the radiating pain.

And that is actually a fairly small segment of the overall Spine business.

Particularly for us, it is roughly 5% of our business.

Great.

Thank you very much.

Mike Weinstein, JPMorgan.

Good morning.

A couple questions.

Bill, I think you said you are optimistic about getting the Arctic Front approved by the end of the fiscal year.

Are you expecting that to go to a panel?

And then can you give us an update on Ablation Frontiers as well?

You know, you are right; we are cautiously optimistic that we are going to be able to get this by the end of the year.

We are in discussions with the FDA right now.

We haven't heard anything about a panel, so the assumption is that will not come into play.

On the Ablation Frontiers, at this point it is going to be beyond obviously the cryo.

But we are in active discussions with the FDA and really can't -- it is hard for us to put a forecast at this juncture.

But it will be in FY '12, obviously.

It won't be in this year?

It won't be this year.

Okay.

Let me ask you about the pacemaker business in Europe.

I was -- it is hard to try and pull out the Japanese business from -- because that is obviously negatively impacting your international pacing side.

But I was kind of hoping the Advisa launch in Europe would be having a bigger impact on your European pacemaker business.

I was hoping you could give us a sense of how that launch is going and if you think it is moving the needle.

Because it just doesn't look like it in the revenues that we are getting.

Thanks.

Well, our estimates of the international pacemaker market is in that negative 3% range.

As it relates to the Advisa with MRI safe, actually it's proven to be a little bit more difficult in terms of just the training that we need to go through.

Because it is a new lead, and so I think we underestimated initially the importance of what it was going to take to train people.

So on the other hand, if we look at right now it is growing month by month.

Then finally, you remember in terms of just how big this is going to be, it is only dual chamber and it doesn't impact replacements.

So overall we are seeing good month-to-month growth in the uptake of this.

And, Mike, Japan does distort the overall international growth rates.

That is clearly the biggest factor that is actually driving the growth to be negative.

If you took that out you wouldn't be negative; you would be more in the positive range.

We are starting to see some uptick on, as Bill said, on the MRI SureScan is progressing.

But it is taking us a little bit longer especially in Europe just based on how the adoption rate has been a little bit slower.

But we are seeing progress now.

Okay, one last clarification, Gary.

I was actually surprised; the other expense line came in a little bit I guess better for you guys than I would have expected with the weakening of the dollar over the course of the quarter.

Can you give us just a little insight into why that would have been the case?

Well, obviously it all gets back to timing on when the contracts come due and everything else.

You are right, with the dollar shifting as it did during the quarter that has obviously had some impact obviously going forward and is going to minimize obviously the gains we had going forward, as I mentioned in my comments.

But the reality is just on the timing on when these contracts come due.

We probably got more benefit in this quarter just because of the timing on when the dollar did start to weaken overall.

So I can't say anything other than that.

We hedge, as I talked about, out in several quarters; we got some good rates over a year, year and a half ago in the quarter we were in.

But it is part timing, partly just the rates we did have for this quarter.

And going forward it won't be near the benefit.

I think it is more of a timing item than anything else.

Thanks.

David Lewis, Morgan Stanley.

Good morning.

Gary, a quick question for you on SG&A.

I know you mentioned Greece and some of the acquisition spending for SG&A.

But it seemed materially higher to us.

I wonder, is the spending on new product launches, is that shifting spending from sort of last quarter to this quarter?

Or do you see something in terms of the near-term approval of some of these products or opportunity for market share from marketing and intelligence that leads you to believe you can be more successful than you initially thought?

Yes.

I mean obviously, as I indicated in my comments SG&A was a little bit higher than we had even estimated.

Although we had expected, because of the investment we are making in some of these new product launches, and as we just talked about, one being Solera, we are expecting that that will be launched here in Q3, and so there is a lot of market development cost going in there.

You have, as we talked about with Arctic Front, we are expecting to be launching that product and so there is cost we are incurring getting ready for those market launches overall.

So we have some products coming that we are excited about, and we are making those investments.

But probably the biggest factor in the quarter as far as just the percentage overall was just the impact of the acquisitions.

As you pull in these acquisitions there is a very large SG&A cost associated with that in many cases.

And obviously it takes us until we can get it integrated and we can leverage our infrastructure and manage those costs, it takes us a couple quarters for us to do that.

So you're going to have a higher cost initially, and that is why it will start to work down here over the next several, couple quarters as we get ATS, Invatec continues, and now with Osteotech -- as we get those things worked into our infrastructure and reduce the cost structure overall.

The other issue we did have in the quarter as I highlighted in my comments were we did have a higher allowance for doubtful accounts expense than we have been historically seeing, primarily in some of the Eastern European countries and in Russia.

So for example some of the countries where we are seeing some financial difficulties -- for example Greece being the perfect example -- we have seen the DSOs extending out.

We have seen the pushback on discounting some of the receivables, etc.,

As a result -- not just for ourselves, this is industrywide that it's being going on.

So as a result of that, we had to increase our allowance for doubtful accounts during the quarter more than we would have historically seen.

I think it is more of a one-time item, but it did increase our rate a little bit in this quarter.

That is now behind us, but that was something we had to do.

Right, helpful.

Bill, just in the last two quarters you have talked exclusively about emerging markets and specifically this call talking about training in China.

I wonder if you could share with us.

As you think about these emerging markets, China or others, as you think about the training and infrastructure required to build businesses in those markets, which of your products do you think are the leaders into these markets and which of your products do you think lag?

Well, in terms of leaders, our cardiovascular business, the pacing side of our CRDM, and I think eventually the defibs will have more of an impact.

The diabetes is -- and then the Spine business I think are the leaders.

In terms of what is probably going to lag is some of the Neuromodulation technologies.

Also one of the leaders by the way is Surgical Technologies, actually in China, with the incidence of trauma.

That has been an important market for us.

But so I would say Surgical Technologies; the stent business; the heart valves; and pacemakers; Spine; diabetes -- those are all the leaders.

And then I think it is really more Neuromodulation, to some degree ICDs are the ones that will be a little bit later coming.

Thank you very much.

Larry Biegelsen, Wells Fargo.

Good morning.

Thanks for taking my question.

Just Gary, two quick clarification questions and then I wanted to ask about Ardian.

The R&D tax credit, is that benefit assumed in the new guidance?

Second, for the old revenue guidance of 2% to 5%, did it assume the constant currency growth rate in Q1 before or after adjusting for the extra week?

With respect to the tax rate in our overall guidance, we have all year assumed that the R&D tax credit was going to get extended; and that has been in our guidance from the beginning.

So it is still in our guidance, the expectation that we will have that.

So that is reflected in our numbers.

With respect to the revenue growth, the 2% to 5% that we had talked about previously at the last quarter did take in consideration the extra week.

So we did have that in the numbers when we gave that guidance out previously.

So Gary, just to be clear, it was after adjusting for the extra week?

It included the impact of the extra week.

So it would have basically -- we would have been assuming, if you had an apples-to-apples basis, it would even been a little bit higher than that.

So that was a negative impact on our guidance.

Okay, thanks for that.

Then on Ardian, can you talk about the ramp in Europe you expect in 2011?

And maybe a little bit of -- just some sense of the sales you expect over the next few years as reflected in that $0.04 to $0.06 of dilution?

And just lastly on the US regulatory pathway, I think you are saying a fiscal 2014 US launch.

Ardian had planned to do a 300-patient trial with six months of follow-up.

Do you have any sense of what the FDA is looking for in terms of a duration of follow-up?

Thank you.

Yes, this is Bill.

On the ramp-up in Europe, it is really too early for us to comment on what that looks like.

I mean we are, -- obviously just announced the deal last night.

But we have got to figure out the impact of leveraging our current distribution on top of what they were doing.

So we will get back at some point in the near future and give you a little bit more guidance on what that looks like.

Yes, and as far as the trials, I mean going forward, obviously again we just signed the deal.

We now have to go close this and we will have to be working with the FDA.

We haven't had any conversations ourselves with them.

So obviously Ardian has; we understand their discussions.

But again give us some time to have these conversations, close the deal, and then we will have a better sense on those trials at that point.

Thanks a lot.

Rick Wise, Leerink Swann.

Good morning, everybody.

Bill, let me start off with a big-picture question and then focus on a couple of points related to it.

It seems to me when I think about your considerable efforts over the last few years, you have reshaped Medtronic organizationally, operationally, on a cost perspective, but now increasingly on a mix and portfolio basis.

Maybe talk just a little bit about what changes lie ahead.

Will the pace of acquisitions continue at this kind of rate?

Will they accelerate?

Are you thinking about the portfolio in terms of eliminating certain businesses?

Just again some larger-term, longer-term perspective.

Yes, thank you for the question, Rick.

So, you're right.

There has been a lot of reshaping of the business over the last few years, recognizing the opportunities on a global basis for the chronic disease area which we are in, and realizing -- we know that over time markets reach certain maturity levels.

And we have been planning to find ways of further diversifying our portfolio and leveraging, if you will, the strong footprint that we have.

We clearly see the CRDM business and the Spine business as very important platforms for us.

There are areas in those businesses that we are going to invest in to expand our business, whether it is in clinical studies like RAFT or whether it is in adjacent technologies like atrial fibrillation.

But we are not counting on those businesses to provide the real upside growth.

We are really working to identify some of the new spaces like transcatheter valves, like InterStim, like the Ardian.

We have been tracking this for some time and we think this is a huge opportunity in the space of hypertension.

So the strategy is to basically protect and optimize, if you will, the base business and then use our scale in terms of global footprint to be able to move into adjacent areas, to generate market-leading performance.

Then from an operational point of view, we are doing some things to be able to take advantage of the breadth of Medtronic with the recent restructuring, with Mike having the Cardiac and Vascular businesses.

And we are moving forward to really look at how we can take costs out of that breadth of portfolio.

Likewise, with Chris on the Restorative Therapies Group, there's a lot of opportunities for us to do some things to, one, get synergies in front of the customer, but also to be able to take cost out.

So big picture we are going to protect and optimize our existing base and then invest disproportionally in emerging markets and emerging therapies.

Okay.

Let me follow up with three specifics related to that general question.

One, you said emerging therapies are going to double over the next five years.

Is that with or without acquisitions?

And what is the dollar number you would call emerging therapies today?

So the emerging therapies is roughly close to $2 billion on an annual basis.

It is a bit -- so that is the emerging therapies.

Then on the emerging markets, it is closer to $1 billion, a bit more than $1 billion.

So those -- and in terms of emerging therapies, in terms of the growth, it will be a combination of organic as well as adjacent tuck-ins.

Ardian is a great example, and that has potential to be, as we all know, very big when you consider the unmet clinical need there.

Transcatheter valves, when we get to the US, and some of the -- and atrial fibrillation, which we again are excited about here for the US.

So there is a lot of upside when you look at AF, when you look at transcatheter valves, you look at Ardian, you look at even some of the things we are doing in the Neuromodulation space with InterStim.

We believe thee subcu diagnostics, that has been growing very, very well and we are investing there.

So this is clearly where we are putting a lot of focus to get long-term growth.

Thanks, Bill.

Joanne Wuensch, BMO.

Can you hear me?

Yes, we can, Joanne.

Yes, we can.

Terrific.

Thanks.

I have three specific questions.

Where are we on the Physio-Control sale?

Where are we on Kyphon in Japan?

And on the call you mentioned a decline in drug pumps as part of the Neuromodulation business.

Can you comment on that?

Thank you.

Well, just quickly with respect to Physio-Control, obviously Physio-Control is doing well.

We have indicated previously that we are going to let that business obviously get back and operate and highlight how well it can do, which obviously we saw in this quarter, get it back to profitability, and then take a look at obviously as we have discussed previously strategically spinning the business out.

But that is not -- as we indicated that was not going to occur in FY '11.

We were going to let it operate here in FY '11.

So we will evaluate that as we get to FY '12.

In Japan, we got approval earlier in the year, but we just recently have gotten -- we are getting reimbursement which will not kick in I think until the January time frame.

So Kyphon Japan, as we said all along we think long-term there is a big market opportunity there.

But the ramp -- this is a major market development opportunity because they don't do a lot of vertebral compression fractures.

They don't do a lot of vertebroplasty in Japan.

So we have got to really help develop this overall market.

On the pump, the drug pump, we think here too this is a platform technology for us.

That we are in fact developing a new implantable pump.

But the existing business, one, it is being held back a little bit because today there is not very good reimbursement for refilling pumps.

So we have seen a shift from pumps to neurostim, and that has been hurting the pump side and has been picked up a little bit on the neurostim side.

Okay, terrific.

Thank you.

We have time for a couple more questions.

Tim Lee, Piper Jaffray.

Hey, good morning.

Thanks for taking the question.

Just first a clarification on the CRM warning letter.

Do the new AF products fall under that category?

Or are they free and clear of the warning letter?

They are free and clear.

Okay, great.

Second, how should we think about the impact from the RAFT study?

Now with the RAFT and MADIT-CRT, could we see the use of CRT-Ds in less sick patients be put into guidelines?

And when do you think you can get labeling for RAFT?

Thank you.

We are very excited about the data out of RAFT, which does expand into that mildly symptomatic population, the Class II heart failure patients, which have not been indicated.

So we are going to combine RAFT and REVERSE and the MADIT, and we are moving forward to file an indication as soon as possible.

I think if you layer on top of that the work that we are continuing to do on the Joint Commission, we think we are going to be able to impact the market over the next couple of years.

When you say file as soon as possible, is labeling call it a mid calendar 2011 event or is it a late 2011 event?

No, it is probably early next year, early next fiscal year.

Great, thank you.

One last question.

David Roman, Goldman Sachs.

Good morning, everyone.

Thank you for taking the question.

Maybe just one quick one on or Neuromodulation.

You called out the declines in pain pumps and also noted the divestitures impacting growth.

But it still looks as though the growth rate there is coming in somewhat below what your peers are generating.

Can you maybe just talk about where we are in your product cycle?

Give us some sense as to timing of new product launches and when we could expect -- how we should look at growth over the next several quarters.

Yes, so, on the neurostim business the product that we are really excited about is the RestoreSensor which is just now available in Europe and we are seeing very good traction in Europe.

That should be available in the US mid FY '12 is our estimate.

So that we think is going to be a really -- the platform for us to have real differentiation from a technology point of view.

If you look at this quarter I would say that on the pain stim in the US, our share was relatively flat.

The market we believe softened a little bit because of just some of the things we talked about with the economy.

If you look outside the US, with our competitors coming in on the DBS side we saw a little bit more competition there.

But in the US we had very good quarter on DBS.

So you put it all together our performance has been stable, but we believe we have the portfolio to be able to put ourselves back into a strong share-gaining position over the next 12 to 24 months.

And then maybe just a clarification on your comment about enduser market stabilization.

If you add everything up, US and O-US, it does look as though things are stabilizing.

But there are geographic differences.

For example in Endovascular you talked about the US being weak but called out O-US as a source of strength.

Can you maybe just help us understand?

Is there any reason to think that some of the trends you're seeing in the US will occur later in the fiscal year outside the United States?

Have you factored any of that into your guidance?

Well, we said all along particularly in Europe we remain cautious about what is happening there.

I mean as Gary mentioned with some of the economic challenges in countries like the UK and Greece, there is -- we are keeping a close eye there.

But no, we go back to the underlying demand for our products is not changing.

In fact, in many markets the governments are most reluctant to want to impact, if you will, the benefits.

So we remain cautiously optimistic that the demand will stay strong and that we will get through this macroeconomic bubble that we are in right now.

Just to add to that last comments, what I would -- the other thing I would add is what we have seen is, even though there is somewhat the softness in the markets, innovation still does drive these markets.

And back to your comment even on Endovascular, part of the reason we're still seeing strong growth in Endovascular outside the US is because the new products have been launched.

And we're getting ready to launch new products here in the US which we think will actually help re-accelerate the market.

So the reality is even though there is softness and pushback on some of the procedures, innovation still drives these markets.

And these new product launches we are talking about we think will help us get these markets growing back to what we would have maybe historically expected as we work through these macroeconomic conditions.

Yes, I mean I agree with Gary.

If you look at on the Endovascular side, we are very optimistic about the Endurant AAA which we think will really help us to grow market share and grow the market.

Then on the ICD side again we're working our way through the warning letter.

But when Protecta gets into the market we think Protecta is going to give us a very strong competitive position.

And same thing for Revo MRI.

So we have got -- we are positioning ourselves to be able to not only influence the market but really take market share back.

So, let me be mindful of the time here and just before we close, just to reiterate that again Q2 results we do believe reflected relative stability in a challenging healthcare market.

And during this time of softer growth we remain focused as I discussed on our core strategies of growth and on innovation.

This quarter we continued to generate strong growth in emerging markets and from our emerging therapies.

We gained, as I mentioned, share on many of our markets including CRDM and Spine.

In addition our strategy of making smart, disciplined, and opportunistic tuck-ins is working.

We are very excited and look forward to the addition of Ardian and this multibillion-dollar opportunity.

Going forward we will continue to leverage our financial strength including our strong free cash flow generation to fuel disciplined investment and return to our shareholders.

Our broad portfolio, our rich pipeline, our strong global footprint, and our world-class capabilities and talent we believe position on us very well to deliver market-leading performance over the long run.

So, with that, let me wish each and every one of you a happy Thanksgiving and we will talk to you next quarter.

Thank you.

This concludes today's conference call.

You may now disconnect.