Boston Scientific Corporation (BSX) Q4 2007 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Boston Scientific's Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Mr. Dan Brennan. Please go ahead sir.

Thank you, Alex, and good morning everyone. Thank you for joining us. With me on the call today are; Chief Executive Officer, Jim Tobin; Chief Operating Officer; Paul LaViolette; and Chief Financial Officer; Sam Leno. In addition, Larry Newman is joining us as well. I will be transitioning to other responsibilities within the company and Larry will be new Vice President of Investor Relations. We issued a press release last night regarding our Q4 and full year 2007 results, key financials were attached to that release, and we've also posted support schedules to our website, which you might find useful as well. The agenda for this call will include a review of the Q4 financial result, as well as Q1 and full year guidance from Sam, and update on the CRM business from Jim, a review of the cardiovascular and other business and update on our quality initiatives from Paul, and the CEO perspective from Jim followed by a question-and-answer session. Before we begin, we will be making some forward-looking statements on this call today, so I would like to remind everyone of the Safe Harbor statement. This call contains forward-looking statements the company wishes to caution the listener that actual results may differ from those discussed in forward-looking statements and may be affected by, among other things, risks associated with our financial performance, our restructuring plan our programs to increase shareholder value, new product development, regulatory approvals, litigation, our growth strategy, market recovery and our market position. The company's overall business strategy and other factors described in the company's filings with the Securities and Exchange Commission. With that, I'll now turn it over to Sam for a review of the fourth quarter results.

Thanks, Dan. Before I begin my summary of the financial results, I would like to take this opportunity to thank Dan Brennan on the outstanding job he has done heading up our Investor Relations functions for the past year. And as a result of his performance we've asked Dan to lead our Financial Planning and Analysis function as our new Vice President of FP&A. Larry Newman has held a number of senior finance positions during his 11 years with Boston Scientific and he is very excited to move into his new role of replacing Dan as Vice President of Investor Relations. Now, I'll address the results of our business. 2007 was a challenging year for Boston Scientific and for our competitors as we all experienced the challenges of servicing two large volatile markets, the DES and the CRM markets. For us, it was also a year of transition. A year where we made important progress and arranged our fronts in restoring Boston Scientific to a sustainable, more profitable growth plan. We demonstrated our ability to maintain market share throughout the year. We cleared the CRM warning letter and made significant progress towards the mediating the legacy BSC corporate warning letter. We positioned our CRM business to launch more new products in 2008 than has ever launched in a single year all with the Boston Scientific name for the first time. We strengthened our interventional cardiology businesses ability to compete in the drug-eluting stent market with the only two drug platform in the industry, including the expected U.S. launch of TAXUS Liberte, our next generation stent system. We created and implemented a thoughtful plan for our capital structure going forward including improved operating and free cash flow. We positioned the sale of five non-strategic businesses. We monetize much of our public investment portfolio and launched the plan to monetize the majority of our private investment portfolio. And finally we launched a major expense in headcount reduction initiative. We are very pleased with how we finished the year operationally and our fourth quarter financial results were very complex as we continue to make significant progress on our broad set of programs designed to improve shareholder value. Because a number of these initiatives resulted as expected in the large P&L charges in the quarter, I will disaggregate them so that you can clearly understand our results of operations. In addition to our adjusted fourth quarter operating results coming at a high-end of the guidance range that we provided at the end of the third quarter, our reported results also included net charges related to divesting businesses, monetizing our investment portfolio, launching our restructuring initiatives, litigation, and discrete positive tax items. It will be important to understand each of these components not only in the context of our fourth quarter results, but also their effect in the guidance that I will provide for 2008 a bit later in my remarks. Let me begin our fourth quarter results by first discussing revenue. Consolidated revenue for the fourth quarter was $2.152 billion that exceeded our guidance range of $2.050 billion to $2.150 million. This represents 4% increase over the fourth quarter of last year, and 5% growth over last quarter's revenue. Compared to the foreign currency contribution assumed that our fourth quarter guidance range, foreign exchange contributed a positive $43 million. So without this benefit, revenue would have been $2.109 billion or slightly higher than the midpoint of the guidance range. Overall, the contribution of foreign currency to sales growth was a positive 3% or about $75 million compared to the fourth quarter of 2006. Compared to the fourth quarter of last year, domestic revenue declined 3% while international revenue increased 15% reported or up 6% on a constant currency basis. Paul, will provide more color on the DES market dynamics for the quarter, but I will share the revenue results with you at a higher level. Worldwide DES came in at $435 million at the low-end of our guidance range of $430 million to $480 million, and down 14% from the fourth quarter of 2006. Geographically, U.S. DES revenue was $224 million at the low-end of the guidance range of $220 million to $250 million, and 32% below the fourth quarter of last year. International DES sales were $211 million compared to our guidance range of $210 million to $230 million representing an increase of 19% over the fourth quarter of 2006. Before Jim provides more detail on the CRM market, I'll review some of the specifics for CRM sales here. The $544 million of worldwide CRM revenue reported in the fourth quarter marked the highest quarter of worldwide CRM revenue we have achieved since the acquisition. This represents an 11% increase over the fourth quarter of 2006. U.S. CRM revenues were $347 million representing an 8% increase over prior year, while international CRM sales were $197 million and 17% greater than prior year. With respect to defibrillators worldwide ICD sales of $396 million, were well above the midpoint of the guidance range of $375 million to $405 million, an 11% over the fourth quarter of 2006. ICD sales in the U.S. were $266 million that's 6% higher than last year and near the midpoint of the $260 million to $280 million guidance range. International ICD revenue of $130 million exceeded our guidance range of $115 million to $125 million and represents 23% increased over the last year. I would like to add just a bit more color on the U.S. ICD revenue for the quarter. As many of you are aware, when you sell a product that has a future service expectation, GAAP accounting requires that you assign a fair value to that service and differ that portion of the sales price together with the associated product costs in the future periods. Our latitude enabled devices fall under this category, and as such we currently differ a portion of each sales of these devices. The amount of this deferral is reviewed periodically as we complete... and we completed a thorough analysis of this in the fourth quarter of this year. This analysis caused us to increase the amount we are differing from $300 per unit historically to a range of $650 to $1000 per unit going forward depending on the battery life in the fourth quarter and beyond. This deferral will be released to revenue over approximately four to six years, which is the average expected battery life of the implants sold with a latitude device. The net impact of this was an $8 million increase in our sales deferral for the quarter. So excluding this impact the U.S. ICD number would have been $274 million representing a 10% growth over the fourth quarter of 2006 and towards the top end of the guidance range. On a global basis, six of our divisions achieved double-digit growth for the quarter. In addition to the CRM business growing at 11% for the quarter, our electrophysiology, neurovascular, endoscopy, urology, and neuromodulation franchises all grew at least 10% in the quarter. This speaks to the diversification of our product portfolio, the quality of our sales force and the growth opportunity that these businesses bring to Boston Scientific products portfolio. I would also like to provide some highlights of our full year 2007 revenue results. Reported revenue for the year ended December 31st, 2007 was a record $8.357 billion, which represents 7% growth over prior year. The contribution of foreign currency to full year sales growth was a positive 2% or about $180 million compared to 2006. On a pro forma basis including the acquired CRM and Cardiac Surgery businesses for the entire year in 2006, full year 2007 revenue declined by 2%. Our global cardiology business was down 14% basically due to the DES market contraction that we have experienced throughout 2007. Our U.S. DES market has been at least 53% for the past three years and our OUS share has also proven to be resilient even in the face of many new entrants into the OUS competitive landscape. The peripheral intervention and vascular surgery businesses showed a decline of 6%, but the vast majority of decline was due to the loss of our Terumo distribution contract for Guide Wires in June of 2006. The rest of the business has posted a very solid growth numbers in 2006, and here are some of the highlights of these businesses. Endosurgery continued its track record of double-digit growth with 10% increase over prior year on the strength of 12% in endoscopy. Our Electrophysiology business also grew 10% for the year, and we are excited about the future for this business as we capitalize on the benefits of integrating it into the CRM group. We continued our history of leadership in the neurovascular market with 8% growth over prior year and finally our neuromodulation business grew 40% as we continue to believe that this will be one of the more significant growth engines for us in future years. The common theme among these businesses is our strong market share and often times leadership positions in many franchises including coronary balloons, IVUS, biopsy, Biliary, stone management, and neurovascular coils and stents to name only a few. I believe that our revenue results even in our most difficult markets illustrate our ability to deliver impressive execution by our teams in our each of our businesses. The contraction of the DES and CRM markets during the year dominated much of the headlines. But, when you look across our entire portfolio of products and franchises, it is clear that there is much to be proud of. The rest of the portfolio excluding DES and CRM grew 10% and 9% for the fourth quarter and full year respectively compared to 2006. We posted record breaking sales in total for both the fourth quarter and the full year by delivering record sales in seven of our 10 businesses, while at the same time successfully launching TAXUS Express in Japan and restoring trust, confidence, and cadence in our CRM franchise. Reported gross profit margin for the quarter was 70.5%, which is 140 basis points lower than the third quarter of 2007, and for 100 basis points lower than the fourth quarter of 2006. The adjusted gross profit margin for the quarter excluding acquisition and restructuring related charges was 70.6%, which was also 140 basis points lower than last quarter, and 340 basis points lower than the fourth quarter of 2006. As has been the case during all of 2007 revenue mix was a key contributor to the lowest gross profit margin compared to prior year. More specifically, the lower mix of DES revenue exerted a downward pressure on our gross profit margin. The total revenue was 4% higher in Q4 2007 than Q4 2006, but drug-eluting stents, which are significantly more profitable than our average of our other products represented 20% of consolidated sales in the fourth quarter of this year that's down from 25% of consolidated sales in the fourth quarter of 2006. Product mix clearly plays an important role in determining our gross profit margin, but in addition the fourth quarter gross profit margin rate was 70 basis points lower due to increased inventory exposures triggered primarily by higher than normal scrap charges within our CRM business. Research and development remained 12% of sales with spending of $256 million for the quarter, which was down $11 million versus fourth quarter of 2006, and down $15 million compared to the third quarter of 2007. Similar to SG&A, the swift execution of our approved restructuring plan in the fourth quarter resulted in reduced spending. We believe that our reduced R&D spending, driven in large part by selectively eliminating projects that have lower likelihood of success will not negatively affect our ability to restore short and long-term profitable sales growth. Our reported SG&A expenses in the fourth quarter were $704 million, which were 7% lower than the fourth quarter of 2006, and 2% lower than last quarter. Adjusted SG&A expenses, excluding acquisition related items were also $704 million, which is 1% lower than the third quarter, and 4% lower than the fourth quarter of last year. We began to execute on our approved restructuring plans in early November, which resulted in a dramatic reduction and SG&A expenses earlier than anticipated at the time, that we provided guidance in our third quarter earnings call. I am pleased to say that we have been able to make significant progress in executing a number of shareholder value improvement programs that we've been talking about for the past few quarters. Several of these resulted in large charges as expected, and had a significant negative impact and reported operating profit. It's important to understand these large expense items, so I will spend a few minutes here, addressing these in some detail. We reported a GAAP operating loss of $430 million for the quarter. On an adjusted basis, excluding acquisition, divestiture, restructuring, and litigation related charges, as well as amortization expense, operating income was $509 million for the quarter and 23.6% of sales. That's up 190 basis points from Q3 2007. The difference between GAAP and adjusted operating profit consist of five major items including normal amortization expense write downs of intangible assets related to certain suspended R&D program, merger and integration expenses, restructuring expenses, and an increase in our legal reserves related to patent litigation involving our interventional cardiology business. I'll address each of these in a little more detail. Our total amortization expense was $174 million, which included the write-off of $25 million of intangible assets as a result of our decision to suspend funding of certain internal research programs, and as a result of divestitures, we are anticipating a decrease in our annual amortization expense of approximately $50 million for full year 2008. We also recorded $260 million pretax of merger and integration related charges during the quarter, and those include $193 million of the $240 million previously disclosed as an after-tax charge primarily, associated with the write down of goodwill in connection with the sale of our cardiac surgery and vascular surgery businesses, which were announced on January 7th of this year. Note that the remaining amount of the approximate -- approximately $50 million of the goodwill write down for cardiac surgery and vascular surgery is recorded as an expense, primarily tax expense in the first quarter of 2008 concurrent with the completion of this transaction. In addition, we recorded $15 million true-up primarily associated with the write down of goodwill in connection with the sale of our auditory business. We recorded $184 million pretax of restructuring related charges in the quarter, which are primarily related to severance accruals in conjunction with our previously announced expense and headcount reduction initiatives. We also recorded a pretax increase of $365 million in our litigation related reserve related to patent litigation involving our interventional cardiology business. The sum of these five items was $939 million, which is the difference between the $430 million GAAP operating loss and the $509 million of adjusted operating income. The interest expense was $137 million in the quarter, which was down $10 million in the third quarter, and $7 million lower than last quarter primarily as a result of the $750 million debt repayment that we made in conjunction with our facility amended in the third quarter. Our average interest rate for the quarter was 6.3% compared to 6.4% last quarter. In other net expense was $29 million and that includes a net charge of $48 million primarily related to the write down of our private investment portfolio, and interest income of $80 million was in line with last quarter, and $5 million lower than the fourth quarter of 2006, due to lower average cash balances. The reported GAAP tax rate for the quarter was 23% and the adjusted was negative 3%. The reported and adjusted tax rates for the quarter reflect a reduction to 11% in our annual operational effective tax rate for 2007, from our forecasted rate of 18%, as well as the benefit in the fourth quarter to catch up for the impact of this annual rate reduction on our results for the first three quarters. We were able to reduce our forecasted tax rate for 2007, as a direct result of tax planning that was implemented during the year. While this planning provides substantial one-time cash savings, it is not anticipated that these planning initiatives will impact our effective tax rate beyond 2007. In addition, our fourth quarter tax rate reflects $4million benefit for certain discreet non-recurring tax items, and are required to be accounted for within the quarter. GAAP earnings per share for the fourth quarter was a loss of $0.31 as compared to a loss of $0.18 per share in the third quarter and positive earnings of $0.19 per share last year. GAAP results include $0.43 for the acquisition, divesture, restructuring, and litigation related charges that I mentioned earlier. To our adjusted earnings per share excluding amortization expense and restructuring, acquisition, divestiture, and litigation related charges was $0.24 for the quarter as compared to $0.20 last quarter and $0.30 in the fourth quarter of 2006. As a reminder the fourth quarter of 2006 also included $0.10 one-time tax benefit and without these benefits EPS for the fourth quarter of last year would have been $0.20. The $0.24 achieved in this quarter is obviously well above our guidance range of $0.14 to $0.19, and included in this $0.24 is $0.05 of non-recurring tax benefit. Excluding these non-recurring tax benefits adjusted earnings per share of the quarter would have been $0.19, and approximately $0.02 of these $0.19 performance was driven by a rapid execution of our restructuring plans early in the fourth quarter, which was not anticipated in our fourth quarter guidance. Stock compensation was $27 million and all per share calculations were computed using 1.5 billion shares outstanding. Turning to working capital management DSO was 66 days at the end of the quarter, which was a decrease of two days compared to last year and an increase of three days compared to the fourth quarter of 2006, and the two day reduction was a result of... direct result of improved cash collections in both our domestic and our European operations. Days inventory on hand were 115 days and that was down 19 days compared to the third quarter of 2007 and down 16 days in the fourth quarter of 2006. The additional inventory provision that I mentioned during my gross profit margin comments, as well as overall decreases in CRM and DES inventory relates to improved management of transition... of the transition process associated with numerous new product launches in 2008, and those contributed to this improvement. Operating cash flow was $308 million, in the quarter, which compares to $365 million in the fourth quarter of 2006, reflecting higher accounts receivable to support our increased sales, restructuring payments, and increased cash tax payments partially offset by improvements in inventory days. Fourth quarter of 2007 operating cash flow declined by $167 million, compared to the third quarter and $74 million of this charge... of this change is primarily due to the timing of semi annual interest payments on our senior notes. $36 million of restructuring payments, and an increase in accounts receivable due to increased sales. For the full year 2007, operating cash flow was approximately $900 million compared to $1.8 billion in 2006. The 2007 operating cash flow decline is primarily due to $400 million of tax payments, related to the gain and sale, of the cardiovascular -- of the Guidant's vascular business to Abbott made in the first quarter of 200, $160 million of additional interest payments reflecting a full year's increase debt balance due to the acquisition of Guidant in April of 2006, approximately $100 million of restructuring payments including the CRM payments in the first half of 2007, and lower adjusted after tax operating income of approximately $220 million. We did monetize most of our public investment portfolio and are on the process of monetizing majority of our private portfolio. We receive proceeds of $94 million in the fourth quarter and $243 million for the year. The total booked value of our investment portfolio at the end of 2007 is $380 million. We recorded gains of $19 million in the quarter, and $65 million in gains for the year associated with investment sales. These gains were offset by write downs of $67 million in the fourth quarter and $180 million for the year. Capital expenditures were $90 million in the quarter, which were in line with Q3 2007, and down slightly from the $111 million in the fourth quarter of 2006. For the full year 2007 capital expenditures, were $363 million compared to $340million in 2006. This contributed to free cash flow of $280 million in the quarter and $571 million for the year. We closed the quarter with $8.2 billion of gross debt and $1.5 billion in cash resulting in a net debt balance of $6.7 billion. Gross debt is $713 million lower, and net debt is $496 million lower than our 2006 ending balances ref1ecting our $750 million debt repayment in the third quarter and our net cash flow. We reduced net debt by $182 million in the end of the third quarter. We announced our initiatives to improve shareholder value at the time of our third quarter earnings call. And we told you that we would provide updates in each quarter. I am pleased to say that we are on track with the process... processes and activities that will drive the savings targeted, that we had previously disclosed. We said that we would exit 2008 with a run rate, annualized savings in operating expenses, of $475 million to $525 million and planned to achieve 90% plus of those savings in 2008. We also announced that we would be eliminating 4,300 physicians with 2,000 associated with the businesses identified for divestiture, and 2,300 positions, from our ongoing businesses. Our divestitures, timing is basically in line with our original timeline and as we exited 2007, we had completed more than 50% of the reductions in the ongoing businesses. As you see in our fourth quarter results we have initiated our restructuring plans faster than originally anticipated. So these activities have already begun to make a meaningful contribution to reduce operating, expenses and we expect to accelerate that momentum as we progress through 2008. As you know, we have been giving sales and earnings per share guidance one quarter at a time for the past year due to the volatility in our two largest markets, DES and CRM. On our third quarter earnings call in October, we provided our aspirational goals of 3% to 5% revenue growth, and 18% to 20 % adjusted earnings per share growth for 2008 and 2009, because we wanted to put our restructuring initiatives and expense reduction targets into a meaningful context. Our full year 2007 revenue guidance range was $8.255 billion to $8.355 billion dollars and we came in slightly over the top end of that range primarily due to the strength of foreign currency contribution to sales growth in the fourth quarter. The business is identified for divestiture accounted for roughly $550 million of revenue in 2007. So a range of $7.705 billion to $7.805 billion was the base for our 3% growth excluding these divestures. Given our sales performance in the fourth quarter, we are providing full year sales guidance consistent with our previous aspirational goals of 3% to 5% growth, and the 2007 revenue base of $7.8 billion excluding the revenue from divested businesses. This results in expected revenue for 2008 in a range of $8 billion to $8.2 billion and our foreign currency rates held construct throughout 2008, the contribution from foreign currency would be approximately $250 million and represents 3% of growth. For those of who you are attempting to adjust your 2007 models for divestitures, the 2007 revenue for each of the divested business by quarter will be available on our website immediately following this call. Providing adjusted earnings per share guidance for the full year 2008 is a bit more complex, so let me take you through the details of our thought process. On the third quarter earnings call I provided an aspirational goal of 18% to 20% adjusted earnings per share growth for 2008 and 2009. The derivation of this goal included actual adjusted earnings per share are $0.53 for the first 9 months, less $0.03 of non operational items from the third quarter that I mentioned on that call principally tax items and gains on our investment portfolio plus the midpoint of the Q4 range of $0.17 for a total 2007 adjusted earnings per share of $0.67. Given the complexities and details of the fourth quarter results that I have already discussed the $0.67 remains a reasonable based build arm for providing 2008 adjusted earnings per share guidance, and using the 18% to 20% growth rate on 67% operational earnings base for 2007, we are targeting a 2008 adjusted earnings per share range of $0.79 to $0.80. As a reminder the divestitures are about $0.05 dilutive from the $0.67 adjusted 2007 earnings per share base and as a result we expect to overcome this provision and still achieve $0.79 to $0.80 of adjusted earnings per share in 2008. Before I move on to first quarter guidance, I would like to say a few words about gross profit margins for 2008. As you know, we do not give line item guidance only sales and earnings per share. But as you build your models and attempt to estimate gross profit percent for 2008, please keep in mind that the effect of added inventory charges in the fourth quarter was to lower adjusted gross profit margin by 70 basis points. Without these added costs the adjusted gross profit margin would have been 71.3% in the fourth quarter and as the quarters unfold throughout 2008, the mix of TAXUS and PROMUS may begin to exert some downward pressure on gross profit margin, but offsetting this pressure should be reductions in the transitional quality remediation cost as we move closer to the corporate warning letter been cleared. We should also see the benefits of manufacturing, value-added improvement programs coming online as manufacturing engineers are refocused back into what they do well, which is to drive significant manufacturing cost improvement programs in all of our plans. Turning to sales guidance for the first quarter of 2008, consolidated revenues are expected to be in a range of $1.96 billion to $2.08 billion, up a range of 1% to 7% from $1.95 billion recorded in the first quarter of 2007 excluding divestitures. If current foreign exchange rates held constant throughout the first quarter, the contribution from foreign currency should be approximately $80 million and represents 4% of growth. For drug-eluting stents. We are targeting worldwide revenue to be in the range of $395 million to $435 million with U.S. revenue in the range of $215 million to $235 million, while OUS revenue in the range of $180 million to $220 million. For our defibrillator business, we expect revenue of $395 million to $430 million worldwide was $270 million to $290 million in the U.S. and $125 million to $140 million outside the U.S. For the first quarter, adjusted earnings per share excluding charges related to acquisitions, divestitures and restructuring, as well as amortization expense are expected to be in the range of $0.15 to $0.20. The company expects earnings per share on a GAAP basis from the first quarter of 2008 of $0.13 to $0.18. We expect to record restructuring related charges of $40 million to $50 million or $0.02 per share in the quarter, as well as an additional loss of $15 million on both the pretax and after-tax basis on the sale of our Cardiac Surgery and Vascular Surgery businesses, and $230 million pretax gain or $120 million after-tax gain on the sale of our fluid management and Venus access businesses. The Cardiac and Vascular surgery, as well as the auditory transactions closed in early January, and the fluid management Venus access divestiture is expected to close in the mid February, so any operational impact from these businesses, beyond what is included in our guidance should be minimal. I will also provide some other key elements, which might be helpful to you as you model 2008. We are planning approximately $450 million of capital expenditures during 2008 and with respect to the tax rate, we are currently forecasting 21% rate for the year, based on our assumption, that's similar to many of the past year's the expired R&D tax credit will be reenacted for 2008, but not until the fourth quarter of 2008. Consequently, we anticipated the tax rate or the first nine months of approximately 23% on adjusted earnings, offset by a tax rate below 15% in the fourth quarter to record a full year impact of the R&D tax credit in the fourth quarter of 2008 and that should result on 21% effective tax rate for the full year. That's it for guidance. Now let me turn it over to Jim, who'll review of the CRM business.

Thank you Sam. Since Sam's detailed the financial numbers for you all, I'd like to make some qualitative comments on the ongoing improvements in our CRM business. For the past 21 months I have spent much of my time in Arden Hills, working with some very talented and committed people. During that time the CRM organization has transformed itself to better serve our customers and their patients. With much hard work we've re-engineered how we design, build, test, and hold on our products. These efforts have greatly succeeded in improving our product quality and have gone a long way toward rebuilding trust and confidence in among our customers. Our attention is now clearly on restoring our new product cadence and growing revenues and market share. We have an impressive slew of new products that we plan to launch this year. I will share more details on our pipeline in a moment, but first let's review our recent progress. The fourth quarter result show evidence of revitalized business competing more effectively in a slowly recovering market. We saw a strong overall growth in Q4 CRM sales at 11 %, international defibrillator sales remained particularly strong with 23 % year-over-year growth and 17% sequential quarter growth. The quarter also showed slow, but steady recovery in our U.S. defibrillator sales, which posted increases of 6% year-over-year with an upward trend in actual implants, which rose 8% year-over-year and 5% sequentially, a trend that started well before Medtronic's Fidelis lead recall. While it is too early to determine the full impact of the Fidelis recall, sales of our defibrillator leads did show a modest increase in Q4 with the largest proportional impact in Japan. We will all have more complete picture of market shares after Medtronic's earnings announcement, but overall we seem to have done okay especially, in the face numerous competitive product launches. We expect modest, but steady growth in CRM revenues in 2008 and we look forward to share gains as we introduce new ICD and CRT-D products beginning this quarter. Before I discuss some of our anticipated product launches, I would like to comment on the tremendous progress we have made in our quality systems since acquiring Guidant. In less than two years we have fundamentally reengineered the culture of quality in our CRM organization. In all areas of the business we have scrutinized and redesigned our processes with a keen focus on customer and patient needs. From the product development processes to manufacturing, operations, and our extensive supplier network, we have dramatically improved the way we bring new products to market. And most importantly, we stand by the results of our improved quality systems with the most comprehensive on line product performance reporting available. I believe we are now producing the highest quality products in the industry, which will soon begin to set new standards for excellence and reliability. During our quality improvement efforts, we diverted significant engineering resources to assist our quality teams with the integration of new processes and systems. With those efforts essentially complete, and the resulting quality enhancements in place, we have now entered the phase of continuous quality improvement, this has allowed valuable engineering resources to be refocused back on the product development. The results are evident in the numerous product launches we've planned for 2008. Our restored product cadence has already begun to take shape with major product approvals in just the last few weeks. In Q4, we received CE Mark approval for our CONFIENT ICD and the LIVIAN CRT-D, the first Boston Scientific branded pulse generators. The first European implants occurred in late January, and we are anticipating U.S. approval launch at the end of Q1. Two weeks ago, we also announced CE Mark approval for our COGNIS CRT-D and TELIGEN ICD. These next generation devices are the result of a multi-year research and development effort to provide physicians, enhanced clinical options for their patients. COGNIS and TELIGEN are among the world's smallest and thinnest high energy devices and offer significant advances including extended battery life, self correcting software, and improved programming technology. We expect the first European implants to occur this month, and we are preparing for full European launch by the end of the second quarter, both COGNIS and TELIGEN are currently pending FDA approval, which we expect to secure in time for our U.S. launch in the second half of this year. Other important product launches scheduled for mid-2008 include the Altrua pacemaker, the first Boston Scientific-branded brady device and the ACUITY Spiral LV lead, which features the smallest LV lead tip profile on the market. Our enhanced pipeline demonstrates additional evidence of a revitalized CRM business in our first products designed and built on our foundation of improved quality. An integral part of our new product cadence is our latitude patient management system. With the recent attention of the issue of lead failure, we have clearly seen the importance of a remote monitoring of device performance, not only the managed patients but to build position confidence and the reliability of the devices. We believe Latitude offers us a strong differentiating platform and we are increasingly seeing examples of referring the planet positions, choosing Boston Scientific devices based on the enhanced clinical benefits provided by Latitude. We now have more than 82,000 patients enrolled on the system, exceeding our own aggressive targets, with a faster adoption rate than any competing system. In 2008, we planned two significant latitude updates to support additional clinic alerts, more comprehensive electronic medical records integration, and other system enhancements based on our user feedback and continuous improvement. Overall, I think we've provided ample evidence that we've indeed transformed our CRM business over the past 21 months. We are beginning to hit on all cylinders, as our quality improvements have taken hold, our expanded pipeline is ready to be unleashed, and our sales force is stronger than anytime in the recent past. Where our revitalized team prepared to deliver pioneering innovations driven by solid clinical science and built on industry leading quality standards. All these strengths will be applied to our market wit strong fundamentals that are showing incremental signs of improvement. Our success in 2008 will depend largely on our ability to execute our product launches, lead with our latitude strategy, and leverage our quality improvement. I have every confidence, we will achieve our goals, and I look forward to productive and successful year in CRM. I'll have some additional perspective with you later in the call, but now I'm going it turn it over to Paul LaViolette.

Thanks, Jim. I'll first update on stent market dynamics, and then on our global business performance followed by comments on our progress in quality. Overall, stent market indicators are heading in the right direction and our business with TAXUS and with PROMUS is very healthy. U.S. PCI procedure volume in 2007 was down about 8%, yielding 990,000 procedures. The rates of stenting at 92% and stents per case at 1.45 remained fairly consistent with historic levels throughout the year. U.S. procedure trends continue to improve in the fourth quarter. Cardiologist opinions about volume are improving. Diagnostic catheter volume by December had nearly reached 100% of Q1 levels, pre the courage impact. Also by December, our Bellwether PCI product lines had reached about 97% of prior year, and we believe PCI procedures in December were at 98% of prior year levels. After substantial drops in volume early in the year, second has stability, has been accentuated with signs of yearend recovery. It remains to be seen if these trends persist, but they are certainly encouraging. U.S. DES penetration did not accelerate in Q4, but did remain highly stable in this 62% to 63% range, now from five months running. Our data and MRG data both confirmed this stability. Europe and Japan penetration rates were steady at 48% and 66% respectively. Stentplus, the BSC initiated dual and a paveled [ph] program has been endorsed by SKY, the Society for Coronary Angiography and Interventions. The BSC initiated, I'm sorry, and is now rolling out. We expect full rollout by end of Q2. And we believe this program will be a gradual a contributor to increasing interventional cardiologist's confidence in the use of DES as the preferred clinical option compared to bare-metal stents for on label patients. Boston Scientific stent selling performance was strong. Our U.S. market share reached the 10th quarter in a row of between 53% and 56%. Q4 once again averaged over 54%. The TAXUS averaged selling price premium also expanded to $80 compared to CYPHER. We also anticipated and are prepared for the endeavor stent launched by Medtronic. Our sales team has been thoroughly trained and provided with selling materials on the limitations of that device, notably its weaker efficacy and the absence of any safety advantage, and they are actively conveying those messages to U.S. customers. Internationally, our market share also remains strong again at 38% overall and stronger in the major markets of France, Germany and the U.K. Our PROMUS, everolimus-eluting stent is playing an increasing role in our dual drug strategy, Q4 PROMUS revenues in Europe grew by 80% sequentially and even faster in intercontinental. The PROMUS brand created well after its everolimus counterpart now has 88% recognition in Europe. We have also received reimbursement for PROMUS in France, and we will be launching there shortly. We believe the everolimus platform in its two brands surpassed Endeavour in Q4 revenues and will surpass CYPHER shortly. However, TAXUS Liberte still remains solidly entrenched as the number one stents in the international marketplace. This position will be strengthened by our newly received CE Mark for diabetic patients, the only DES brand to receive such a claim in Europe. In Japan, TAXUS Express average 52% share for Q4, lower than its peak share achieved post launch, and we believe that share will fluctuate before eventually settling in over 50% consistent with most other TAXUS CYPHER head-to-head markets. Our DES pipeline activity remains diversified and progressive. We anticipate launching the PROMUS and TAXUS Liberte platforms in the U.S. mid-year. Our TAXUS LMN IDE trial, the Perseus trial continues on its enrollment plan and the PROMUS LMN program is progressing toward its clinical trial around year end. We continue to believe our cadence of platforms, expansion of the stent size metrics and data enabled label claims expansion will reinforce our objective of sustained leadership in the DES market. Beyond stents, the strength of our other cardiology product lines was clear in Q4. We maintained 63% balloon share and have commenced international launch of our next generation Apex platform to very positive physician reviews to be followed by the U.S launch expected in Q3. Our worldwide IVUS market share lead was bolstered by 24 % global growth enabled by our iLab next generation systems. Of the eight major non-stent cardiology franchises, we hold the number one position in five, and a strong number two position in the remaining three. With launches of the Apex balloon, iLab Imaging System and the kinetics Guide Wire expected in Q4, we remain very enthusiastic about the financial contributions of this business as PCI volumes were cover and the strategic contribution of our Kat lab [ph] acquisition as we fortify DES leadership through our dual-drug strategy. Our peripheral business is regaining strength, our PolarCath Cryo balloon system grew 13% and we expect this rate to continue, aided in part by clinical data on below the knee outcomes. This novel technology continues to gain evidence and momentum while other technologies, notably the Fox Hollow device are in decline. We expect to gain strength in peripheral spending as we gear up to launch the Epic stent, now in its final stages of approval by the end of Q1. We expect to gain strength in Guide Wires having just completed a 25,000 unit evaluation of the ZIPwire, which is now ready for full launch. We expect to gain strength in PGA balloons with sterling below the need line extensions that complement the 24% growth generated by the current sterling offering. Lastly, the mid 07 launch of our first Carotid device, the NexStent and our FilterWire has taken the number three market spot, and we expect to add further strength with the Carotid Wallstent later this year and our next generation ADAPT system, which will be launched internationally in the fourth quarter. With a strong new product flow, procedural growth, and leading market share positions, the peripheral interventions business should be a strong contributor to total cardiovascular performance in 2008. Our neurovascular business, against coil launches from the three key competitors grew 9% globally and 8% domestically, while maintaining clear leadership in every product category in interventional neuroradiology. We expect to maintain this position in the lab to fortify this position, by our unprecedented and clinical trials for coils and arthrosclerotic stents and to extend this position with restored new product flow as our engineering teams return their focus once again to innovation. I'd like to also comment on the strength of our non-cardiovascular core businesses, which are demonstrating impressive vitality and depth. Our EP franchise had double-digit U.S. and worldwide growth in 2007, despite its primary commitment to quality remediation. Our U.S. therapeutic franchise grew 8%, and maintained leadership and our diagnostic franchise grew 18%. We believe this growth will be enhanced by new product flow and by the organizational leverage we expect from selling and marketing synergies with the CRM team. We are successfully piloting these programs in Europe and will implement them in the U.S. throughout 2008. Our, Endosurgery businesses continued to grow to solidify leadership and expand their technology and procedural reach. Urology grew 9% globally, highlighted by 13% growth in pelvic floor surgery, and 26% in gynecology. We grew faster than the market in total stone management, where we hold clear overall market leadership, and we are very optimistic about growth prospects for BPH and gynecology going forward. Endoscopy, has emerged as a global balanced and prominent business for BSC. Our 2007, worldwide growth was 9% for balloons, 13% for GI stents, 19% for hemostasis with great contributions from our resolution clip system, and 16% for our Biliary franchise. Each of these businesses, plus biopsy and others hold number one market positions. We are launching our Spy Glass system this month, the world's first cholangioscopy system that enables direct visualization in Biliary interventions. This system adds revenue per procedure creates pull-through for our other Biliary devices and is empowering cost effective and improved clinical decision making. I expect this platform to emerge as a steady driver of the Biliary franchise for a long-time to come. And lastly, as we divest our Venues access business, we are positioning... we are repositioning remaining oncology product lines to other divisions. Endoscopy has gained DRF oblation franchise for tumor management and we expect this technology to blossom in the larger endoscopy commercial organization. Neuromodulation, Boston Scientific now operates neuromodulation independently from the divested advanced Bionics Company. This separation has been seamless to our customers and is moving rapidly toward final integration status within BSC. We learnt a lot about this business in 2007. We learnt we have a technology advantage that is enabled consistent share gains and fast revenue growth, 38% for pain management in 2007, 43% for the fourth quarter. We believe the advantage will be further revealed by the ongoing launch of our OMG device, which enables a side-by-side comparison during patient trials of our precision device with competitive devices. Early clinical feedback from physicians, bought importantly from patients being provided a head-to-head therapy choice reinforces the improved therapy delivered by Boston Scientific. We are also introducing the new ST Lead for placement in the cervical region to treat upper extremity pain. Finally, we have increasing confidence that our platform offers advantages for expansion into new neuromodulation segments, and we are working to finalize our portfolio of investments in pursuit of this strategic expansion. Overall, reinforcing Sam's comments, many of our businesses posted very solid often double-digit growth numbers, and as we've restored new product investment focus, we expect innovation to contribute incrementally to future business growth. Switching to quality, I'd like to just take a minute to recount our overall progress and status. We received the corporate warning letter two years ago and its message was unmistakable. We had to over hold our systems and our culture and do so as a top priority to remediate compliance issues and create an organization where quality systems, values and output are sustained and continuously improving. We have invested every necessary resource to accomplish this change. We have added over 600 people in the global quality function. We have implemented a number of entirely new quality systems. We have revalidated our manufacturing processes. We have reengineered our management controls. We have eliminated hundreds of weaker product codes and incurred their lost revenues. We have diverted R&D investments and product cost improvement programs to focus technical and plant resources on remediation. We have run all new systems to assure effectiveness, trained every person in the organization on every applicable change, and subjected those systems and people to repeated internal and external audits. This has taken a passionate commitment by our team and we have done this work very well. There are many signs of progress across the company importantly the project horizon structure we used to drive change has been disaggregated into the sustaining organization. The vast majority of our technical resources have completed their remediation efforts and have returned to driving our new product pipeline forward. And we have numerous indicators that our investments are producing better quality management, improved reliability, and a more responsive and preventive management environment across the company. We indicated previously that our plan... that we planned to confirm our inspection readiness date with the FDA for sometime in the first quarter and we have done so. We also hope to have a timely inspection start by FDA. I am pleased to tell you that FDA investigators have commenced site inspections at Boston Scientific. As indicated on prior investor calls, we will not provide status updates during this inspection process. We appreciate your patience as we work with FDA next phase of our quality and compliance evolution. And with that I will turn it back over to Jim to provide his yield perspective.

Thank you, Paul. I am going take just a couple minutes to give you brief perspective on both the quarter and the year, and then open it up for questions. We had a decent quarter and it's a strong finish to a difficult year. Net sales and adjusted EPS both exceeded gains and we reported record sales for Q4 and 07. With the DES and CRM markets while they were not what we wanted them to be, both saw positive developments which provided more reasons to be optimistic about these markets and their prospects for recovery. In DES, there are more data showing that prior reports of safety concerns were basically unfounded. A number of study show that in addition to there... to being far more effective drug-eluting stents may actually be safer than their bare-metal counterparts. In CRM we saw evidence that the market is recovering albeit slowly, and we saw a double-digit growth in our own sales. For the year we made substantial progress on our main goals. We implemented a series of initiatives to focus and simplify the business. These included extensive expense in headcount reductions intended to bring our expenses back in line with our revenues. We have implemented many of these cuts, and we are already seeing their benefits with the balance of our reduction program schedule to take place throughout 2008. We also announced the sale of five non-strategic businesses and we expect to have closed all five by the end of this quarter. We are also in the process of divesting the majority of our investment portfolio. In addition to these measures, we have streamlined our product portfolio. We made progress throughout the organization during the year with notable accomplishments in a number of areas. Let me mention the highlights in case you missed them. TAXUS was approved in Japan and it received CE Mark for use in diabetics. We become the number one stent manufacturer worldwide and we successfully held DES market share in virtually all our major markets even in the face of new competition, and we marked our third year of leadership in U.S. DES market. In CRM we've received several new product approvals from the FDA and a warning letter was lifted and we positioned ourselves for 10 launches next year... this year. Through the process of selling non-strategic businesses, we have positioned our endosurgery and neuromodulation businesses to become even greater growth engines. We amended our credit facility and reduced our gross debt by more than 700 million. Perhaps almost meaningful progress came in quality, where we revolutionized our approach and changed our culture. With these accomplishments... while these accomplishments represent progress, in our own right, the real value is in position in a company for profitable growth going forward. This year 2008, we expect to introduce a number of important new CRM products that offer entirely new platforms. See the corporate warning letter lifted, receive FDA approval for the TAXUS Liberte and PROMUS stent systems, restore new product flow acrossed all our businesses in the U.S., and continue to strengthen our international business. We also expect to be able to ship substantial resources from the remediation back to innovation. We have spent heavily on fixing our quality problems, and while quality will continue to be our most important responsibility, it will not demand the same level with remedial spending. Those dollars will now shift back to R&D and manufacturing VIPs. With R&D spending boosted, and the corporate warning letter lifted, we believe our robust products flow of profitable new products will be restored across our businesses. We don't underestimate the challenges ahead in this year, but we believe we are prepared well for them, and that we have strengthened our organization to meet the challenges of 2008 and beyond. In closing, I'd like to make a few special recognitions. I'd like to recognize those people who left the organization during the past years, as a result of the reductions. Their departures were related to our need to reduce expenses. And the fact that they left is no reflection on them. Many of them put years of dedicated and effective service to Boston Scientific, and I want to thank them and wish them well. And I also would like to recognize Jeff Goodman and Paul Sandman who are retired. Jeff is most recently run our International business, which is grown substantially in size and importance. Over the years he is covered the world for Boston Scientific. He has been one of the driving forces in making BSC a global company. Paul Sandman is served as our General Counsel since 1993, and he has been a crucial partner in our growth and success. Above all he has been the more comfort... encompass of Boston Scientific. He has set and demanded and uncompromising standard of integrity and we are all better off because of it. We will miss Jeff and Paul and we wish them all the best. Now let me turn it back to Dan who will moderate the Q&A.

Okay. Thanks, Jim. Alex, let's open up the questions, and as usual in effort to enable to us to field as many questions as possible in the time remaining. I would respectfully request that you ask no more than two questions at a time. Question And Answer

Thank you. [Operator Instructions] And our first question comes from the line of Bob Hopkins with Lehman Brothers. Please go ahead sir.

Okay. Thanks very much. Lot to assist you here, I am trying to keep it to two. Congratulations on the progress first of all. My first question is for Sam. Just want to be clear on the guidance Sam, the revenue guidance you gave of $8 billion to $8.2 billion does not include currency and if you include the currency it would add $250 million is that right?

No, it's not right. It includes our best estimate or the currency effect.

Okay. So, the $8 billion to $8.2 billion includes currency, okay. And then on the EPS side, the reason you're using $0.67 isn't 07 base, is that the restructuring is happening faster than expected, but not necessarily going to be larger than expected at this point. Is that why you are using that base to grow 18 to 20 instead of the extra $0.02 by which you beat this quarter?

Yes, that's correct. We wanted to be sure why we're really pleased with the fourth quarter, and we're happy to have turned in the level of earnings per share that we did. Part of that the $0.02 part actually got us out ahead of the still expected full year reduction rate of 475, 525. So we're not increasing that range, we just got to it a bit sooner.

Okay. Thanks. And then for Jim, Jim, I was wondering if you could talk a little bit... in a little more detail about the ICD benefit that you had this quarter from Medtronic's PROMUS in Japan. It seems you obviously broke that out at about $20 million. I was wondering if you could quantify that for us and give us any other thoughts including what kind of market growth expectation you think, we will see on a worldwide basis for 2008? Thank you.

Yes, Bob, I... the sense you get is that the impact of the Medtronic Fidelis lead recall was not that great on us, kind of lost in rounding frankly, we made that accounting adjustment. Those two probably offset each other, give or take, so it wasn't a major factor in Japan or anywhere else for us. As far as market growth goes, that's hard to call because when Medtronic had the recall that impaired their ability to put product on the shelf at the end of that quarter. That will reverse itself this quarter I think, and so what's likely to happen is you're seeing a slightly depressed market growth in the past quarter and maybe a little extra this quarter and you've got a kind of average those out and it's hard to tell, alright. So I think the defibrillator business, overall, is back in high single-digits maybe even 10% growth rate, pacers are surprisingly strong versus everybody's expectations. But, until we see what happens with Medtronic this quarter and really next, I don't think we're going to have a good feel for what the market growth really is.

And those are the number you used to put forward this guidance, those kind of market growth rates?

Yes.

Thanks very much.

Try to make one more quick correction on guidance during my comments, part of the Q&A period, as I was discussing worldwide DES guidance range for Q1, I said that it was a range of 395 to 435, should have said 395 to 455.

Next question?

Our next question comes from the line of Rick Wise with Bear Stearns. Please go ahead, sir.

Good morning, everybody. Let me ask, maybe one product question and P&L question. On the P&L Sam, can you help us seeing through gross margins going forward a little bit, I know you're reluctant to give any precision, but can you help us assist through at least a little bit, how gross margins, maybe your aspirational goals, if you will, how gross margins might look sort of post Endeavor, post PROMUS, you have new products coming in, you're still getting more efficient, just help us frame it a little bit?

Yes, I attempted to do that in my comments without giving specific numbers Rick, because as you know, we don't give line item detail, but clearly mix place the most significant role of anything and determining what our gross profit margin is going to be and while we have a clear set of underlying assumptions that drive our overall EPS guidance. We don't disclose that internally because we can get to margin of variety of ways. But, clearly the wild card is mix and, I think we've done our best job to estimate what that is. And I tired to put that in balance too, while mix, in the presence of PROMUS and if we do lose any of the volume or share from TAXUS has a downward pressure on gross profit margins. That's the bad news, the god news though is that we have in fact redeployed our manufacturing resources to drive VIP programs, and those have already begun,. We should start seeing those as the year progresses, and the amount of dollars, that we have historically spent in remediation, transitional cost for quality, were quite substantial and those are already coming out of the system, and as we looked towards lifting the warning letter, we will be able to turn our attention even more towards improving the, rather inefficient processes that we put in place to remediate the quality efforts that will give us some boost and lift going forward.

So it might be reasonable to assume that the both reported and the adjusted gross margin might represent lows and things stabilized at a minimum to improve from here?

I've given you all I can Rick on this one.

Okay, that's right. CRM, maybe Jim you could help us think through the international sales have grown clearly faster than the domestically not for just for you guys but for the industry, how sustainable is that? And maybe just if you could talk about the new implant replacement mix, how that factored into driving growth in the quarter? Thanks so much.

Yes, those are good questions, the international piece seems sustainable to me. There is no fundamental thing going on other than people recognizing the value with the therapy and using it. You, see, just sort of slow and steady growth on the pacer side and defib side, you now it's pretty strong. So, that looks good. As far as the replacement piece goes, I think the market suffered greatly from a lot of free replacements in 05 and 06 and we started to see people paying for replacements in 07. How much of that is, what that... how much of that looks like growth, but then goes away when you start doing 08 over 07. It's hard to call, but it's certainly helped in 07. And that should be a more or less steady piece of the thing. I don't really... it's hard to call. So I just don't... I don't think about it as really being separate. It's all one big market and it's growing.

Thank you.

Next question comes from the line of Glenn Reicin with Morgan Stanley. Please go ahead.

Folks, just want to confirm a couple of issues as pertains to guidance. The guidance Sam that you gave $0.79 to $0.80 that obviously excludes amortization, it sounds like the amortization numbers can be... you said $50 million lighter than what you projected last turnaround. So if we--

Our run rate for amortization has been about $150 million a quarter roughly, $600 million for the year, and we think it'll be about $50 million less than that in 2008.

Okay. So if I want to adjust for amortization it takes $0.79 minus $0.27 and that will give us $0.52 roughly or $0.53. Correct?

If you want to add amortization expense back to the guidance?

Yes, so I think that's what consensus estimates are.

Well I think consensus estimates are mixed. It's really hard to decide, we've spend a lot of time on this, because some of the analysts have now confirmed to the exclusions that we have, some may not, some have backed out the effects of the divested businesses, some have not, so right now first call is quite a mess. The reason we went into such meticulous discloser here trying to give everybody enough information to more appropriately construct our models using whatever normal growth rates for sales and operating results that they can.

Okay fair enough. But that $0.27 is the right number in terms of a yearly amortization.

I haven't converted the cents, but if you are using roughly $550 million that would get you there.

Okay. And then on a little bit... at the yearly guidance looks fine, quarterly guidance in Q1 and the top line looks like but the bottom line looks a little bit light. Now penny of that is tax rate, I am wondering in terms of the cost cutting initiatives. Is there something going on there in terms of the ramp that we need to be aware for the year? And if you're going to achieve 80% of your goals, maybe give us a sense of how much they achieved in the first half versus the second half.

Yes, we haven't broken that out separately. Publicly we obviously have that in our internal models. But, we provide a range really because of mixed issues. And so with... especially with Medtronic coming out with Endeavour having recently being approved, all those play some role and the breath of the range that we provided for earnings per share growth.

But, this cost cutting actually ramp pretty steep as the year progresses?

It's... it takes places throughout course of the year... throughout the entire year. One of the issues we deal with is that we are absorbing $0.05 of dilution on the divested businesses for starters.

Right.

So, that one more to penny a quarter, so that's an issue to deal within and opens the models as well. But, we have more than 50% of the 2,300 targeted headcount reduction out of the system by the end of 2007. Those positions and people have moved on. And the rest will get through business process improvement programs and a variety of other mechanisms we put in place. So those will take place throughout the course of the year. There is no big single event that's going to happen to get the balance of those jobs we've reduced and removed, its a meticulous set of programs and business process improvement initiatives that we have in place.

Okay, fair enough and then one last question for Paul. When we look at international stent market share or drug-eluting market share, can you give us a sense of what that share is ex-Japan, and then maybe also tell us what the rough mix is between PROMUS and TAXUS?

Well, we don't provide the PROMUS TAXUS breakout, but as I indicated in the revenue comments, PROMUS of course from a smaller base is growing pretty impressively sequentially. So I think... and I expect that to continue. We established that brand well after XIENCE and of course it has taken sometime to build some recognition for that. That recognition is now established, and we expect that to just continue to grow. The numbers that I gave regarding Europe are pretty well confirmed by MRG at 38 % for Boston Scientific, that's been stable and our estimates for intercontinental, which has a little bit less organized competition, shall we say would put Boston Scientific at probably three to four points higher than that.

So the 38% was a European share or total international share that you gave us on the introductory comments?

That's a European position.

Okay, good. Thank you very much.

You're welcome.

Our next question comes from the line of Mike Weinstein with J.P. Morgan. Please go ahead.

Good morning. Can you hear me guys?

Yes, Mike.

Okay, perfect thanks. Couple of different items, maybe the first one just to clarify because I thought it was clearly meaningful. You reported that over 70 basis points of our gross margin hit from scrap in the CRM business that amounts to $15 million and that's a lot of scrap, so maybe you can explain to us what happened and why was there such a big write-off? Second, I just wanted to make sure I understood your first quarter, you had drug-eluting stent guidance you reported for the fourth quarter, $224 million in drug-eluting stent sales in the U.S. and that was down from the third quarter by about $17 million. But, for the first quarter, even with Endeavour launched in February 1, your guidance is basically flat, U.S. drug-eluting stent sales sequentially as maybe you can just explain that? Thanks.

Mike let me just talk about the CRM situation. When... when I say that we have revolutionized our quality program in CRM that is not free. What we essentially do is, buy components and assemble them and it is called an ICD or pacemaker. That part of our process needed major rework. That was one of the major root causes, for how Guidant got in the mess it got into in the first place. In the course of doing that, we went through a ton of inventory of components and threw away, I think the number last year was $55 million worth of components that would have found their way into devices in the past. And that's what you saw, reflected in Sam's comments.

And Mike maybe I can answer the comments just on Q1 guidance for DES. First of all there has been a penetration change from Q3 to Q4 went down probably a point. We do expect it that trend in Q1 to pick up a bit. So there is a little bit of shift from... on the sequential Q4 numbers penetration downward. We expect that might be a tailwind in the first quarter. And then obviously Medtronic has... we have seen that coming, we couldn't tell when it would be launched, but obviously we now know that it was factored into the lower end of our... range estimates so we did have a placeholder if you will for Medtronic. Bear in mind it will be really in evaluation mode for a number of weeks. So it will take a bit of time before there is any traction, I think Medtronic will have a difficult time penetrating. I think the absence of monorail is going to play heavily against them. I think there's been a lot of selling that has taken place to inform the market on the weaknesses of the Endeavour platform, and we see it coming. It's in our range, it remains to be seen how we all do relative to that, but that's been factored in.

So, you think that sales will be flat sequentially. We had that right, yeah, that was your guidance.

That's right.

Okay. Sam I just want to make sure that one other cleanup item, if you went through all the different pieces write-off and some steps that you guys will call that in the press release or not. In the amortization expense, I think you said there was $25 million of write-offs. What was that tied to?

We suspended some funding for internal research programs and as a result we ended up running down some of the intangibles associated with that. We haven't disclosed publicly what they are, but that's what it's related to.

Okay, last question for Jim. You answered a question where you gave, you know in commentary about the outlook for your international ICD market and your comments about let say the U.S. market. Can you give us how you're thinking about the growth profile of the ICD market both in the U.S. and international. Obviously, U.S. market didn't grow in 2007 or in 2006, do you expect the U.S market to grow and then how do you view the profile internationally? Thanks.

I think, yes, internationally the impact of all that went on in 05 and 06 has largely been absorbed and there is... the market is fundamentally less penetrated than the U.S. and so you are seeing, I think a sooner snap back of demand in international. On the U.S. side, little closer to home, longer memories, I think it will take new generations of devices from all competitors before the market is fully confident again in what it is that they are implanting, particularly the referring physicians. So that begins this year, we will be introducing five new pulse generators during the course of this year, built on quality systems that are totally reengineered and I think that's going to be a catalyst that, that is not going to resume 15% to 20% growth like it was for a long time. But, you will see stronger growth than you have this last couple of years based on new products.

And so what you think of regional brand switch?

I think 8 to 10 is probably where it's going to settle out on the ICD side. I think pacers is probably more like four to five, but these are big markets so those are lots of dollar.

Okay, great.

We have to move on to the next caller.

Thanks.

Let me go back and just add a little bit more definition to as Jim answered to your first question. Your estimate is about $50 million, affecting gross profit is certainly accurate when you look at the sales base and 70 basis points. What we are seeing this is a scrap charge and the cost of transition to higher quality standards. What you are not seeing that is the benefits that come with that -- the benefits come with that if it were right in our assessment are fewer field actions, fewer recalls, and the benefits associated with that are almost immeasurable. So the good news is you have to follow up, the bad news was we took $15 million our charge in the fourth quarter to rid ourselves of some problem inventory,

Okay. All right Alex, next question.

Next question comes from the line of Larry Keusch with Goldman Sachs. Please go ahead.

Hi, good morning. Just a couple of questions may be to start with Paul. Paul when you talk about PROMUS element, what is your understanding now with where the FDA's headed with what sort of trial you would be expected for that product?

Larry we have... that's a great question. We haven't really discus that yet and we won't probably for at least another quarter or so, but we are still finalizing that program. So it's an internal program right now. We know about obviously the FDA guidance in general. We have to bear in mind that PROMUS element of that point will be already known drug/polymer combination and an already known stent and delivery system. So we are dealing with... hopefully a limited need to generate longer-term data, and all that of course will be factored into the protocol that we develop. So we haven't discussed that yet and we will announce that as soon as we made a decision.

Okay. And I assume that you are trying to do something of... sort of the ATLAS registry maybe a little bit longer follow-up, but something in that respect?

We will do the right thing. So we will generate as much data as is necessary leveraging the fact that we have more drug-eluting stent data than any other company on earth?

Okay. And then just a couple of other quick questions, maybe for Sam, if I heard you correctly you said that you're assuming that the R&D tax credit will get renewed by the end of the year and that will become retroactive and that reduces your tax during the fourth quarter. I guess what sort of gives you that confidence that, that will happen and if it doesn't do you just assume that 23% rate for the 4Q is question one? And then maybe Sam, you could just review the $1.5 billion of cash, so where is that sitting and sort of how are you thinking about using that cash over the next couple of years?

Yes, let me address your first question, which was...

The R&D tax credit. .:

The tax credit. The reason we're confident that the R&D tax credit will get approved again is because it always does. It's used as a bargaining chip by every politician on a planet to get what they need and other bills that go before congress. So, I think corporate America would be outraged if the R&D tax rate didn't go through and that would not be good for the politicians. It's typically so volatile and used so many times that's why it ends up being approved in December of every year. This year wasn't, the year just ended was a first year in a long time that we actually had that in the hand to start of the year, but I will be shocked. But, if it doesn't come through, then our tax rate ends up being 23% for the year instead of 21%. In terms of the $1.5 billion of cash, we invested in very safe investments, A rated investments and money market funds and a wide variety of thing, we have a specific list. But, the use of cash will be the pay down debt obviously. It won't be used to buyback shares it would be used pay down debt. But, as part of our strategy to get our balance sheet back into investment grade land by 2010, we are targeting a 1 to 1.5 times debt to EBITDA. To do that we also anticipate that we'll have a lot of cash on hand at all times, a lot of cash to us means about $1 billion or more. So, we will always be targeting to have about $1 billion of cash on hand to go and offset the gross debt that we have.

It's not in sub-prime if that's what you are asking.

Yes well that was a part of it, thanks. And then just quickly, Sam the cash which is physically, how much is sitting overseas, that's what I was just getting at?

We haven't disclosed that publicly.

Okay. Thank you, guys.

Next question comes from the line of Tao Levy with Deutsche Bank. Please go ahead.

Good morning. This is Tao from Deutsche bank. Just a couple of questions here, Sam can you help us think of how we should be doing operating margins this year, and if you want to provide that level of detail. But just, with improvement on the gross margins on the manufacturing side, offset with the mix and then also all your restructuring efforts, is this the year, where operating margins stay relatively flat, versus last year maybe a little bit of improvement? And then we should be thinking of 2009 where you would you see a little bit more benefit there?

Well, are you... with a tax rate that's increasing effectively year-on-year and our shares outstanding staying the same. You really can't have the 3% to $5% growth in sales and 20%... 18% and 20% growth in earnings, with other substantial improvement in operating profit margins, just a way to do that. So if you just run your models, what we've said is that we are planning and taking out $475 million to $525 million of total expenses from the $4.1 billion estimate finish for 2007, by the time we get to 2009 and we expect 90% of that would be on the P&L by the time 2008 is done. That alone...

To get us nice benefit.

Together with... gross profit margin should have your models with some dramatic improvement in operating profit margins.

Great. And on... Paul on TAXUS Liberte, I think you'd mentioned mid part of this year is that what's assumed in the forecast in the U.S.?

Yes, yes that assumes that by sometime in the next month or two to the only remaining regulatory hurdle will be lifting other warning letter and elimination of compliance whole. So given the commencement of our inspections we of course aren't forecasting any specific time lines for FDA activity in the investigator process. But, we feel prepared and we are still planning for TAXUS Liberte approval sometime mid year.

Okay. And then just lastly, the deferred revenue associated with the latitude, are you familiar... are the companies doing the same thing with their remote patient monitoring systems just trying to get an apples-to-apples for my picture?

Yes,we don't know... they don't disclose it, we do but they don't. I would expect we may suspect when we set our new standard for disclosure here.

And this a first time in this quarter that that's happened.

Yes really obligated to do that from what we can tell, whether they do or not, you have to ask them directly.

I think we had been doing 300 bucks and now its fixed 2,000 depending on which device you are talking about. So it didn't start from zero, it started from 300.

Okay, great. Thanks a lot.

And our next question comes from the line of Joanne Lynch [ph] with the BMO Capital Market. Please go ahead.

Thanks. It's Joanne Wuensch. If you take a look at your products, your ICDs came in little bit better than we are expecting, the pacemakers came in a lot better than what you're expecting, and Jim in your commentary, you are talking about a market that sort of, I think you used the word defy what everyone had been expecting of it. Could you comment on what you are seeing that market and how sustainable it is?

Fair enough Joanne, its ironic, because people have been predicting the demise of the pace of business for five, six, seven years and in fact when you looked at the... the former Guidant pipeline, there was not a single funded project for new pacer on list because obviously the market was going away, so why invest. Well the market didn't go away, it's actually grown and so we are going to have two new pacers in the next two year. I think that as a result of some of the product performance issues, they occurred in 05 and 06, people have been... some people at least have kind of been using pacers as a starter device. It's a simpler way to get started and they are simpler devices, they are very, very, very reliable, unbelievably reliable actually. And so I think that's been a fact and I think that will continue for a while because it's not a bad way to go.

Okay. The second question is, can you talk about the pricing environment for drug coated stents particularly in Europe, now we've been hearing in United States and also what you are seeing in the United States on the CRM side? Thanks.

Well the pricing environment, first of all internationally, it is so varied from market-to-market, we generally don't comment much on it. I would say TAXUS has been surprisingly stable in pricing, and of course we are just really getting started with PROMUS around the world, so it's little bit too early to tell. I was encouraged by the nice conclusion earlier this month because it reaffirmed incremental value for drug-eluting stents despite all of the hoopla leading up to that. So, I don't think there's any question, drug-eluting stents are valued, there's a luck... there's a lot of competition obviously in Europe 20 companies, and given 20 companies competing with quite varied product lines and clinical performance to have TAXUS with pretty stable ASPs, I think is impressive. We had in 2007, we have projected around 4% year-over-year pricing decline. We have projected previously that we would expect that to increase a little bit with more competition and that's really where we stand. We don't expect any dramatic shift in pricing. We believe the investments made by the newcomers in years of clinical trial, years of program development, acquisition costs are pretty sizeable and that everyone has a vested interest in maintaining the value of the marketplace. So, we don't see any variability from that trend and let you know if we see that.

As far CRM goes, the way the market is operated for a long time is pricing has been relatively stable because as new products come in, they come in at a premium and we have not had a flow of new products as we sort of paid the penalty in our pipeline for... while we fixed the quality into this thing. That has put more pressure on pricing, but within new products coming out in the next year, I think you'll see a return to essentially overtime stable pricing in the marketplace and us include.

Thanks.

Let we go back to one of the question as prior to Joanne here is where do we invest our cash. Invest our cash in highly liquid investments that have high credit ratings and they consist of U.S. treasury, short-term bank time deposits, money market funds. We do not have any funds invested in either auction rate securities, or subprime mortgages. Next question?

Next question comes from the line of Jason Wittes with Leerink Swann. Please go ahead.

Hi, thanks a lot. I guess you just implied that pricing on ICDs is slightly down, but you also indicated, if I heard correctly, that you are getting additional pricing of latitude. How do we reconcile those two?

I don't think I talked about latitude, as far as pricing goes.

I thought you mentioned that you were, I guessed you were, you said, your base is really $300. It's now at $652,000, I guess.

That's a deferral thing. You now, I only think about this in cash, cash hasn't changed.

So there is an additional cost right now that we should be thinking about for latitude.

No.

Just you changed the deferral recognition basically.

That's correct.

Okay. And in terms of, just one final question on the cascade of new products, I assume, you mentioned you have 10 new products, and I assume most of those are basically gone, a lot of those have already gone through the review with the FDA, and once you get the lifting of all the regulatory issues, of the FDA those should start coming out immediately, is that the way to think about it or, how should we think about the cascading new products this year.

Okay, guidance...former Guidant is still and has been on a separate quality system from the legacy side of the business. So when the warning letter was lifted last April, that eliminated any whole backs of products, actually we had received product approvals during the warning letter, and then we've got some additional ones, when the warning letter was lifted, so there is no connection between the flow in new products on the CRM side and the warning letter on the legacy side. As far as the cascade goes... most of these have been approved in Europe with approvals are still to be had on the U.S. side... fillings are basically being done. So it's a matter of time and there are no regulatory impediments that I am aware of. These are high quality files. We've got approval for COGNIS and TELIGEN in Europe in a matter of weeks because the file was so strong the evidence was so complete. So I think... I don't think this is an issue looking forward.

Okay, great. Thanks.

Next question comes from the line of Larry Biegelsen of Wachovia. Please go ahead.

Hi, and thanks for taking my questions, just two drug-eluting stent questions. The first Abbott indicated that XIENCE share year in Europe ended 2007 in the low 20s and the combined XIENCE PROMUS share was in the mid-20s suggesting the PROMUS this shares was about 20% of the combined sales. I know you launched a little bit latter, but it's about a year-out. So why is it only about 20% in Europe how might that change in the future and how do you expect this ratio to differ in the U.S. or is this a good benchmark for the U.S. split of PROMUS and XIENCE and my second drug-eluting stent question is a simple one. On what quarter does your guidance assume that PROMUS is launched in the U.S.? Thanks.

So no change on the guidance for timing we have said mid-year for PROMUS and of course that's going to be simultaneous with Abbott's approval. So it remains to be determined that we haven't provided a specific split of our revenues internationally. I would underestimate however, the lag time that we have had or the absence of any knowledge about the fact that product would exist. We started that product the PROMUS product from a standstill, had to create the product, manufacture a separate set of inventory, create a brand and then launch it well after XIENCE number one. Number two, we started of course as the market leader and had a slightly different objective our second product than a new competitor would with a brand new product. So we have perhaps been a little more disciplined in our launch and of course that launch happens in a marketplace internationally where there are at least half a dozen major stent platforms available and another dozen plus secondary. So there is a shelf space dynamics are different, the customer interest in incremental choices is different, and I would say as a result of that the... what I might take away from Europe as a precedent for the U.S. would be TAXUS has demonstrated remarkable fortitude and durability, and we expect that in the U.S. and that PROMUS and its ability to launch concurrent with XIENCE with a well established brand will probably do considerably better out of the gate than it did in Europe.

Okay, next question Alex?

Our next question comes from the line of Matthew Dodds with Citigroup. Please go ahead

Thanks. Question for Paul and then one for Sam. For Paul, you talked a little bit of neurostim, which indication do you think is first, in terms of our moving forward or can you at least say where you are in Phase I or II, next indication that's not spinal cord simulation? And then for Sam, in terms of your debt, how much is that roughly is floating rates, meaning if you are 6.3% blended rate in Q4, how much could that come down as we move into 2008 now?

Matt, good question. We haven't really disclosed our comprehensive thinking on what's next. We have discussed three basic directions and just to give you a color on those. Overactive bladder of course is an established market, where existing Boston Scientific Technologies would have applicability. So that's direction we can take with what I would describe is very low clinical and low regulatory risk. So that's one thing we are considering. The second thing of course is the deep brain simulation market where we have already done some research on entrepreneurial leads and other technology requirements necessary to facilitate that direction and then of course migraine, which was initiated by advanced bionics using the original bion product and which does still have applicability for even though that particular device was perhaps not powerful enough. So the way I look at those three is that we are going to try to optimize our prioritization within them, we have started work in each of those and we have yet to sort of run the mill to finalize exactly how we prioritize and which one we would expect to accelerate into next stage at clinical work. We expect to do that strategy formulation in the next quarter, and then we'll update you probably sometime in Q2 on what that strategy looks like.

Okay.

And in broad numbers, we have about $200 billion of our outstanding gross debt is floating the balance is fixed in varying degrees. But, typically the blended average I think we said this quarter blended average was about 6.3% it was down a bit from the 6.5% last year because of the backing off some of the interest rates that we've seen from the fed, hopefully that will go down. But we have... I think we have a pretty good blend of exposure minimizing the effect of rapidly moving interest rates.

Okay.Thanks, Sam. Thanks, Paul.

Okay, Alex. We past the top of hours, we probably have time for one more question.

Thank you. And our last question comes from the line of Kristen Stewart from Credit Suisse. Please go ahead.

Hello, thanks for taking my call.

Yes.

I just had a few quick questions hopefully quick. Sam on the gross profit margin just in terms of PROMUS how should we be thinking about how that's really reflected. Is it appropriate to think about it as within the cost to goods sold for that products, we should be including the operating profit you will be paying to Abbott?

Well, that's correct.

Okay. Then other litigation... other long time liability is increased sequentially, specifically what was the legal settlement related to or the estimation is that the Cordis litigation that was announced recently?

Yes, we don't disclose any of the details of our litigation Kristen.

I am just referring to the accrual.

We don't disclose that either.

Okay. And what exactly is within the composition of other long-term liabilities?

Just take a quick look here. It's legal... it's litigation, tax reserves, it's a variety of things.

Then we have Guidant product liabilities also in there?

No that would be up in other current liabilities.

Of all the entire amount related it's all incurred?

For--

Is that because you expect to pay other guidance product liabilities, of next year.

It's mixed, we have a part of it is in other long-term liabilities, and part of it's in other current liabilities.

Okay, perfect. Thank you.

Yup.

Okay. With that we'll close the call. I appreciate your interest in Boston Scientific, and Alex will provide you all of the important details for the replay of this call.

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