美敦力 (MDT) 2012 Q2 法說會逐字稿

At this time I would like to welcome everyone to the Medtronic 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) I would now like to hand the program over to Mr. Jeff Warren, Vice President, Investor Relations. Please, go ahead, sir.

Good morning, and welcome to Medtronic's second quarter conference call and webcast. During the next hour, Omar Ishrak, Medtronic Chairman and Chief Executive Officer, and Gary Ellis, Medtronic Chief Financial Officer will provide comments on the results of our fiscal year 2012 second quarter which ended October 28, 2011. 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 our 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 2011. All year-over-year revenue growth rates are given on a constant currency basis. And with that, I'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning, and thank you, Jeff. Thank you to everyone for joining us today. This morning, we reported a second quarter revenue of $4.1 billion which represents growth of 6% as reported, or 3% on a constant currency basis. Q2 non-GAAP earnings of $898 million and diluted earnings per share of $0.84 increased 1% and 2%, respectively.

Our Q2 results reflect a quarter of stability in a challenging market. New products are making a difference in many of our businesses and our international markets continue to deliver solid results. Once again, over 60% of our revenue grew a combined 8%. This portion of our business has steadily delivered improving growth over the last five quarters. It's also worth noting that the same set of businesses grew a combined 9% in the US, demonstrating that the US healthcare system still recognizes the value of innovative products.

Let me provide you with some specific details In Cardiac and Vascular, we had good growth in almost all our businesses. I was particularly pleased with our ability to take share in the Pacing market with our Revo MRI pacemaker. We're also gaining share in drug-eluting stents as Resolute is performing extremely well in international markets. We're looking forward to Resolute's expected US approval later this fiscal year.

In our Restorative Therapies Group, VBS, Uro-Gastro, Diabetes and Surgical Technologies all delivered solid results. InterStim continues to perform extremely well both in urinary and our new US fecal indication. In Diabetes, we gained share in insulin pumps and continue to see strong global growth, largely a result of the success of our Veo pump and Enlite CGM sensor in international markets. Our Surgical Technologies business continues to deliver consistent growth, accelerated by products from our new Advanced Energy business.

At the same time, ICDs and Spinal, which account for nearly 40% of our business, continue to face pressures, and together declined 5%. While the ICD market remains challenging, we grew sequentially and took share on the strength of our Protecta ICD and Sprint Quattro Defibrillation leads. Although the market dynamics in this segment are complex, we do expect some of the current trends to eventually reverse. We remain focused in analyzing and improving the barriers to adoption of this therapy in both the US and international markets.

Our Spinal business showed modest sequential improvement with solid growth in international markets, and share gains in core metal constructs, driven by the strength of our new products. At the same time, we continue to face challenges in BKP and Biologics. BKP still represents a large under-penetrated opportunity. However, our execution in this area needs to improve substantially. We have to demonstrate better results. Our team has to show that the clinical promise of BKP technology can translate into market and business growth. Biologics, the recent controversy surrounding INFUSE has affected our results. Although the drop remains stable throughout Q2, we remain cautious and are watching utilization very carefully. We strongly believe that the INFUSE data we have submitted to the FDA over the years support the safe use of INFUSE for approved indications. We await the results of the Yale study next fiscal year.

Looking ahead, we have a number of growth platforms where the progress that we are making today should help us steadily improve our growth profile over time. Recently, we received a number of product approvals, including the iPro 2, our professional CGM system that identifies patients who can benefit from our diabetes management technologies. Last week, we received approval for RestoreSensor, our next generation spinal cord stimulator that uses innovative motion sensing technology to provide patient comfort and convenience.

We also continue to advance meaningful clinical trials across the Company. We're making good progress in our core valve US IDE trial which is a basis for our expected entry into the US transcatheter aortic valve market. In Diabetes, we received US IDE approval for two important pivotal trials. ASPIRE, an in-home study of our glow glucose suspend feature and the Enlite study for the US approval of our Enlite CGM sensor. Both of these therapies have CE mark approval and have been getting an enthusiastic reception in international markets. These two trials are also part of our extensive industry-leading clinical program that is focused on the ultimate goal of developing an artificial pancreas.

In Ardian, we began enrollment in our Symplicity HTN-3 pivotal study. Ardian is an exciting opportunity which can have a dramatic impact on the treatment of hypertension. I hear this from customers all around the world. Ardian was recently recognized as the top medical technology innovation for 2012 at the Cleveland Clinic Medical Innovation Summit. I also spent some time with customers at TCT, where there's growing excitement, not only with Ardian, but also with our entire cardiovascular portfolio and strong innovation pipeline. While we have a number of exciting growth platforms that represent multi-billion dollar opportunities, we need to execute in order to translate their potential into commercial success. I continue to stress to the organization the importance of crisp and consistent execution, which is critical to delivering better and more predictable business performance.

While I was pleased with our overall execution this quarter, I also recognize that we need to perform consistently over a sustained period of time. Our integration activities on recent acquisitions are progressing well. PEAK and Salient have been part of Surgical Technologies for about 12 weeks and have become immediate contributors to our growth. In addition, products that came from acquisitions that we have made over the past few years in transcatheter valves, atrial fibrillation, Biologics, heart valves and renal denervation were all strong contributors to our growth this quarter.

We will look carefully for compelling opportunities to broaden our portfolio with strategic tuck-in acquisitions that can quickly create value for us, attaching them to business teams that are executed. At the same time, we continue to systematically assess our portfolio of businesses. Where appropriate, divest non-strategic assets. As we did last week when we announced our agreement to sell Physio-Control. As I look across the Company, I believe our combination of businesses is uniquely positioned to create value through our synergies and technologies, customer base, disease progression and operations.

I've also made it clear that we must execute on our plans to significantly reduce product costs across our entire portfolio. Both to offset the pricing pressure in many of our markets, as well as to support fewer product lines as we expand into emerging markets. We're in the final year of our five-year, $1 billion cost of goods sold reduction program. We won't stop there, as I'm challenging the organization to take out another 25% of our product cost over the next five years.

Let's now discuss, how we are optimizing our innovation process to improve R&D productivity. This will require some major changes, but perhaps the most important area that needs improvement is our method of selecting and prioritizing investments. We believe that the customer economic value of our technology has to be an over-arching factor in our selection process. We're building systematic business tools that leverage our deep and unique skill set in healthcare economics to insure that customer economic value is understood and considered in all our investment decisions. While it may take some time to realize the full benefit of these changes with our new investments, I believe that there are also near-term opportunities in our existing pipeline. I'm looking forward to giving you more details in the coming months.

Now let's talk about accelerating globalization, our biggest growth opportunity. In Q2, our emerging market revenue continued to grow close to 20%. Our Greater China business is annualizing at over $600 million and grew 24% this quarter, which marks our 11th straight quarter of greater than 20% growth in China. I continue to challenge our entire organization to generate new ideas, using our latest and most innovative technologies to create new and potentially disruptive business models, specifically directed towards each of the major emerging markets. I recently reorganized and streamlined our global business matrix to insure our business units have a direct line of sight into, and have accountability for, each of our major global regions. Our business units now have global P&L responsibility and every business unit president has representatives on their staff from each region. We expect to achieve our global growth goals through a strong and collaborative partnership between our business units and our local market experts in each of the geographic regions.

Over the past several months, I've traveled extensively around the world, taking the opportunity to meet our employees, customers, and government leaders. My entire leadership team went with me to India and China to meet with local customers, expand our insights into these markets, and review our businesses. This was important for my team, to gain a deeper understanding of the enormous multi-billion dollar opportunities in these two important markets. I look forward to updating you in the coming quarters in our progress as we develop specific plans to accelerate our global growth.

This quarter, Medtronic was recognized as one of the world's 25 best multi-national workplaces by the Great Place to Work Institute. And we were the top healthcare company on the list. This was a strong acknowledgment of our industry leadership in the global workplace and a testament to our organization in many markets around the world. I would like to conclude by making some comments on the current state of our industry, which continues to face a very challenging environment.

First, the cyclical problem of depressed macroeconomic conditions in many developed countries have led to constrained healthcare budgets and increased pressure and utilization. Which affects both our customers and us. Second, it is clear that the current trajectory of rising healthcare costs is unsustainable. This secular problem is independent of the current global economic situation and simply will not go away when macroeconomic conditions improve. Third, it is clear that the emerging markets represent a tremendous growth opportunity for our industry.

At Medtronic, we are addressing each of these trends to position the Company for sustainable growth. First, while we acknowledge that part of our growth is a function of the broader global economy, we are demonstrating in the US and in Europe that it is possible to grow even in this environment when you have innovative products. When macroeconomic conditions eventually improve, we would expect our growth to correspondingly accelerate. Second, it is imperative that despite the slower growth of our markets, we make the disciplined investments during this downturn to develop solutions that will not only improve healthcare but do so while delivering better economic value.

Our industry thrived for decades while engaging primarily with the physicians, who in most instances evaluated the merits of our products solely on their clinical value. That world is quickly changing. While clinical value will always be a critical decision factor, we must increasingly demonstrate the economic value at both the provider and payer levels. In addition, we must look for opportunities to offer broader solutions across the care continuum to our hospital customers. Medtronic's breadth in customer relationships uniquely position us to deliver value to the overall healthcare system. And finally, during this economic downturn we must prioritize our investments into our biggest long-term opportunity of all, which is meeting the needs of the billions of people in emerging markets that have limited access to healthcare.

In summary our investments in solutions that deliver better economic value, as well as accelerated investments to serve the emerging markets, will insure that we not only participate in the future global economic recovery, but that we emerge stronger leading our industry in providing better and more cost-effective solutions to many more people around the globe. We remain focused in improving our sustainable growth profile at Medtronic, while maintaining a strong focus on returns and financial discipline. Including our ongoing commitment to return 40% to 50% of our free cash flow to shareholders. As I've discussed, this focus will involve improving execution, optimizing innovation and accelerating globalization.

Gary will now take you through a more detailed look at our results. And at the end of the call, I will make some brief closing comments. Gary?

Thanks, Omar. Second quarter revenue of $4.132 billion increased 6% as reported, or 3% on a constant currency basis, after adjusting for $123 million favorable effective foreign currency. Breaking this out geographically, revenue in the US up $2.3 billion was flat. While international sales of $1.832 billion increased 14% as reported or 6% on a constant currency basis.

Q2 international revenue results by region were as follows. Greater China grew 24%, growth in Latin America was 17%, Middle East and Africa grew 12%, growth in other Asia was 6%, Japan grew 1%, while Canada declined 1%. Europe and central Asia grew 5% where the current economic environment and payment uncertainty continues to cause us to defer revenue in Greece, which has now accumulated to $14 million.

Q2 GAAP earnings and diluted earnings per share were $871 million and $0.82, an increase of 54% and 58%, respectively, due to the settlement of our US Fidelis lawsuits last year. After adjusting for certain acquisition-related items, as well as the non-cash charge for convertible debt interest expense, second quarter earnings and diluted earnings per share on a non-GAAP basis were $898 million (sic - see press release) and $0.84, an increase of 1% and 2%, respectively. After adjusting for this one-time tax benefit we received in Q2 of last year, as well as the Ardian dilution, our non-GAAP diluted earnings per share increased 8%. It is worth noting that while our non-GAAP quarterly results include the gain, acquisition cost and dilution related to PEAK and Salient, we expect the overall impact from PEAK and Salient to be neutral to our fiscal year non-GAAP earnings, after including the expected modest dilution in the second half of this fiscal year.

In our Cardiac and Vascular Group, revenue of $2.207 billion grew 1%. Results were driven by growth in Pacing, AF Solutions, Coronary, Structural Heart, Endovascular, and Peripheral, offset by declines in ICDs and Physio-Control. CRDM revenue of $1.268 billion declined 2%. Worldwide ICD revenue of $708 million declined 8%. We estimate that the worldwide ICD market declined in the mid to high single digits. Our US ICD business declined 12% with the majority of the decline being driven by fewer procedures. We estimate that the US ICD market declined in the mid teens as it continues to feel the impact from a number of factors including the JAMA article and the DOJ investigation of hospitals that are negatively affecting procedure volumes.

Despite the market slowdown, we are pleased with the performance of our Protecta ICD and Sprint Quattro Defibrillation leads and their impact on our ICD share. We sense a building enthusiasm among electrophysiologists in competitive accounts for both Protecta with its SmartShock and lead integrity monitoring technology and Sprint Quattro with its 10 years of proven performance in a market that is increasingly concerned about long-term lead reliability. Our estimates show that our US high power share was up over 150 basis points sequentially. Protecta is continuing to partially offset the pricing pressure in the US ICD market. Our international ICD business was flat. On a sequential basis, we believe we gained nearly 200 basis points of international ICD share.

Pacing revenue of $511 million grew 4% in a flat market. US Pacing grew 5% and we maintained the large share gains driven by our Revo MRI SureScan pacemaker. Revo continues to demand a mid teens percentage price uplift which is offsetting pricing pressure in the Pacing market. Our international Pacing business grew 3% while we estimate the international Pacing market returned to low single digit growth.

Our AF Solutions business grew in excess of 50%. Driven by the ongoing successful US launch and continued adoption in Europe of our Arctic Front cryo-balloon. We are taking share in the AF market and continue to expect this business to generate solid double digit growth. While Arctic Front is doing extremely well, we are working with the FDA to address their concerns raised at a recent panel on our Ablation Frontiers phased RF system. We remain focused on obtaining the first labelled indication in the US to treat both the unserved persistent and longstanding persistent AF patients.

Our cardiovascular business had another strong quarter with revenue of $830 million growing 8%, and with 6% growth in the US and 9% growth in international markets. Coronary revenue of $376 million grew 3%. Worldwide drug-eluting stent revenue in the quarter was $192 million, including $40 million in the US. We continue to expect a late FY '12 approval of Resolute in the US, which we believe will be a meaningful driver of revenue growth and share gains. To put the US opportunity in perspective, in Europe, where Resolute is approved and we have more competitors than in the US, our DES share is nearly double our US share. In markets where we have regulatory approval for both our Resolute Integrity drug-eluting stent, and Integrity bare-metal stent, Medtronic holds the market-leading coronary stent share position. We expect to drive growth by taking share when these products become available in new markets.

Turning to Ardian, we continue to make progress on this multi-billion dollar opportunity in hypertension and are tracking to our expectations of generating $30 million to $40 million of revenue in FY '12. On the commercial front we introduced our Symplicity System into new centers in Europe, the Middle East, and Asia; and remain focused on expanding reimbursement into additional countries.

Structural Heart revenue of $266 million increased 8% driven by strong growth in transcatheter valves. We continue to split the transcatheter valve market with our competitor and have clear market leadership in the largest TCD segment, transfemoral implantation. In addition to being the only device with CE mark approval for the Subclavian Approach, CoreValve recently became the first and only device to receive CE Mark approval for direct aortic implantation. Which is gaining considerable attention from cardiac surgeons as an alternative to the Transave implantation, as direct aortic does not require an incision into the heart.

We are seeing strong interest in our new 31-millimeter CoreValve and we expect CE mark approval for our 23-millimeter CoreValve in the second half of FY '12. In the US, we are pleased with the great progress of our CoreValve pivotal trial. We expect to finish enrollment in the extreme-risk arm by the end of the calendar year and the high-risk arm by next summer. In addition, we started our CoreValve pivotal trial in Japan earlier this month. In surgical heart valves, we grew 4% on the strength of our mechanical valve portfolio. We estimate we gained 300 basis points on mechanical valve shares sequentially.

Turning to Endovascular and Peripheral. Revenue of $188 million grew 20%. In the US, revenue growth of 33% was driven by the continued success of the Endurant Abdominal Stent Graph. Endurant is having strong sales growth in markets around the globe and we continue to expand into new markets including recent launches in France, Mexico and Japan. In Peripheral, our drug-eluting balloons had strong double digit growth. We received FDA approval last month for our Assurant Cobalt Iliac Stent. Physio-Control revenue of $109 million declined 3%. After adjusting for resuming shipments in Q2 last year, following a supply constraint issue, the business grew 7%.

Last week, we announced our intent to sell Physio-Control to Bain Capital. We expect to treat Physio-Control as a discontinued operation in our financial statements starting in Q3. The deal is expected to close in the first calendar quarter of 2012. We expect to use most of the proceeds to offset any potential dilutive impact from this transaction to FY '12 non-GAAP earnings per share. This transaction is reflective of our ongoing commitment to evaluate our portfolio of businesses and divest non-strategic assets as necessary.

Now turning to our Restorative Therapies Group. Revenue of $1.925 billion grew 4%. Growth was driven by another quarter of solid performance in Surgical Technologies and Diabetes, as well as improved growth in Neuromodulation, offset by challenges in Spinal. Spinal revenue of $839 million declined 3%. The global spine market remains challenging, with global growth in the low single digits and the US market declining in the low single digits. In the US market, mid single digit pricing declines continued to offset low single digit procedure and mix growth. Although the market continues to be challenged, our Spinal business grew 8% in international markets on the strength of new products.

In Core Spinal, which includes core metal constructs, IPDs and BKP products, revenue of $631 million declined 3%. Core metal construct products declined 1% but we were encouraged to see growth of 5% sequentially as we continue to ramp up the rollout of our new products, including VERTEX SELECT, ATLANTIS VISION ELITE, and SOLERA, our flagship posterior fixation system. In the US, SOLERA is growing nearly 10% and is garnering a mid teens price uplift. We launched SOLERA SEXTANT, our minimally-invasive product late in Q2. And plan to rollout SOLERA 5.5 and 6.0 to address the complex deformity segment. As well as POWEREASE, the industry's first powered instrument solution for SOLERA, later this fiscal year. We expect SOLERA will continue to become a larger part of our mix and drive growth as we roll out additional sets. At NASS, we also announced our new MAST MIDLF procedure, a solution for minimally invasive lumbar fusion surgery through a midline laminectomy approach.

In Q2, we were pleased by a $101 million jury verdict that found a competitor infringed on three of our patents. We remain committed to vigorously defending our intellectual property.

In BKP, revenue declined 8%. While we continued to face procedure and pricing pressures in the VCF market, our recently launched Xpander II balloon had strong adoption in its first full quarter. Biologics revenue of $208 million declined 4%. Sales of INFUSE declined 16% in the quarter which was similar to the upper teens decline we saw in Q1 following the publication of the Spine Journal articles in June. Despite pressure on INFUSE, we were encouraged to see double digit sequential growth in other Biologics. Our acquisition of Osteotech contributed $26 million in revenue. MagniFuse has accelerated following the recent INFUSE decline.

Turning to Neuromodulation. Revenue of $421 million increased 6% driven by double digit growth in DBS and InterStim. In Pain, the RestoreSensor spinal core stimulator, with our proprietary AdaptiveStim technology, continues to perform well in Europe. Last week, we announced FDA approval for RestoreSensor and we expect this breakthrough technology to drive growth and take share in the US market. In Uro-Gastro, the US launch of InterStim therapy for bowel control continues to go well and is contributing to the success of InterStim.

Diabetes revenue of $367 million grew 10% driven by double digit growth in insulin pumps in CGM. Our international diabetes revenue grew 15% as we continued to see adoption of the Veo pump with its novel low glucose suspend feature. In addition, our recently launched Enlite sensor continues to see success in international markets, with very positive feedback on its improved comfort, accuracy and ease-of-use.

Surgical Technologies revenue of $298 million grew 20%, including $21 million from our new Advanced Energy business which is comprised of our acquisitions of PEAK and Salient. Excluding Advanced Energy, Surgical Technologies had strong organic growth of 11%. We are excited about the addition of Advanced Energy growth business and its platform technologies to Medtronic, including the recently FDA approved Aquamantys 3 System. Surgical Technologies had a strong performance in US capital equipment, driven in part by the decision we made this summer to merge our NT and Navigation sales forces to strengthen our account coverage. We are also continuing to see solid growth in disposables, especially in ENT Power and Monitoring.

Turning to the rest of the income statement, the gross margin was 75.5% compared to 75.4% in the second quarter of last year. We continued to expect our gross margin for the remainder of the fiscal year to be in the range of 75% to 75.5% as we continued to offset pricing pressure through our $1 billion cost of goods sold reduction program. Second quarter R&D spending of $379 million was 9.2% of revenue. We remain committed to investing in new technology development and evidence creation to drive future growth and continue to expect R&D spending in the range of 9% to 9.5%.

Second quarter SG&A expenditures of $1.437 billion represented 34.8% of sales, a 30 basis point improvement from the second quarter last year. It is important to note that incremental bad debt expense included in our SG&A this quarter in International and Diabetes had a 40 to 50 basis point negative impact, which also had a little more than a $0.01 negative impact on our earnings per share. We believe the Diabetes issue related to a system change over is behind us. However we remain cautious on the possibility for incremental international bad debt expense going forward given the current economic conditions in Europe. We continue to focus on several initiatives to leverage our expenses, while at the same time investing in new product launches and adding to our sales force in faster growing businesses and geographies. We expect SG&A spending to be in the range of 33.5% to 34% for the full fiscal year.

In an effort to improve disclosure to investors, we continue to break out the non-cash amortization expense as a separate line item from net other expense on our income statement. Amortization expense for the quarter was $86 million compared to $85 million in the second quarter last year. For the rest of FY '12, we would expect amortization expense in the range of $85 million to $90 million per quarter. Net other expense for the quarter was $142 million compared to $9 million of income in the prior year. The year-over-year increase in expense is primarily a result of the losses from our hedging programs which were $84 million during the quarter compared to $48 million in gains in the comparable period last year. As you know, we hedge much of our operating results to reduce volatility in our earnings. Net other expense this quarter also includes $28 million in expense from the Puerto Rico excise tax. Which is almost entirely offset by a corresponding tax benefit I will discuss in a moment.

Looking ahead, based on current FX rates we anticipate Q3 net other expense will be in the range of $85 million and $105 million, including hedging losses in the range of $30 million to $40 million. For FY '12, we expect net other expense will be in the range of $405 million to $455 million, which includes hedging losses in the range of $190 million to $230 million based on current exchange rates. Net interest expense for the quarter was $38 million compared to $67 million in the prior year period. Excluding the $21 million non-cash charge for convertible debt interest expense, non-GAAP net interest expense was $17 million. At the end of Q2, we had approximately $9 billion in cash and cash investments and $10 billion of debt. For FY '12, we anticipate non-GAAP net interest expense in the range of $60 million to $70 million.

Let's now turn to our tax rate. Our effective tax rate in the second quarter was 17.3%. Excluding the impact of one-time items our adjusted non-GAAP nominal tax rate in Q2 was 17.6%. Included in this rate is the $25 million tax benefit associated with the US foreign tax credit from the Puerto Rico excise tax which mostly offset the charge recorded in other expense. Also, included in the tax rate for the quarter is a $17 million net benefit associated with the resolution of certain income tax audits, changes to uncertain tax position reserves for the quarter, and the finalization of certain tax returns. This one-time tax benefit of more than $0.01 would basically offset the impact from our incremental bad debt expense I mentioned earlier. For FY '12, we expect an adjusted non-GAAP nominal tax rate in the range of 19% to 19.5%, which includes the tax credit associated with the Puerto Rico excise tax.

In Q2 we generated approximately $1 billion in free cash flow, defined as operating cash flow minus capital expenditures. We expect to generate $4 billion in free cash flow in FY '12 and remain committed to returning 40% to 50% of our free cash flow to shareholders. During the first half of FY '12, we have paid over $500 million in dividends and repurchased $600 million of our common stock. As of the end of Q2, we had remaining authorization to repurchase approximately 80 million shares. Second quarter average shares outstanding on a dilutive basis were 1.063 billion shares.

Let me conclude by commenting on our revenue outlook for the remainder of fiscal year 2012. We believe a constant currency revenue growth rate of 1% to 3% from continuing operations is reasonable for the second half of FY '12 as we continue to execute in slower markets. While we cannot 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 fiscal year, then our FY '12 revenue would be positively affected by approximately $290 million to $330 million, including a positive $20 million to $40 million impact in Q3. Our FY '12 revenue outlook assumes our CRDM and Spinal businesses combined, continue to decline in the low single digits on a constant currency basis. Our outlook continues to assume that the rest of the businesses combined continue to grow in the mid to high single digits on a constant currency basis.

Turning to our guidance on the bottom line, we believe it is reasonable to continue to expect non-GAAP diluted earnings per share in the range of $3.43 to $3.50, which includes approximately $0.04 to $0.06 dilution from the Ardian acquisition. After adjusting for the Ardian dilution and $0.10 of one-time tax benefits we received in FY '11, our guidance implies FY '12 earnings per share growth of 6% to 9%. While we don't provide quarterly guidance, we would point out that Q3 has typically had similar earnings per share to Q2. Therefore, would not be surprised to see some models shift a couple pennies from Q3 to Q4. As in the past, my comments and guidance do not include any unusual charges or gains that might occur during the fiscal year. Nor do they include the impact of the non-cash charge for convertible debt interest expense.

With that, Omar and I would now like to open the phone lines for Q&A. We have a number of people waiting in queue, so I would respectively request that you limit yourself to one question and if needed, only one follow-up to that, so that we can get as many questions as possible. If you have additional questions, please contact our Investor Relations team after the call. Operator? First question, please.

Kristen Stewart with Deutsche Bank.

I was wondering if we could just walk through real quick the additional gains related to the Peak and Salient acquisitions. I just wanted to make sure that, that had been in your prior guidance.

Kristen, this is Gary. In the prior guidance we had not provided any information on Peak and Salient. Other than we said basically Peak and Salient for the year would be basically earnings neutral. Which is what we are still saying, that is our current expectation. But we knew, what we had also indicated, was that the gain on the investment would be offsetting the dilution from an operating basis, and that is also still our expectation. But as you indicated, in the quarter itself, because the gain was all recorded in the quarter with some of the dilution coming in the back half of the year, we actually end up with a little over $0.02 benefit of the gain more than offsetting the dilution we had obviously in the quarter and the integration cost itself. So there is a $0.02 pick up we have in this quarter that was not in our original guidance. That obviously will be offset as we go through the back half of the year by $0.01 or $0.02 dilution we expect from the operating results of Peak and Salient.

Just for Omar, I know you had talked about making appropriate divestitures. I was just wondering if you could maybe give us an update, now that you've had another three months under your belt, just in terms of how you're thinking strategically about Medtronic, the businesses you have today, and just an update on if there's other things that you view to be non-core and non-strategic.

First of all, as I look at Medtronic, we're basically in attractive markets in the long term. The demographics are such that these are all potential growth markets around the world. And even in our businesses which are challenged, these are attractive markets with demographics suggesting that there will be growth in the long term. We constantly look at our portfolio and we look at our ability to win in these different businesses. Right now as I see it, our portfolio is well balanced. And more importantly, we think that different elements in the portfolio actually add to each other to provide considerable synergies in front of our customers. Not just putting products together but real technical synergies through which performance can be enhanced because of our expertise in different areas. So at this stage, we feel that we've got a pretty good portfolio. But we continue to look at this on a quarterly basis and a regular basis.

Matthew Dodds of Citigroup.

I'll focus on Europe. Gary, when you look at Europe, there seems to be rising concerns again that austerity might get tougher in calendar '12. So can you say what you're seeing specifically in Western Europe? \ And on the receivables payments front is there any concern there that other countries, not just Greece, may be extending payments?

Overall, Matt, as we look at Europe in general, our performance in Europe actually right now continues to be still relatively strong. Again, I think the new products we're launching, the innovative products are still a positive. As we talk to our team over there, the management team, I think they're still feeling good that our products in this marketplace, they can win and that we can continue to grow. But as you know, Europe is not just one market either. The reality is, the growth we're seeing in Germany, for example, and France and some even the northern European countries is stronger right now than probably what we're seeing in some of the countries that are struggling more. Especially Greece which is by far the worst at this point. We have seen Italy on the receivable front, some concerns on their receivables. And so that's one of the reasons we saw a higher bad debt expense in this quarter, was not just from Greece but it was also we took some additional bad debt in Italy because of what we're seeing happening in that environment.

Now that being said, in Italy and Spain, where you're seeing some of the other concerns about the overall economic troubles, our business is still relatively strong. So as we look to the next year, we're cautious, we're watching it carefully, we're making sure we're managing the receivables issue overall. But the business itself, outside of Greece, outside of what I would say the worst situation, is continuing to be relatively strong. And we expect that our innovative products will continue to take share and we can actually continue to grow. So I'm feeling good in general. But the international receivable issue, especially in Italy and Greece, are the ones we are watching.

And then one just quick product question. Revo in the US, can you give a rough idea of what percent of units do you think it was? Is it in the 10% to 20% range in the quarter?

Yes, right now, we're thinking it's right about the 20% range.

Mike Weinstein with JPMorgan.

Thank you, good morning. Omar, I want to just talk more bigger picture than just the quarter. And I would be appreciative of your insights. If you look at this quarter in the broader picture, what's going on in the med tech landscape, Medtronic, once you back out currency and acquisition noise, grew about 1.5% organic. Which obviously isn't where you want to be longer term. So can you just talk a little bit more about how you reinvigorate growth? First question would be, A, is that possible, and, B, how do we think about the timetable for you doing that? Thanks.

First, it's possible. That, I want to make absolutely clear. I completely believe in it. I see data around the world that suggests that it's completely possible. And the management team absolutely believes in it. Second, the approach we're taking is pretty straightforward. First of all, we've got to make sure that the investments that we make today result in better growth. We're investing a considerable amount of money every year, reinvesting a considerable amount of money every year because of the margins that we have. And we've got to align them in a way that results in growth. And the way we'll do that is first by better execution. So in all areas, facets of the Company, tighter discipline around targets, commitments, aligning goals with each other. So just basic good excellent execution.

Following that, using customer economics is a very important lens through which we've got to select what we work on. I'm a strong believer and we're all a strong believer in the fact that, especially in this environment, but in general, if you take innovative products and you show it to your customers how they can be financially better off by using these products, and provide better care, then these products will sell and we will grow. Now, we uniquely in the industry have the capability to actually generate that kind of evidence in a customer base, on a specific customer basis. We haven't done so in the past in a comprehensive and reverse fashion. We intend to do so. So that's one big bet, if you like, that we're making, that we think, when applied comprehensively across the Company in every product that we work on, will trigger growth. And then the third thing, that I've talked about before and I believe in it more and more every day, is our opportunity to globalize.

When I look at the China device market, just for the products that we have today, with exclusion factors built in so that people who can only afford these products get them, if you can bring them to standard of care, that's a $7 billion opportunity in that market. And we today are at $500 million to $600 million. So even if he can get a reasonable penetration of that $7 billion opportunity, which does not include brand new products or low-cost products, all of which we will work on, as well, that alone can double our business in China. So as I look around our landscape, improving execution, optimizing innovation methodology by using customer economics as a fundamental lens through which we look at every investment decision that we make. And having a resilient focus and a relentless focus on globalization, country by country, starting with China and India. And then moving across to other growth markets around the world on a very specific basis is the way in which we will deliver growth. And I think although long term ramifications, I think we'll start to see results incrementally every quarter as we go forward.

And just to maybe add to Omar's comments, Mike, the reality, as we even highlighted in the comments, 60% of our businesses right now are growing high single digits as far as a growth rate, 8% for the quarter. So the fact of the matter is, yes, we have a couple businesses right now that are clearly holding us down as far as where the growth rates are. But at some point in time that will also start to anniversary from the standpoint of the comparisons and from the new basis that we have within the spine and ICD markets in general. And so as we look forward, all the focus we have internally here is starting to have some pay off. Now, I think we're going to have to obviously work through this for the current year and that's why we still gave guidance of 1% to 3% for the current year. But as we start to see some of these businesses that have been really pulling us down start to anniversary, I think you're going to start to see the growth rates accelerate as we see the broader businesses, which are growing, as Omar said in his comments, are clearly growing in very tough economic conditions, you can get growth in this marketplace. And that's what we're focused on trying to do.

Okay, let me focus. There's a lot I could ask you on that just relative to the math. But let me just ask you on the gross margin line. If we look at a couple different things. If we look at the pricing pressure in your comments, up mid single digit pricing pressure in spine. You're getting a bit of a reprieve right now in your CRDN business because of the new product launches of Revo and Protecta that's helping you for a piece of time. But longer term you're looking at probably pretty significant pricing pressure in spine and CRDM. And your growth is going to come more from emerging markets versus, obviously, developed markets which has already taken place. Is the plan to take out 25% of your COGS over a five-year period sufficient to offset the pricing pressure that you'll see across the portfolio? If all you do is take out 25% of your cost of goods sold, in other words, are gross margins flat five years from now?

First of all, we aren't going to stop at 25%. That's the initial target and we continue to look for opportunities to continue to improve that. That's one point. Second is that we need to create within our businesses a culture that this is an ongoing effort. So we're working on long-term programs right now that take costs out dramatically in the future. So it's not going to stop. It's a continuing effort that we continue to have across all our businesses.

Second, there are other line items between the revenue and the gross margin outside of the cost of the products which we are also working on making more efficient. Everything from our logistics to the way we sell our products, all of that while always preserving customer service and focus. We want to make sure that we drive much more efficiency in lots of those other line items. And I think there's opportunity there, as well. And I think pricing our products in a realistic fashion around the world and carrying those products over time will give us incremental growth in these different regions. And I think we have the capacity to afford it.

Bob Hopkins with Bank of America Merrill Lynch.

Obviously these are fairly extraordinary times when it comes to the CRM market and potential changes in Europe. And with that in mind, I was wondering, since you're the only company that we've listened to over the last month that has good data on October, I was wondering if you could give us any comments, especially as it relates to the ICD market, about trends you saw for the market in October relative to the DOJ process. Are there any signs, in your view, that that process may be coming to an end as you look at the numbers for your results later in the quarter?

Bob this is Gary. Just to add some comments there. Obviously, it's hard for us, we don't have a lot of market data for October. We have some of our own data. And our implant rate, we've actually seen even slight improvement here as we end the quarter and especially even going into Q3. So we've actually seen the implant data sees some modest improvement. What we don't know right now is are we taking more share or is that just the fact that the market is starting to stabilize. So we don't have market data. Until we see that, we're being cautious. Our current thought is we're optimistic that maybe we've bottomed out and we're starting to see some flattening. But we'll have to wait and see what the actual market data is, which we probably won't have for this period for another couple months yet.

But do you have any thoughts on the DOJ process anecdotally from the field in terms of fewer audits or anything of that nature?

Overall, I don't think we've seen anything worth necessarily falling off. But we are starting to anniversary against that. Our people are again, cautiously optimistic that the market is starting to stabilize. We're coming up on the anniversary of when this started as far as a process. Our implant data is starting to stabilize and they're actually seeing some modest improvement. We'll have to wait and see again what's the actual data as we go forward. We don't want to say this is over yet so we're trying to be cautious on that regard. But we see at least some hope in what our results are showing.

And then just to round that out, from a pricing perspective in ICDs, obviously you have some new products but if you exclude those new products any change in the pricing environment for ICDs as you see it? And then also on Europe, was Europe stable throughout the quarter? I think you might have mentioned that but I just wanted to confirm.

Yes, from a pricing perspective overall, we really didn't see. As you said, we're getting some uplift in our prices because of the new products that we are launching in the marketplace. But even outside of that, we didn't see necessarily any big change in pricing pressure from what we've been seeing for the last year or so here. So I think it's been pretty consistent. Within Europe, same thing. We really didn't see any change in the trend as we went through the quarter, or even as we've entered into the current year. So there's been no dramatic change in that. It continues to be the same pressures we've been experiencing and working through and being able to manage through at this point.

David Lewis with Morgan Stanley.

Omar, one area of the business that we've heard some broad strokes about but very few specifics is actually the topic of R&D and R&D efficiency. And clearly you want to enact some positive change here. But given the cycle of medical device investment and then obviously commercialization, can you help us with some realistic guide posts in terms of when we could expect some type of improvement in Medtronic's relative R&D efficiency? Is this something you can affect positive change on in six to 12 months? Or is this something investors should be thinking about from an 18- or 36-month type perspective?

First of all, the way in which we measure this is when our growth rates start to improve, it's pretty straightforward. It's tough to be very precise about what caused what in this scenario. And so the general improvements we're making in R&D will start to impact results. As I pointed out earlier, while the new investments we make will go through the screen we talked about, which will result in better selection of products that will create growth in a more efficient fashion. However, products that are already in our existing pipeline, and some which we've already launched, could also benefit from value creation in an economic sense. Which we haven't done so in the past. So I think from that perspective, we can probably get more near-term results as a consequence of this focus on economic value creation. So products that we already have on the market recently launched or products that are in our pipeline, when we look at their economic value, get evidence that our customer sites do demonstrate that economic value, and we communicate that to our customers, we think that that can give us differentiated growth on a continuous basis quarter over quarter.

Just to add to that, you're going to see continued improvement. I don't think it's going to be all of sudden two years from now everything changes. And I think, as Omar is saying, there's opportunities for us to do things now and we'll start to see some benefit from that. Clearly some of the programs that are just currently under development, you won't see those benefits until, as you point out, David, until two to three years. But you shouldn't assume you have to wait two to three years for that to happen. We expect the things that we put in place are going to start to have payoffs already. But it's also not a cliff item. You're not going to just all of a sudden see this change dramatically in one period. You're going to continue to see continuous improvement.

And Gary, in coming quarters should we expect Medtronic to come out and give a much harder number around those COGS reduction issues akin to what the Company did several years ago?

As we go through our process and as we finish the current year, my guess is, yes, as we go forward for the next five years we'll give you some specific expectations on what we're going to be looking for. As Omar said in his comments he's challenged the organization to say -- How do we achieve another 25% out. But as he indicated, we're actually driving some expectations that we need to have more than that. And so, what are those programs. The businesses have developed plans already for much of that but there are still some things being developed and firmed up. Once we have that firmed up, as we get into the next five-year plan, we'll lay out some expectations.

Rick Wise with Leerink.

Let me turn to INFUSE. INFUSE down 16%. Is it your sense that we've seen the worst of the decline? When we were at NASS, I was surprised, just at my random conversations with various docs, it seemed like the move away from INFUSE--and this is totally anecdotal now--seemed to be actually accelerating the last three months. And can the other biologic products continue to help offset? Just any perspective of when you think we're over the hump there?

First of all, our data shows that in Q2 actually, the number stabilized to a fairly steady number, which is a drop in the high teens. Now, we're watching it carefully. We remain cautious and we are watching it carefully and we've got to watch the data and then conclude. So we don't want to make any concrete conclusions that it's completely stabilized but our data does suggest in Q2, it was pretty steady. But again, this is volatile and we watch it very carefully. Anything else, Gary?

The only thing I would add to that comment, Rick, because I agree with Omar, we're watching it, we are not predicting we're at the bottom, yet. On the other hand, Q2 did not get worse as we went through the quarter. It was pretty stable, as he indicated. The issue is, we are seeing, as we had mentioned in the comments, we are seeing increases in some of our other types of biologic products. Osteotech and Magnifuse and a few others, where we're starting to see strong growth in those businesses.

The fact of the matter is, INFUSE, if you do see a decline, there is something they need to use for these procedures. And so we think we have a strong product line even outside of that, that will help drive the growth going forward. But INFUSE, right now it's cautious. Until we can get the Yale data out there, I think there's going to continue to be just people, comments and questions and concerns. And so as a result of that, we expect the business will be, and our guidance assumes, that basically we continue to see the same kind of decline that you saw here in Q2.

I think also, before we finish on the topic, I just have to make the point that aside from the financials, I just want to reiterate that our position is that we always put patient safety and quality first. We believe in the clinical data that we submitted to the FDA and we know that that data supports safe use in the indicated areas. The Yale study we're depending on to look at the data transparently and we will take action resulting from whatever we find in the Yale study. And I think that I just had to make those points. That integrity, patient safety and quality are our highest priorities. And that will continue to be so, irrespective of what financial consequences we have here.

Just on a different maybe happier note, Neuromod seemed to have a pretty good quarter, up 6% ex-FX, if I'm looking at it correctly. It's maybe the best since early fiscal '10 with RestoreSensor you talked about. With the fiscal third quarter launch in the US and Japan, and the other new products, do we get this business back to double digits? Or how do we think about the second half or the outlook on the Neuromod side?

I'll make some comments and then Omar can add, Rick. Overall, as you said, yes, we saw improvement in the Neuromodulation performance this quarter. They saw some very strong growth, continuing strong growth in Interstim. And also even this quarter, for the first time, we saw also some very strong growth in drug pumps. But Interstim, with the new fecal indication in the US, is clearly continuing to grow, and that's helping that part of the business overall. And then we also saw DBS and pain pump relative to the current increasing.

Pain stem in the US was still somewhat of a struggle. That obviously, with RestoreSensor now being in the marketplace, we think will clearly help us in the US market as that product launches here in Q3, and we roll it out full during the quarter. We won't get the full impact in RestoreSensor in the quarter because it's actually, I think, the launch is assumed here in mid December. So they will have it for about half the quarter overall. But we do really think that will continue to help accelerate the growth in that business. And as we've talked about in the past, the Neuromodulation business is more of an elective procedure so it can be impacted somewhat in this marketplace with reduced procedures overall. But we think ultimately this is back to a double digit kind of growing business. And with these new products we're launching now, we think we can stop the share erosion in some of the pain stem side and actually start to see some share gains.

I think also, I'd like to add to Gary's comments in saying that this is also an example of where using our economic value modeling of, say, the RestoreSensor is to show how usage of the RestoreSensor is better economically for the providers. Is something that we will gather evidence around and demonstrate. And we think this will incrementally drive the growth of that market and growth of our position in that market. So we remain optimistic about this segment and about the new products. And particularly excited about the RestoreSensor and what it can do for us.

Steven Lichtman with Oppenheimer.

First question is a follow-up to spine. It seems like the core spine business ex-biologics held up okay. Can you talk about the efforts of the sales force to ring-fence the INFUSE issue from the core metal business?

I can try to address that a little bit. Overall, as you indicated, our core metal constructs we actually saw sequential growth in that business, and that was actually up about 5% versus the prior quarter. It is still down. I think the numbers were 1%, was still down overall. But we are starting to see some improvement in the core metal constructs because that's where we have a lot of the new products. SOLERA, the POWEREASE, things we were talking about earlier. So we are expecting that business will continue to improve as we move forward.

INFUSE, basically overall INFUSE, there's no commissions with respect to INFUSE. It's a straight salaried sales force. So there's really no connection between the impact on the core metal side on INFUSE itself. It clearly can drive some share gains overall but there's no connection on the sales force side. I'm trying to address the question. I don't know exactly what you're getting at, but if that's what you're saying. INFUSE itself is a non-commission sales force versus the sales organization for core metal constructs, which is obviously the typical commissions.

And I think if I can add to that, I think the point is that the salespeople have plenty to sell in the core metal area, especially with the new products. And back to my whole story around economic value, even there where we recently launched products, we're doubling our efforts to make sure that it's clear what the economic value is of these products. And as we do that, we find that our customers are more receptive to the value of these products and it makes more sense for them to use it. It's still early days but that's the angle we want to take. And the sales force should stay focused in that area. While INFUSE has to play it out depending on the data that we find, and we'll take action correspondingly.

On SG&A the guidance maintains a 33.5% to 34% but first half was running a little higher than that. So in the second half Gary, what should we expect is different? You mentioned the bad debt expense maybe comes off a little bit. What else as the restructuring really starts kicking in in the second half?

Obviously some of the things that we did at the beginning of the year you're starting to see bigger benefits on the restructuring side as we go through the back half of the year. It's normal also, if you look historically at our SG&A, because of the revenue, especially in the fourth quarter, we get more leverage in the back half of the year. It's just natural because we get outside of the summer season, et cetera. So we get to see some leverage there. But we are expecting the expenses, the decisions we made as far as restructuring, to start to have a bigger benefit in the back half of the year than they did in the first half if these things play out. And we are not expecting that we're going to continue to have the bad debt expense being as significant an issue as it was in this quarter. As we indicated, we're expecting that there's going to be some small issues as we go forward, and we're watching it carefully. But we're not expecting that it's going to be of the magnitude we saw here in Q2.

David Roman with Goldman Sachs.

I just wanted to clarify something from your prepared remarks regarding CoreValve. I think you said that you're expecting enrollment in the high-risk arm to be completed at the end of this year, and the extreme risk arm to be completed in the summer of next year. Can you file on those separately and gain approval for two different cohorts there? Or are those intended to be filed together once both trials are completed?

First of all, I want to make sure -- you had it flipped. The extreme risk is the one that will be done, we're expecting, by the end of this calendar year. The high risk is the one that's summer of next year. And from my understanding, they can submit different data but in total they are going to have to go in, all of the data will have to be in there ultimately. But right now you can submit them separately.

And so you're still comfortable with an FY '14 approval of CoreValve in the United States? I think that's what you communicated previously.

Yes, I think we're still seeing -- I think we've indicated calendar year '14 or FY '14, but basically it's in that time frame. We're still expecting the timing on the enrollment is tracking along with what our expectations are and so we aren't expecting any major difference. Obviously once you get the data, we're going to have to go through the process and then go through the whole FDA approval process. So we're not getting anymore specific about that at this point in time.

And then just, Omar, to some of your comments regarding Medtronic's portfolio, on some of the previous calls we've heard from management, certainly this is only your second call, about the value of the diversified model and the opportunity to either cross-sell or take advantage of some of the vendor consolidation issues that hospitals are undertaking right now. Can you maybe update us on your latest thoughts? It wasn't something you had addressed too much on this conference call. I was wondering if this is something you're potentially either de-emphasizing or taking another look at.

All of that, we start with the customer. If there's true value in front of the customer then it's going to be more than the fact that we just have a collection of products. And we've got programs in place where we work with customers to make sure that their operation runs better as a result of the capabilities that we have. That's one thing that we are doing and we'll accelerate in the future. Now in addition to that, there are a number of other areas where adjacent businesses working together can provide real and unique value for Medtronic. For example, using a suite of technologies around the spinal surgeon, not just the implants but the navigation system that we have, the power tools that we have. All of that linked together in an appropriate fashion can provide differentiated value for us over a spine-only company.

In other areas, we can share technology from one area into another. The delivery system in our peripheral and endovascular business can be used in our coronary business or in our transcatheter business. So there are technologies that can be shared across businesses. So this is not a matter of every business in Medtronic having something to share with every other business. You just need a couple of adjacencies where you can really make a difference in front of the customer. And that's where we're focused on. And I think through that, if we do that in a consistent fashion across our business, we think we can create some unique positions which will really demonstrate the true value of the breadth of Medtronic.

And just to add to what Omar indicated, the reality is, it gets back to the question, which is who is the customer. And in all these cases, the physician clearly is the customer, the hospital is, in some cases it's the cardiovascular administrator, and the hospital is a customer, the hospital administration is a customer, hospital systems. So back to the point, on each one of those, we have the ability now with our products that we can go on in and address each one of them individually. And where can we provide value, back to Omar's point to each one of them, and it will vary depending on what their interest is at that level.

We believe that there is real synergy there. We'll provide further clarification of these different categories as we move forward. It's an area where we're working on to clarify. We just really believe internally that there's real opportunity here.

Derrick Sung with Sanford Bernstein

On the ICD share gains that you're seeing, could you give us a little bit more color there in terms of a break down of how much of that is mix from the new products that you've launched, how much of that is Protecta and how much of that is the leads issue? And how sustainable do you think that is?

I really don't have the details of being able to break down and say what is driving the overall share gains that we are seeing. Obviously, we believe it's probably everything related to our entire portfolio. We have, we think, a very strong portfolio with the new products we just launched. Protecta with its capabilities and for shock reduction and lead integrity alert aspects of it. The overall other aspects of the product portfolio in general, the leads, et cetera. We think we just have the strongest portfolio in general that's out there. And I think that we believe that the customer physician is noticing that. So from our perspective, we've indicated when these new products start to hit the marketplace we will start to see some benefit in share. And that's what's occurring at this point in time. But I don't have anymore details about what is driving what share in each different category.

And, Omar, you talked about the cyclical versus the secular pressures that are facing the whole industry moving forward. As we think about the two biggest markets that you're in that are declining -- spine and ICDs -- can you talk about how much of that you think is secular versus cyclical? And then also, how do you see the hospital spending cuts that are coming from the deficit reduction deal impacting your business in 2013? Thanks.

First of all, some of this, in those two businesses, there's probably some cyclical trends there because in certain areas there is a little bit of choice, elective choice as to whether you want it or not. And so under depressed economic conditions there's always a tendency for those kinds of sales to be depressed. But at the same time, the secular tendency is true as well, which is true across all our product lines. Just the fact that the demographics will create a huge onslaught of new patients into the healthcare system, we have to reduce cost and the healthcare system has to be more efficient at providing value. And so, although in those two instances there are cyclical trends, we just cannot forget the fact that efficient delivery of care is something that is pervasive to all our businesses.

In terms of the spending cuts and so on, we don't see anything that's clearly tied due to one-off changes in the government policy and so on. It's more that there's a level of uncertainty which forces both the hospitals as well as our patients to be more cautious. And that leads to a certain degree of pressure in our markets. And I think until the overall economy improves, and there's more certainty in the way in which healthcare is going to be deployed in the US, there's always going to be a level of pressure in this market. People are going to be cautious before they spend their money.

Just to add to that, that's the reason also in the US market it's a little bit hard to predict what's going to happen as we move forward. But that's why we're also focused on all these markets that are still growing at this point. And at some point the US market will come back and you'll see growth even across all of our businesses. But in the meantime we're focused on where we do see the growth and where there's significant under penetration, which as we've indicated is mainly the international markets.

Bruce Nudell with Credit Suisse.

Omar, one of the things that is a great gift of Medtronic is its free cash flow. And I think you're bringing a more disciplined lens to how that's deployed. As you look back on the acquisitions that have been made recently, with that lens of medical economic cost benefit, and maybe emerging market opportunity, could you cite a couple of the acquisitions, one good, one bad? And what went right and what went wrong?

I don't know of the total history here but I do know that one big bet was Ardian. Here was an acquisition that we made which had virtually no revenue, we paid a lot of money for it. And there was very strong clinical promise and hypothetical economic value around it of the clinical promise played out. So that was a big bet. And we've still got a long way to go but there is one where that swing may actually connect. So we're really excited about that.

There are other areas where, again, it's difficult to predict and I don't want to call any specific one out. But a little more of a refined lens around the certainty of return and the potential economic value of those technologies would probably allow us to be a little more selective about what we buy. I would, however, say that we probably haven't focused nearly as much in emerging markets as we can, as we could have and as we will in the future. The risk levels that are associated with emerging markets are different, but are no higher than the risk levels, say, with something like Ardian. And we were to have belief in some of the companies there and belief in those markets and take some swings there. And I think when you pass it through the economic lens in those emerging markets, you will find that there are big opportunities there. So if I were to go back and comment on the past, that would be the only thing that I would really bring out. A more stronger focus around emerging markets earlier probably would have had us in a better position today.

And just as a follow-up, one of the frustrations of investors is that Medtronics had large positions in the defibrillator market and the spine market. And basically they were very buoyant markets. But Medtronic almost seemed oblivious to the fundamental changes that were likely to occur in those markets. Is there anything that you're doing to insure just better market intelligence, where the Company doesn't get taken by surprise or rely on past trends as predictors of future performance, as it were, so that the Company is more nimble in responses to change?

Yes, indeed. I think actually we've got some excellent tools and some really industry-leading tools in terms of market analysis and market understanding as to where we stand on those markets. And what barriers have to be crossed to promote further growth. And this tool that we are also optimizing right now, also gives us a view as to what it takes to overcome some of those barriers. And if you look at that systematically across the Company, I think we'll have better insight into the future and we'll make better decisions.

This tool has existed for a while. We just haven't used it rigorously. And we haven't applied it to our business planning in a way that we will going forward. And we have insight as to the size of potential markets of virtually every therapy that we have in every country in the world. That's the kind of data that we have. And not only that, we also have data regarding where those therapies stand in the progression of their maturity. And what barriers have to be overcome to take them to the next level. We have to organize all of this into a systematic business planning methodology, which we're in the process of doing. And I think that will give us better selection process and a far better insight as to what's happening in the marketplace, and enable us to make much better decisions going forward.

This concludes our question and answer session for today. I would now like to hand the program back over to Mr. Ishrak for any further comments or closing remarks.

Okay, thank you very much for all your questions. And before I end today's call I'd like to reiterate that Q2 was a quarter of stability the market that still faces many challenges. I was pleased to see the strong performances in many of our businesses, as our new products are taking share at protecting pricing. In addition, our international markets had another successful quarter. And our top priority is to improve our growth on both the top and bottom line. And we remain focused on the three key imperatives that I've outlined -- improving execution, optimizing innovation and accelerating globalization. We still have a lot of work ahead of us but I'm encouraged by the progress that we made this past quarter. I look forward to updating you on our plans in the coming months. And despite a number of challenges I see tremendous opportunities and I'm very optimistic about our future. With that, and on behalf of our entire management team, I would like to thank you again for your continued support and interest in Medtronic. And for those of you in the US, I want to wish you and your families all a very happy Thanksgiving. Thank you.

This concludes today's Conference Call. You may now disconnect.