美敦力 (MDT) 2013 Q3 法說會逐字稿

Good morning.

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

At this time I would like to welcome everyone to Medtronic's Q3 earnings release conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) I would now like to turn the call over to Jeff Warren, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, Brandi.

Good morning and welcome to Medtronic's third-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 2013 third quarter which ended January 25, 2013.

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 investor portion of our website at Medtronic.com.

Finally, unless we say otherwise, references to quarterly results increasing or decreasing are in comparison to the third quarter of fiscal year 2012 and all year-over-year revenue (inaudible) 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, Omar Ishrak.

Good morning and thank you, Jeff.

Thank you to everyone for joining us today.

This morning we reported third-quarter revenue of $4.027 billion, which represented growth of 4%.

Q3 non-GAAP earnings of $946 million and diluted earnings per share of $0.93 increased 7% and 11%, respectively.

Despite facing many challenges, Q3 represented another step in building toward our goal of delivering consistent growth on both revenue and earnings per share in line with our baseline expectations.

We had a number of businesses and geographies that delivered strong performances, but at the same time we faced some unexpected pressures in certain areas.

We are still in the process of strengthening and geographically diversifying our business so that we can continue to deliver a balanced and consistent performance reliably.

In the quarter, we continue to see sequential stabilization in two of our key markets, US ICP and US Core Spine.

While these businesses declined a combined 2% versus the prior year, average daily sales grew 4% sequentially as we had five fewer selling days in Q3.

In addition, our daily revenue share increased sequentially in both of these markets, despite facing competitive year-ends.

Gary will walk you through the details later, but the trends confirm that these markets are indeed stabilizing.

At the same time, we continue to manage challenges in other businesses.

First, US Pacing declined 8% versus the prior year and daily sales declined 2% sequentially.

Our procedure volumes were relatively stable through December but decelerated in January.

However, our Q3 performance was in line with the market and we do expect further improvement with the launch of Advisa MRI which recently received FDA approval.

Also, our International Pacing business covered for the weakness in the US, growing 5% and taking over 300 basis points of share year over year.

Next, our BMP business continues to face pressure and declined 21% year over year and 14% sequentially.

Diabetes, historically a high-growth business, also faced some near-term pressure in the US as we wait to receive FDA approval for our MiniMed 530G.

We expect diabetes to quickly return to positive growth once our new products are approved.

Our other high-growth platforms continued to perform well in Q3.

In the Cardiac and Vascular Group our ADF and endovascular businesses delivered double-digit growth, while our transcatheter valve business had upper-single digit growth.

In the Restorative Therapies Group, our DBS, Gastro/Uro, CGM, neurosurgery, and Advanced Energy businesses all delivered double-digit growth while ENT and pain stem grew in the high- and mid-single digits, respectively.

Combined, this broad base of growth platforms, including insulin pumps, represented over 35% of our revenue and delivered 9% growth in Q3.

Recent product approvals and upcoming launches will also contribute to sustained future growth.

In CVG we recently received CE Mark for our Evera family of ICDs and FDA approval of our Advisa MRI pacemaker.

Looking ahead, we are expecting CE Mark approval for our Engager [cross typical] aortic valve this spring and are targeting the US launch of our Viva CRT and Evera ICD products this summer.

We are also expecting an approval for our Endurant II AAA stent graft in Japan this summer.

In the Restorative Therapies Group, we recently received CE Mark approval for the first spinal cord stimulation systems that have an indication for full body MRI scans.

As I mentioned, we are waiting for approval of our MiniMed 530G, which includes our new insulin pump, CGM sensor, and threshold suspend automation algorithm.

Looking beyond FY 2014, we are executing on our US trials for the CoreValve transcatheter valve and the Symplicity renal denervation system, and are targeting FY 2015 approval for these two important growth drivers.

Turning to International.

Our revenue grew 7% with strong growth in Japan and emerging markets offsetting declines in Western Europe.

While we have been monitoring Western Europe closely over the past year, Q3 was the first quarter where we experienced a meaningful slowdown, declining 1%.

Western Europe sales were tracking through the first two months of the quarter but our daily sales slowed in January.

Like we have mentioned, the softness that we have been experiencing in prior quarters was in Southern Europe, especially in Italy.

Towards the end of Q3 we saw a more generalized softness in several markets, including Germany.

We are engaged with our Western Europe team to capitalize the market and our growth, but we do believe it is prudent to be cautious in our expectations as we manage these challenges going forward.

Japan had another strong quarter with growth of 18%, more than absorbing the unfavorable impact of R-Zone pricing that went into effect last April.

Several of our new innovative products are generating significant physician interest.

In CRDM, we gained over 8 points of pacemaker share sequentially on the successful launch of Advisa MRI.

In Coronary, the Resolute Integrity drug-eluting stent gained 4 points of DES share sequentially.

We also are seeing great customer acceptance for our Endurant AAA stent graft and RestoreSensor spinal cord stimulator in Japan.

In emerging markets, our Q3 growth was 21%.

Central and Eastern Europe, Greater China, the Middle East, and Africa, and India all grew at or above 20%.

Latin America growth was somewhat slower in Q3 as we continued to work through product registration issues in certain businesses.

Revenue growth improved in China this quarter, although it was somewhat aided by the easier comparisons due to the timing of the Chinese New Year.

In addition to our focus on expanding our existing businesses in the Chinese multinational segment, we have made two strategic moves this year to expand our presence in the Chinese local segments.

We closed on our acquisition of China Kanghui Holdings, our entry into the global trauma, spine, and ortho value segment, and Kanghui's performance is meeting our expectations.

We also recently completed our investments in LifeTech Scientific and our teams are already working together to enter the structural heart value segment.

Emerging market growth, meaningful product launches, our high-growth platforms, and market stabilization are all key factors to building a dependable business that can deliver consistent mid-single-digit revenue growth.

To achieve this, growth from these areas have to be successfully offset -- have to successfully offset different areas of pressure, which for this quarter were Europe, BMP, insulin pumps, and US Pacing.

As I mentioned earlier, our goal is to strengthen our business in order to consistently deliver on our mid-single-digit revenue growth expectations.

In addition to our focus on the top line, we are also executing on both our product and SG&A cost reduction initiatives, which together with financial leverage from our share buybacks will help us grow earnings per share 200 to 400 basis points faster than revenue.

We are working on reducing product costs by $1.2 billion over at the next five years, which is important not only to maintain our gross margins but also fuels the development of tiered products, which are essential to creating new value segment opportunities.

We are also making progress on our plans to increase our US cash flow through working capital improvements, and have set an early goal of improving our inventory turns by 50% over the next five years.

Not only does this instill a good fiscal discipline, but it will strengthen our already robust levels of free cash flow generation.

Over the next five years we expect to generate $25 billion of free cash flow and remain committed to returning 50% of this to our shareholders through dividends and share repurchases.

We believe this level of commitment is appropriate given our current mix of US and international free cash flow.

The remaining 50% gives us ample flexibility to make investments for sustainable growth, and we are, and will continue, to be very disciplined in how we deploy this capital with a particular focus on returns.

We expect any M&A transaction to surpass our mid-teens risk-adjusted hurdle rate and we do not intend to pass along EPS dilution to our shareholders.

In addition to building credibility and a track record of delivering on our baseline expectations, we are also executing on transformational opportunities that we believe will establish durability in our long-term performance and create potential upside from baseline.

Our first long-term transformational opportunity is accelerating globalization.

As I have mentioned before, we believe there is significant opportunity to deepen the penetration of our existing therapies in emerging markets.

It is striking to recognize that only 8% of the population in emerging markets that can benefit from and have the financial means to afford our therapies are indeed receiving them.

Increasing this penetration level to that of developed markets represents a $5 billion annual opportunity with margins comparable to developed markets.

To realize this opportunity, we are focusing on breaking down barriers such as major deficiencies in the areas of awareness, infrastructure, and trading.

The Middle East is one example of an emerging market that has a strong desire to improve its healthcare system.

I was in Dubai last month attending the largest healthcare congress in the region and came away very impressed and encouraged by our plans to realize the potential and generate significant growth in this region over the coming years.

As we develop the premium segment in emerging markets, we are also creating the necessary infrastructure to participate in the next wave of growth, the emerging market value segment.

As I mentioned earlier, we are taking early steps to be a global leader in this segment with our acquisition of Kanghui and partnership with LifeTech.

We believe that building a platform of multi-tiered products will allow our businesses to sustain 20% growth in emerging markets over the long term.

Our other transformational opportunity beyond globalization is our ability to deliver economic value to our customers, supported by our market-leading technologies.

Healthcare payment models are becoming more complex with new pay-for-value models becoming more important.

In addition, our customers are evolving and now include hospital system, C-suite executive, payers, and governments.

Within this changing environment we are transforming our business to not only deliver clinical value but also deliver economic value.

This transformation will include not only our existing products, but also developing and piloting new economic value programs.

We are in the early stages of this transformation, but we believe Medtronic has specific competitive advantages to win in the new value-oriented environment.

First, our market-leading products remain a critical factor to maintaining a strong position of advocacy in the hospital.

Second, Medtronic has some of the world's leading experts in the area of healthcare economics and reimbursement with a core skill set in economic value.

And, third, Medtronic's breadth and scale gives us the presence to be a desired partner to large payers and providers.

It is important to note that Medtronic is the only medical technology company positioned with all three of these advantages in our markets, which will significantly differentiate us in the new healthcare environment.

Let me now ask Gary to take you through a more detailed look at our results before we take your questions.

Gary?

Thanks, Omar.

Third-quarter revenue of $4.027 billion increased 3% as reported and 4% on a constant currency basis after adjusting for a $41 million unfavorable impact of foreign currency.

Q3 revenue results by region were as follows.

Growth in Central and Eastern Europe was 24%.

The Middle East and Africa grew 23%.

Growth in Greater China was 22%.

South Asia grew 20%.

Growth in Asia Pacific was 15%, including 18% growth in Japan.

Latin America grew 14%.

Growth in the US was 1%, while Western Europe and Canada declined 1%.

Emerging markets grew a combined 21% in Q3 and represented 12% of our total sales mix.

While this is an improvement, it was aided by easier comparisons due to the timing of the Chinese New Year which, conversely, will turn into a difficult comparison in Q4.

Accordingly, we would expect Q4 emerging market growth to be in the mid-teens.

Q3 earnings and diluted earnings per share on a non-GAAP basis were $946 million and $0.93, an increase of 7% and 11%, respectively.

Q3 GAAP earnings and diluted earnings per share were $988 million and $0.97, an increase of 6% and 10%, respectively.

Included in our Q3 GAAP earnings was a $70 million gain, primarily related to the change in fair value of our Ardian contingent commercial milestone payments which are based on annual revenue growth through FY 2015.

Given the current slower commercial ramping in Europe and protracted US regulatory process, we now expect our milestone payments to be reduced as some of the value of our Ardian business has now shifted beyond the final revenue milestone date.

In our Cardiac and Vascular Group revenue of $2.1 billion grew 5%.

Results were driven by solid growth in Coronary, Endovascular, Structural Heart, and AF Solutions, partially offset by declines in ICDs.

CRDM revenue of $1.171 billion declined 1%.

Worldwide ICD revenue of $654 million declined 2%, which was slightly better than the overall market as our shock reduction and lead integrity alert technologies, combined with our proven long-term lead performance, continued to receive strong market exceptions.

In the US our ICD revenue was stable sequentially after adjusting for fewer selling days.

Our lead-to-port ratio remains strong and is at its highest point in several years.

In addition, our ICD implant volumes grew 5%, the fourth quarter in a row of implant growth.

At the same time our US ICD pricing declined 5%.

While hospitals continue to reduce their bulk purchases on a year-over-year basis, they were sequentially stable again this quarter.

Taken together these trends suggest that our US ICD business is stabilizing.

At the same time, we are monitoring the European ICD market very closely as it is declining mid-single digits, driven by deteriorating pricing in some key markets.

Despite the declines we are gaining share and have a number of new high-power products coming to market, including the Evera ICD with increased longevity and the most advanced shock reduction technology available, the Viva CRTD with Adaptive CRT for significantly better response rate, the Attain Performa second-generation quadripolar lead, and our unique CardioGuide real-time navigation system to improve CRT implant procedures.

Pacing revenue of $459 million was flat, outperforming the global market by over 200 basis points as we gained global pacing share on both a year-over-year and sequential basis.

Our US Pacing revenue declined 8%, in line with the market.

These declines were driven primarily by pricing, which was down in the mid-single digits, and to a lesser extent declines in implant volumes.

In Japan, our low power business grew over 20% as our Advisa MRI pacemaker gained 8 points of share sequentially, including a double-digit increase in new implants.

Coronary revenue of $445 million grew 19%.

Worldwide DES revenue in the quarter was $274 million, including $97 million in the US and $30 million in Japan.

Resolute Integrity's deliverability, the unique FDA labeling for diabetes, and long-term clinical performance is receiving strong customer acceptance globally.

This is reflected in our DES share where we gained another point of share sequentially in the US and nearly 4 points of share sequentially in Japan.

This quarter's performance has now propelled us to the number one global market position in combined DES bare metal stent share.

In renal denervation, while Q3 commercial results continued to be soft the long-term outlook for this opportunity in hypertension remains robust, and we are investing in evidence generation and technology development to further strengthen our leadership position.

Revenue is still lagging behind our original expectations, due primarily to the lack of broad reimbursement and limited funding for new technology in nearly every European market.

Many referring physicians and payers are waiting for larger datasets and longer-term follow-up, including data from our HTN-3 US pivotal study which we expect to have fully enrolled by summer.

We are still tracking for an FY 2015 approval, albeit later in the fiscal year.

At the same time we continue to advance our leading renal denervation technology pipeline and expect to receive CE Mark for our Symplicity spiral and multi-electrode catheter this summer.

This product will take ablation time down from 16 to 24 minutes today to only two minutes, and all through a very small 6 French catheter.

We believe our technology, strong [sense of data], and significant intellectual property represents a large multi-billion-dollar opportunity in renal denervation.

In Structural Heart revenue of $272 million increased 4%, including 6% growth in transcatheter valves.

We estimate the international transcatheter valve market grew 6% to 8% in Q3.

Our CoreValve continues to have leading share in our addressable market.

With the expected CE market approval of our Engager valve this spring we expect to expand into the transapical segment, which represents approximately 20% of the international (inaudible) market.

Positive data from our Engager CE pivotal trial demonstrating high procedural success and exceptional rates of PBL at six months were presented at [SPS] in January.

Also on the clinical front, we are actively enrolling patients in our global SURTAVI trial, which is designed to expand the market for CoreValve into more moderate risk patients.

In our CoreValve US pivotal study enrollment in our extreme and high-risk arms is complete and we remain on track to commercialize in the US in FY 2015.

In Endovascular revenue of $212 million grew 14% with strong balanced growth across our aortic and peripheral businesses.

In aortic, our AAA business grew in the double digits driven by strong growth from Endurant in Japan and a continued acceptance of Endurant II in other global markets.

Our thoracic grew over 25% on the strength of Valiant Captivia in the US and China.

In peripheral we had double-digit growth in our peripheral stent business.

Our drug-eluting balloon business also had double digit growth in Q3 and we recently completed enrollment in our US pivotal study trial for our IN.

PACT drug-eluting balloon with an SFA indication.

Now turning to our Restorative Therapies Group.

Revenue of $1.927 billion grew 3%.

Results were driven by growth in surgical technologies, neuromodulation, and diabetes, partially offset by declines in BMP and balloon kyphoplasty.

Spine revenue of $753 million declined 3% globally and 6% in the US, primarily driven by declines in BMP and BKP.

We completed our Kanghui acquisition in Q3, and as expected, there was no us overall impact to Spine's organic growth in Q3 as we started to wind down our Weigao joint venture while only recognizing two months of Kanghui revenue.

Core Spine revenue of $639 million was flat globally and declined 1% in the US.

Excluding BKP, our Core Spine business grew 2% globally and grew 1% in the US, which was a point higher than the US market as we gained share on both a sequential and year-over-year basis.

Our US core business continues to stabilize as new products and procedures are rolling out and performing well.

In thoracolumbar our Solera system is generating strong surgeon interest.

In Cervical we are beginning to see growth in US Disk as we ramp up surgeon training of our recently launched Bryan ACD.

In Interbody our new [AMP] portfolio and Capstone Control, a product used in our mass mid-lift procedure, are driving growth.

In other biologics, the adoption of our Grafton and MagniFuse DBMs continue to perform well.

We are also differentiating our spine business from the competition through enabling technologies such as O-arm imaging, StealthStation navigation, and POWEREASE powered surgical instruments.

Hospitals are investing in our capital equipment for spine surgery as they seek clear value from better outcomes and more efficient procedures.

This is also resulting in significant pull-through for navigation in power-enabled spine implants.

In fact, in accounts that have our O-arm we are seeing Core Spine revenue growth 10 points higher than non-O-arm accounts this fiscal year.

We believe we are still only on the leading edge of this large, differentiated opportunity in Spine.

In BMP, revenue of $114 million declined 21% as this business continues to face market uncertainty.

Seattle University is overseeing the finalization and publication of the findings from independent reviews of the BMP data.

They control the timing and we now understand from them that the systematic reviews are not likely to be published until early FY 2014.

To a lesser extent, our Q3 results were also affected by our inability to fulfill hospital quarter-end sales orders due to a supply constraint of sterile water which is a component of an INFUSE kit.

We received FDA approval for an alternate sterile water supplier last week, which will allow us to work through our backordered kits in Q4.

Surgical Technologies revenue of $350 million grew 10% driven by double-digit growth in Neurosurgery and Advanced Energy.

Neurosurgery performance was driven by Midas Rex powered surgical equipment and core navigation, including sales of StealthStation S7 surgical navigation systems.

In Advanced Energy, strong double-digit growth of both of our Aquamantys and Bipolar Sealers and PEAK PlasmaBlade electrosurgical products drove results.

Turning to Neuromodulation, revenue of $447 million increased 7%.

These results were driven by strong global growth in DBS in Gastro/Uro as well as Pain Stim in the US.

In DBS we had another strong quarter of double-digit growth as our referral channel development efforts are generating new implants.

Our Gastro/Uro business also grew double digits in Q3 driven by strong adoption of our InterStim Therapy in Western Europe and the US.

In Pain Stim we are now launching in Europe the market's first spinal cord stimulator system that are approved for full body MRI scans, including our RestoreSensor SureScan MRI stimulator and [Vectra's] SureScan MRI lead.

Diabetes revenue of $377 million grew 3%, driven by double-digit growth in CGM.

In the US diabetes declined 1% as US consumers continued to wait for FDA approval of the MiniMed 530G insulin pump and the Enlite sensor, which we now hope to occur later this spring or summer.

In addition to the impact of the delay, we also deferred $9 million in revenue as we plan to convert some of the recently sold pumps to the new technology once it is approved.

Outside the United States our business grew 11%, although insulin pump growth slowed somewhat in Western Europe as we await the launch of our next-generation insulin pump, the MiniMed 640G this summer.

Now turning to the rest of the income statement.

The gross profit margin was 75.2%.

Excluding the unfavorable impact of foreign currency, our gross margin was 75.8%.

Foreign currency's negative impact on our gross margin offset the overall efficiencies in product manufacturing which are a result of our ongoing $1.2 billion initiative to reduce product costs over five years.

In Q4 we expect gross margins to be approximately 75.5%.

Third-quarter R&D spending of $376 million was 9.3% of revenue.

We remain committed to investing in new technologies to drive future growth and for Q4 we expect R&D spending to be around 9%.

Third-quarter SG&A expenditures of $1.401 billion represented 34.8% of sales.

Excluding the unfavorable impact of foreign currency, Q3 SG&A, on an operational basis, was 34.7%, a 30 basis point improvement from the third quarter last year.

We continued 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.

In FY 2013 we continued to expect to drive 30 to 50 basis points of improvement.

Amortization expense for the quarter was $88 million, an expected increase from prior quarters due to the Kanghui acquisition.

For Q4 we continue to expect amortization expense to be approximately $90 million.

Net other expense for the quarter was $17 million, which was lower than our original forecast due to less than planned US medical device tax, royalty expense, and minority interest elimination as we wind down our Weigao joint venture.

Net gains from our hedging program where $13 million during the quarter.

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

Based on current exchange rates, we expect Q4 net other expense to be in the range of $20 million to $30 million.

Net interest expense for the quarter was $46 million.

Excluding the $23 million non-cash charge for convertible debt interest expense, non-GAAP net interest expense was $23 million.

At the end of Q3 we had approximately $11.8 billion in cash and cash investments and $11.4 billion in debt.

In Q4 we have $2.2 billion of convertible debt that we intend to refinance as straight debt, which will result in higher cash interest rates on this portion of our debt.

As a result, based on current interest rates, we anticipate non-GAAP net interest expense to be in the range of $25 million to $30 million in Q4 due to the debt overlap.

And it is also worth noting that we will no longer have convertible debt outstanding in FY 2014 and the non-GAAP adjustment will not be applicable.

Based on current rates, we would expect net interest expense to be $40 million to $45 million per quarter throughout FY 2014, a level that is more comparable to our current GAAP net interest expense level.

Let's now turn to our tax rate.

Our effective tax rate in the third quarter was 14.5%.

Excluding the impact of certain acquisition-related items and the impact of a non-cash charge for convertible debt interest expense, our adjusted non-GAAP nominal tax rate in Q3 was 15.8%.

Included in this rate are tax benefits associated with the extension of the US R&D tax credit.

In addition, the finalization of certain income tax returns and audits resulted in a penny benefit from our original tax expectations.

For FY 2013 we expect an adjusted non-GAAP nominal tax rate in the range of 19% to 19.5%.

Fiscal year-to-date we have generated approximately $3.4 billion in free cash flow.

We are committed to returning 50% of our free cash flow to shareholders.

Fiscal year-to-date we have paid approximately $800 million in dividends and repurchased more than $1.2 billion of our common stock.

As of the end of Q3, we had remaining authorization to repurchase approximately 27 million shares.

Third-quarter average shares outstanding on a diluted basis were 1.021 billion shares.

Let me conclude by commenting on our fiscal year 2013 revenue outlook and earnings per share guidance.

We believe a constant currency revenue growth of 3% to 4% remains reasonable for the full fiscal year 2013.

Although 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 2013 revenue would be unfavorably affected by approximately $300 million to $320 million, including an unfavorable $20 million to $40 million impact in Q4.

With respect to earnings per share guidance, we continue to expect FY 2013 non-GAAP diluted earnings per share in the range of $3.66 to $3.70, which implies annual earnings per share growth of 6% to 7%.

While we do not provide quarterly guidance, based on our performance through three quarters, we would expect to be at the upper end of our ranges on both revenue and earnings per share.

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

I will now turn it back over to Omar who will conclude our prepared remarks.

Omar?

Thanks, Gary.

Before opening the lines for Q&A let me conclude by reiterating that Q3 represented another quarter in building toward our goal of delivering consistent and dependable growth.

While we continue to execute in areas we can control, including growing our markets, we are at the same time early in the process of building a business that is strong enough to offset the variables that are beyond our control so that we can reliably deliver on our baseline expectations which are consistent mid-single-digit revenue growth, consistent EPS growth 200 to 400 basis points faster than revenue, and returning 50% of our free cash flow to shareholders.

At the same time, we are also playing a leading role in transforming global healthcare by implementing our long-term strategies of economic value and globalization.

We are only at the beginning of establishing our track record, but we believe that crisp execution on both our baseline and long-term growth strategies, combined with strong and disciplined capital allocation, will enable us to create long-term, dependable value in healthcare.

With that we would now like to open the phone lines for Q&A.

In addition to Gary, I have asked Mike Coyle, President of our Cardiac and Vascular Group, and Chris O'Connell, President of our Restorative Therapies Group, to join us again for the Q&A session.

We are rarely able to get to everyone's questions, so we respectfully request that you limit yourself to only one question and, if necessary, one follow-up so that we can get to as many people as possible.

If you have any additional questions, please contact our investor relations team after the call.

Operator, first question, please.

(Operator Instructions) Mike Weinstein, JPMorgan.

Looks like January was a little bit soft and just curious how the January performance impacts your thinking relative to the goal of getting back to mid-single-digit revenue growth in the near term.

I know it is premature to think about FY 2014, but if you had to think about it today, how that would influence that goal of getting back to mid-single digits for FY 2014.

Mike, the goal is still there.

Obviously the slowdown in January, especially in Europe, put some challenges in our way, but we feel that we are strengthening our businesses in enough ways to get there.

You know, like we mentioned at JPMorgan, there are basically -- our road map included strengthening of the US ICD and Spine markets and of offsetting the year-over-year sort of bad comparison, if you like, with the Resolute Integrity.

However, on top of that the rest of the businesses were supposed to grow, if you recall, at about 4.5% or 5% and that is where we were sort of roadmapping our mid-single digit.

Now Europe has got pressure, but at the same time Japan has got some outside.

And we are pushing emerging market quite hard.

And that is basically our game plan, to offset these different variables and address the challenges and then reach our goal which we think is still achievable.

Mike, if I could just add to what Omar said, overall we -- obviously January, especially in Europe, was softer than we had expected, and as we indicated in our comments, that gives us a little bit of pause.

But as Omar said, there is a lot of parts of Medtronic and we are going to have to push harder in some other areas.

We don't know what the impact of Europe is going to be long term either.

We have to make sure and see how that plays out, but as Omar said Japan continues to be very, very strong.

In the US we are starting to see some growth back in some of our core businesses, Spine and CRDM.

So net-net our goal is to put together plans that can deliver on that mid-single-digit growth.

Now, as you indicated, we are not giving FY 2014 guidance yet, but that is still our plans is to deliver on the mid-single-digit revenue growth.

And then just one quick follow-up.

On the diabetes business it sounded like you got a round of questions on the 530G approval.

Any sense of the likelihood that pushes out beyond just a three-month turnaround?

I can't really say.

We are working with the FDA closely and we are pretty optimistic that we will get it in the next few months, but our regulatory process has unknowns which we cannot control.

But at this stage we are working closely with them and expect to achieve a positive outcome.

Thank you, Omar.

Matthew Dodds, Citigroup.

Good morning.

Just a quick follow-up on Mike's question on diabetes.

The US it was down 1%; I know the pump business you are building held up by the new approval, but how is the disposal business tracking?

And is the diabetes market, in your view, for pump slowing overall?

We are such a big piece of the market I think we, obviously, have an impact on that.

There are some pressures the other competitors have also faced, but I think the new pump is a strong enough catalyst that it will trigger growth in the market.

We are a big enough player in that space.

As far as the disposable market is concerned, I think that is fine.

Matt, the disposables overall are growing fine.

We are not seeing any on the -- CGM margin on disposables we are not seeing any real slow down there.

It is primarily on the pump side of the equation and we do believe that it is related to the fact that people are waiting for the new pump, for its approval.

And so that has clearly had an impact.

I think the overall pump market in the US had been somewhat slower, even if you went back over the last year it had been somewhat slower.

But what we have seen outside the United States, when you get this new pump approved, the 530G, with its low glucose suspend feature, we have seen that actually reaccelerate the markets.

We saw that outside the United States in Europe where we saw double-digit growth for really two years since the pump has been launched.

And so we are expecting that that will accelerate pump growth in the US.

As Omar said, we are such a large part of the market that that clearly will drive market growth.

Okay.

A quick one for Mike Coyle.

With the Advisa now out can you compare and contrast how much more of the market or what the potential share benefit is of Advisa versus Revo?

So, obviously, you have seen Advisa has had a real impact on our growth in Japan, but it was also the first MRI product to be approved in Japan.

Since Revo has been in the marketplace here for a year in the US, we don't expect quite as much benefit as we are seeing in Japan.

But on the other hand, adding all of the top-end feature sets of our Advisa pacemaker to now an MRI-capable product gives us an opportunity, we think, both on price as well as on the market share.

Importantly, it also gives us now Revo as a product tier to deal with some of the pricing pressures we have seen at the mid-tier.

So we think it is going to be an important addition to our product line and we think it will continue the momentum that we are seeing in Pacing.

We are up, as we pointed out, on a global basis 2 market share points year over year.

Obviously, having this to reload our US offering is very encouraging.

Thanks, Mike.

Thanks, Omar.

Thanks, Gary.

Bob Hopkins, Bank of America.

Good morning.

So I was just wondering if you could provide some more details on two things that you mentioned on the call.

First, you talked about selling day comparisons and I was wondering if you could just be more specific about exactly where the mismatches were this particular quarter.

Then, secondly, on Western Europe I was wondering if you could just talk a little bit more detail about specifically which areas of the business are seeing the greatest weakness.

Is it Cardiovascular?

Is it Spine?

Is it pricing?

Is it units?

Just a little more detail on Western Europe and on the selling day mismatches that you mentioned.

Let me cover Western Europe and I will let Gary cover the selling day thing.

And, Gary, you can add to Western Europe.

Western Europe, I will say all of the above, because in general we have had general softness like everywhere.

It's I think more in the cardiovascular area because the products, there is more competition in there, more in the radar screen, if you like, of the policy makers.

But every business faces a certain degree of pressure and it is both pricing and volume and it varies by country.

In Italy, for example, it clearly is both of them.

In Germany it was more pricing, so it varied according to the different countries.

What we saw this quarter which was different from previous quarters was that in previous quarters the softness feel like it was limited to Southern Europe.

This quarter we saw more generalized softening, and to some degree the general economic news we hear is kind of consistent with that.

But, again, we don't know all the answers yet.

We are watching this thing very carefully.

Obviously, we are doing everything we can through our specialists to make it clear to the market the value that our products bring and the value to the healthcare system, both in terms of cost and clinical efficacy, that our products bring.

And through that approach we hope to at least stabilize the markets.

Just quickly on the selling days, Bob, what we were trying to highlight is really not a significant difference in selling days this year versus last year.

There is a difference versus our Q3 versus Q2, which you always have.

Q3 is the lowest selling days for us of any of the quarters just from the standpoint of obviously the holiday seasons that are in there.

And so as a result of that Q4 versus Q3 there is a five, six extra selling days in our Q4 and the same thing versus Q2.

So that is all we were trying to highlight in the comments when we were comparing against our sequential, our Q2 results that there was fewer selling days this quarter versus the prior quarter.

Versus the prior year it is basically comparable.

It does have some impact.

We probably saw a little bit more impact, we believe, this year than last, depending obviously where the holidays fall in the week and what that kind of an impact is.

So there was some of that softness.

In fact, that was in some ways what we thought might have been some of the issue even in Europe.

The first two weeks of January, clearly, were much, much softer than we have ever historically seen, and so we couldn't tell whether that was really a holiday effect or not so we are watching it closely.

But clearly that is what we were trying to get at in the selling days comment.

There is no difference really year on year.

Thanks.

Then just as one quick follow-up on the BMP supply constraint.

How much did that impact the revenues in the quarter and when do you expect that to be resolved?

Right now it is resolved, so we are shipping with the -- supply constraint is done.

We have got approval on the sterile water supplier from the FDA, so that piece is resolved.

How much of an impact there?

It had some impact.

Chris, you want to make a comment on that if you want?

Sure.

Bob, it wasn't a major impact.

We were on allocation on certain kit sizes because of the sterile water supply issue and we didn't take typical end-of-the-quarter orders.

And so now that we have FDA approval on a new supplier for sterile water we are in the process of releasing inventory and getting off an allocation basis on that product.

And so I would characterize it as minor.

Okay, great.

Thanks, guys.

David Lewis, Morgan Stanley.

Omar, you gave us more detail on the acquisition strategy than we have had in prior quarters so I wanted to start there.

And maybe one follow-up.

I guess could you give us some more color in terms of how you are thinking about the size of transaction.

We have sort of become comfortable with Medtronic the last several years doing deals that were less than $1 billion.

If you could talk just about the size of transaction, maybe the stage of development.

It sounds like your preference is still emerging markets over developed markets, but within emerging markets you did talk about some nice return goals.

Help us understand how you think about those return goals as it relates to transactions like Kanghui, which are very much infrastructure type of deals.

Any additional color you could give us on some of those components would be very helpful.

I think, David, I think the goals and the hurdles don't change.

Based on whether it is a geographic broadening acquisition or a new technology acquisition, I mean those goals do not change.

We really look at two things, or three things if you like.

We look for a strategic fit.

A strategic fit; we have already described our businesses in three groups -- the Cardiovascular Group; the Restorative Therapy Group, which essentially includes Ortho and Spine in a broad sense, and neuro for that matter, ortho, spine, and neuro; and Diabetes.

We are aiming to fill gaps within these groups.

That is one area of strategic focus.

The other is as we fill those gaps we are also looking at acquisitions that can help us deliver economic value.

That could mean broadening our focus in the continuum of care, but always related to our therapies.

And by that I mean looking at businesses which help us identify patients better or more efficiently, as well as patient and management offerings.

The other area of globalization.

In globalization it's primarily, at this stage anyway, is approaching the value segment although we are quite interested in market growth as well if we see fit.

Distribution companies who have got high share, who have got credibility in certain marketplaces are also areas that we look at.

So those are the areas that we look at; that is the first thing, the strategic focus.

The second is it's going to have certain hurdle rates in the mid-teens and that applies to everyone, no matter who we buy.

The third is that we have got to cover dilution within the Company.

And by covering dilution what I mean is that our goal of delivering this mid-single digit growth for 200 to 400 basis points of leverage and EPS is something we want to protect despite an acquisition.

The acquisition should help us get there rather than get in the way of achieving that.

So these are the things that we try to look at for the acquisition.

The size, if it meets all these criteria, is a secondary factor.

Okay, very helpful.

Then, Gary, just a quick follow-up here.

If we think about margins and progression throughout the year, specifically gross margins, they have come down maybe 50, 60 basis points across the quarters.

Maybe if the fourth-quarter number that you provided is, obviously, where it comes in at can you just give us a sense of the factors across the quarters, whether it is FX, the pricing pressure you talked about, or geographic mix?

So what has been the incremental downward pressure on GMs across the quarters?

As we indicated, obviously FX was a big impact, especially over the last couple of quarters.

The good news is as we go into fourth quarter here we are starting to anniversary, especially versus the euro, some significant changes on the FX.

And so the FX impact starting in Q4 is less on the gross margin line and so we do expect that we are not going to quite have the negative impact that we have had the last two or three quarters from that factor.

As you indicated, I mean obviously we continue to see pricing pressures across the organization.

We have talked about that.

The revenue mix you get positives and negatives.

Japan obviously being a big growth engine right now has higher margins and that is a positive.

Having the [loss] actually coming back and seeing the CRDM business and even Spine in the US, which are higher-margin businesses improving, is good, but we still have pricing pressure that we are offsetting.

And then we are having product cost reductions, obviously, as we continue to take the $1.2 billion of product costs out, so we are seeing a benefit on the side of the equation.

So there is a lot of factors that are driving it.

Overall, we feel still very confident that we have been able to maintain that 75% to 76% range.

It is going to vary by 30, 40 basis points in kind of given quarters, but in general, as we indicated for the fourth quarter, 75.5% is kind of what we are looking at.

And that is assuming that the FX basically stays where it is at and we don't have a significant negative impact from FX, which is what we have been fighting the last two or three quarters.

Thank you very much.

Bruce Nudell, Credit Suisse.

Good morning.

Thanks for taking my question.

I have one for Omar and then a follow-up for Mike.

Omar, at [GPM] you were sounding reasonably optimistic that mid-single digits was feasible with kind of reasonable assumptions.

Clearly, January in Europe seemed to be a surprise to the Company.

Now the question is do you guys have intelligence as to whether or not January was just a bad month, or there were specific, identifiable policy changes that really impacted the quarter?

I don't think we have really hard evidence, but obviously we have looked into this very closely and are watching the trends very carefully as well.

The policy changes there aren't any dramatic, across-the-board policy changes in Europe that we can point to.

However, in Italy, for example, some of the policy changes people are driving more strongly and it's having an impact.

I think there is a general concern, and it's a little qualitative, but there is a general concern over the overall economy in Europe.

Like you have heard recently in the press, there is even a concern about growth in Germany.

And I think that to some degree is probably driving some of this caution in the marketplace, both from policy makers as well as patients themselves to the degree that they participate in and pay for their own healthcare.

So that is the best that I can do with that.

I would be welcome to --

Bruce, this is Gary.

I don't know if I can add much more to where Omar said.

Obviously, as you indicated, we were surprised by January.

We had seen -- through December we were feeling pretty good and then January, clearly, was softer.

As we indicated, clearly the first couple weeks we could maybe point to the holidays and say that that was maybe just an unusual impact and that was both how we were explaining it.

And we did see a recovery a little bit in the back half of January, but we are still cautious because it is not like it has bounced back to where we were previously at as far as growth rates.

And so we are watching it carefully.

But we don't have any -- as Omar said, there is nothing from a policy or direction that changed in January.

There wasn't anything that came out from the governments or anything else that would have changed why January ended up being the way it was.

It just seems that as the overall -- as Omar said, the overall economy and concern and focus on healthcare is what has kind of focused on this.

We will have to wait and see how this plays out.

Okay.

Then on TAVI, Western Europe is haves and have nots, and I was wondering if you guys could comment on just general trajectory of volume and price.

What is it going to take to get the rest of Western Europe to look more like Germany where they are moving past partner one into partner two type patients?

And then, finally, what is the extreme risk data for your trial in the US likely to be made available?

On the question of Europe in general, we believe the availability of data to the more moderate risk patient population is going to be the key item to expanding the usage of the technology more broadly outside of Germany.

Obviously, we are very aggressively pursuing enrollment in our SURTAVI program to provide those data.

In addition for us, obviously the ability for us to penetrate the transapical segment is going to be important and we expect Engager CE mark here in the spring and going forward.

That gives us an opportunity to penetrate what is roughly 20% of the overall market.

So those would be the primary drivers I would point to for what will keep the growth going in the upper single-digit kind of range for Europe.

In terms of availability for our data, we are -- of the US trial, we would expect that to become available in the fall timeframe for sharing more generally.

And that is what I would set as an expectation.

I guess just to follow up on, like you look at the UK and Belgium, they are not even through partner one yet.

So what is it going to take to open up markets like that?

I mean, again, there has to be compelling data to show the use of this technology in lower-risk patients to really get at the larger patient population.

And I think that we are very aggressively pursuing the generation of those data.

Thanks so much.

Raj Denhoy, Jefferies.

Good morning.

Wonder if I could ask a bit about the US ICD market.

I think for a couple of quarters now you have commented about the lead-to-port ratio continuing to increase for you, but you haven't yet seen any pull-through on the can side.

I am curious whether you expect to do that or really what is behind that sort of lack of pull-through.

I think, Mike, you're in the best position to answer that.

As you point out, we have seen and consistently have seen an increase in lead-to-port ratios, and that is very encouraging for us.

I think the opportunity that we see going forward is to use some of the unique technologies that we have within our cans to differentiate our product line.

For example, we have submitted data for the use of our Lead Integrity Alert with competitive leads, which we believe would be an important catalyst for us to be able to convert replacement shares on competitive lead products.

So that is an example of where I think we have some opportunity to expand can penetration, but the other piece is we just have a very robust pipeline going forward.

As you look at not only the Advisa MRI program on the pacing side, but also the Evera product line is going to be coming into the US in the first quarter of next year, which offers significant size, shape reductions and longevity enhancements to the overall product line, which we think will help us with can penetration.

Then the availability of the Viva/Brava product, which offers some unique algorithms for enhancing CRT effectiveness in that segment of the population.

That too will be coming to the US in the first quarter.

Obviously, those products, Evera and Viva/Brava, are also going to help us in Europe where we now have the Viva/Brava approved and are getting very nice uptake on that technology in Europe.

And we will have Evera here in the fourth quarter.

So we think these are going to give us good opportunities to continue to share capture momentum.

It is encouraging to us that we are up almost 1 point of share year over year on the ICD side, even though our competitors have been in new product introduction modes and we are just entering ours.

So we think the share momentum will continue in these segments.

Okay.

Just two quick follow-ups, so in times past you have also talked about the replacement market improving for you.

How much of that share increase you are seeing is on the replacement side?

And are you actually starting to see now acceleration in that side of your business?

Most of the share capture has been on the replacement side, but we expect that to now shift to the initial implant side as we bring in our new products.

Okay.

Then just lastly into the pricing.

Again, US ICDs I think you noted was down 5% in the US.

How has that been changing?

Have you seen that stabilize?

Is pricing getting worse?

Also, in the context of not bulking to see negative 5% is kind of a big number.

The negative 5% is slightly worse than what we had been seeing.

Typically we have been seeing around 3% declines in the prior quarters, but obviously we think the new products are going to give us an opportunity to play in multiple tiers with better pricing, which is going to be helpful to us.

But, frankly, we have also seen more competitive pressure on pricing.

And so we are going to continue to shift our discussions with customers to the breadth of our CVG product offering from the standpoint that we have multiple programs for economic value creation in leaning out their pacer clinics, leaning out patient flow through their cath labs, the blood conservation programs, the use of connectivity technologies that we have like CareLink Express for being able to do more efficient device checks in the emergency rooms.

These are all programs that we are working with accounts on in multi-product line offerings to basically address their core economic needs beyond simply the price reductions that we are seeing.

And that is something that is getting a lot more traction and we think will help us with mitigating some of these pricing issues going forward.

Helpful, thank you.

Dave Roman, Goldman Sachs.

Good morning, everyone.

Thank you for taking the question.

I was hoping -- I know there has been a lot of focus on this call on trends in January in Europe, but if I look across your US businesses those actually seem to be pretty healthy.

Can you maybe just talk about the trajectory in some of the core US markets?

And maybe you can help us frame it into two categories.

One would be looking at those businesses that have faced a reassessment of prescribing patterns, where that is spine or ICDs, whether we are in fact you think reaching a bottom there and poised for re-acceleration.

Then maybe some of the categories that are more elective in nature where you might have seen some seasonal impact in the fourth calendar quarter and how those have trended.

I think I think you are right.

I think there is room for reason, for some level of optimism regarding the US market because in general that has at least been stable over the past few quarters.

I think a number of things.

First of all, I do think in January and the early part of the year in the US there is some pressure in the market, based on people's insurance plans, deductibles start coming up early in the year.

So any out-of-pocket expense people are more careful with and that has a tendency to shift procedures to the back half of the year when they want to use up whatever health benefits they have.

So there is that kind of pattern in the US market which we think we do see in the early part of the year as insurance schemes become more and more patient care pay dependent.

That is one factor.

But on the other hand, we do think that both in Spine and in ICD there is a general stabilization of volume in implants.

Spine, for example, has reached a level of stability that we haven't seen for years, I think, with the practitioners getting comfortable with the policies in place.

Now we expect to continue to work with them to drive further growth in that market, but there does seem to be some level of stabilization.

I think there is going to be issues with pricing.

I think there is going to be issues in the US with healthcare reform.

The Affordable Care Act gets in play and there is a certain level of uncertainty there.

I think there is factors around accountable care organizations that we have to watch.

But in all of these areas we think that if we can demonstrate value financially of the products that we have that is essential to our success and the success of the overall healthcare system.

So we do think that the US, in some ways, will be a little more stable than Europe, for example, but again there is uncertainties here as well.

Just to add to Omar's comment, David, what I would also say is I think you are right.

I think the US is looking better because of the stabilization in ICD and spine, as Omar said.

I think the other thing that people need to focus on is, as you heard from Mike and even as we went through our discussion, we have a lot of new products that are just hitting the US market at this point in time.

I mean Spine is seeing some uplift because they had some new products here recently that are starting to impact it.

CRDM is getting ready to launch several new products in the US market.

Diabetes, as we have talked about, is clearly getting ready to launch some things in the US market.

The fact is some of the things that have been driving some of the emerging and international markets, some of those products are finally just hitting the US market.

And I think that will even have -- especially on top of the fact that we have stabilized the ICD and Spine business will help to start accelerating some of the growth in the US.

That is helpful.

Maybe my follow-up could just be on that last point, Gary, where you talk about new product launches.

If we look at Ardian outside the United States, I think in your comments that has gone a little bit more slowly than you had expected.

Maybe you could provide a little bit more detail there.

But maybe more broadly speaking, as new products get phased in and launched how should we be thinking about ramp curves and timing of adoption?

Look across the entire sector it seems as though we are all used to you launch a new product it automatically gets adopted.

Those ramp curves are all looking more slowly than they used to.

So maybe how should we think about your new product flow and then the corresponding impact on revenue and then earnings?

Maybe I just add a few comments on that one.

First of all, the ramp.

Increasingly people will demand economic data, because every government everywhere in the world is concerned about healthcare costs.

Even when their spending, as a percent of GDP, is slow, they all watch what is going on around the world and are very careful with escalating healthcare costs.

So the need for economic value of these therapies is going to be and is becoming as important as clinical value, so that is an essential ingredient to accelerating the commercial adoption of some of these products.

The other factor which you had to be careful with is that these products are different.

Ardian, for example, has a referral chain that has to be educated which is not the same as some of the other products that we might launch.

And so depending on the details of and the nature of the technology and who is the adopting it, what are the barriers in changing the physician or the hospital or healthcare system workflow that is needed here, that also will affect the speed of ramp.

So those are two things than I would look at as we look to new products.

Okay, that is very helpful, thank you.

We've gone by the past the top of the hour, so we have time for one last question.

Kristen Stewart, Deutsche Bank.

Just wanted to go back over -- Gary, I know you mentioned other expense came in a little bit lower.

I think you cited the device tax and then also I think a gain on the sale of investment.

Can you just maybe talk about the drivers between where it came in at $17 million relative to your expectations again and whether the device tax is something that we should expect should remain lower, whether it was just a timing issue?

There was a few items that affected the other income and expense line item that were a little bit more favorable than we had expected.

One is something we should have, but we didn't note the timing on it.

With the dissolution of the Weigao joint venture -- one of the things obviously with a joint venture, we consolidated the entire sales and expenses really of the joint venture, but the profits related that basically Weigao took the offsetting profits, half the profits in effect, were down as an expense in the other income and expense line item.

Resolving the joint venture that went away so that expense that we have had down in that other income expense would be eliminated just because of the accounting on how we handle Weigao now joint venture.

So that was a benefit that we didn't anticipate at the beginning of the quarter.

It obviously is offset by the fact you don't have the revenue and everything else that we would also lost from the resolution of the joint venture.

Kanghui, obviously, then the revenues and expenses are all up above the line, not in other income and expense line, even though those two basically offset.

So that was one item.

The medical device tax was also a little lower than we expected.

Now we only have the one month of the device tax, but as the final rules and regulations came out basically what we saw is that basically the existing inventory that is in the field already you don't pay the device tax on that piece of it.

And so as a result of it the only thing you pay is what is coming to the manufacturers that actually go through to the final sale.

So there is going to be a little bit of a slower ramp up on the device tax itself just based on the existing inventory levels that are out there for the various businesses.

And so it was relatively small.

Our previous estimate, I think even for the fiscal year, we had said could be up to $50 million kind of on a pretax basis.

Now our current estimate, based on new regulations, would say that probably for the fiscal year it is maybe up to $25 million, $20 million, $25 million.

So it is about half of what we expected, say, prior to the final regulations and so that was a slight benefit also.

Okay.

Did you have any gains on the sale of any investments?

I know that you guys were selling Weigao.

No, nothing that is unusual.

We have some periodically where we do some, but we also had some impairments on some investments also.

So net-net there was no real change.

Okay.

Then can you provide any more color just around the -- it sounded like it was a gain related to Ardian and the contingent or future milestones.

Just what the expectation --?

Right.

What we did on the GAAP financials reflects the $70 million gain, which is a reduction in the contingent consideration.

So this is -- as we made the acquisition of Ardian we had to record, the accounting rules required you to record what do you think your milestone payments are going to be.

And you have to book that as a continued consideration of liability as you go forward.

Because of the obviously the regulatory process in the US here, and the enrollment I should say, the enrollment process has been longer than we expected.

And because of the slower commercialization uplift in Europe because of some of getting reimbursement and some of these things, the whole things we have been talking about that Ardian -- we are still excited about the opportunity but the reality is it's coming a little slower than we expected.

That means that the milestone payments that we would have to pay out based on our current estimates and forecasts of how this will ramp up is less because we are shifting things out a little bit and we are shifting things out, some of it out passed obviously the final milestone payment which is in FY 2015.

And that gain because the liability has now been reduced, that liability being reduced it flows through the P&L as a gain.

We recorded it; it is obviously in the GAAP financials but we did not reflect it in our non-GAAP numbers.

But it is a gain that the Company recognizes by reducing that liability.

Will that also have any implications on the amortization that ultimately flows through once you get US commercialization?

No, because again the intangible assets and all the assets are related.

The value of Ardian itself we still feel very, very strongly about.

In fact, if anything, we probably feel that there is more value there long term.

It is just that, if you think about it, the value has shifted out past the milestone payments.

Okay, perfect.

Thank you.

Thanks very much for your questions.

On behalf of the entire management team, I would like to thank you again for your continued support and interest in Medtronic.

We look forward to updating you again on our progress on our Q4 call in May.

Thanks, everyone.

This concludes Medtronic's Q3 earnings release conference call.

You may now disconnect.