Medtronic plc (MDT) Q3 2012 Earnings Report, Transcript and Summary

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Medtronic's Third Quarter Earnings Release Conference Call. [Operator Instructions] Thank you. I would now like to hand the program over to Jeff Warren, Vice President, Investor Relations. Please go ahead.

Thank you, Christie. 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 2012 third quarter which ended January 27, 2012. After our prepared remarks, we'll 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's 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 2011, and all year-over-year revenue growth rates are given on a constant-currency basis. And with that, I'm now pleased to turn the call over to Medtronic Chairman and Chief Executive Officer, Omar Ishrak.

Good morning, and thank you, Jeff. And thank you to everyone joining us today. This morning we reported third quarter revenue of $3.9 billion, which represents 2% growth as reported, and 1% on a constant currency basis. Q3 non-GAAP earnings of $888 million and diluted earnings per share of $0.84 increased 8% and 9%, respectively, after adjusting for the onetime tax benefits in Q3 of last year. From a revenue perspective this was a challenging quarter. But looking down the P&L, we saw solid performance in our gross margin, and our team executed to deliver the bottom line. Our Q3 revenue reflects strength in the majority of our business. But at the same time, we face continued challenges in our 2 largest businesses, ICDs and Spine. Similar to recent quarters, our results were bifurcated, with 2/3 of our business boasting strong performances, growing a combined 9% while the remaining third declined 9%. However, as I will explain, it does appear that both the ICD and spine markets are beginning to show signs of stabilization, which will result in easier comparisons and should improve our growth over the coming quarters. Let me discuss ICDs first. From a revenue perspective, the U.S. market declined in the mid-teens year-over-year, a couple of percentage points lower than Q2. However, our market data indicates the procedure volumes were relatively stable for the third quarter in a row, and we believe that the sequential market slowdown was primarily caused by hospital de-stocking. Looking now at our own performance, our U.S. ICD revenue was down 14% year-over-year and was just under 2 percentage points lower than Q2. But our implant volumes rose consistently in Q3 and that trend has continued into Q4. In fact, we are currently seeing year-over-year implant volume growth for the first time in over a year. In addition, our U.S. ICD pricing was sequentially flat in Q3, improving from mid-single digit to low-single digit declines year-over-year. As a result, we can conclude that our sequential revenue decline was primarily a result of hospital de-stocking. It is also worth mentioning that even though we faced these revenue headwinds, our U.S. ICD share is up over 1 point in the past year, and we have maintained those gains sequentially, despite competitors' new product launches and without incurring the typical sequential share declines we see at competitors' fiscal year-ends. Given the fact that the market is showing signs of sequential stability, we are cautiously optimistic that year-over-year declines in the U.S. ICD market should lessen over the coming quarters. This would significantly improve the performance of our U.S. ICD business and with a corresponding impact on our overall corporate growth rate. To put this in perspective, if we can improve our U.S. ICD revenue to flat year-over-year results over the coming quarters, this alone would add nearly 1.5 points to Medtronic's overall growth. Turning now to Spine. I was not happy with our overall performance, but let me focus my comments on core metal and biologics separately, as each had unique dynamics affecting its performance. In core metal, we estimate that the U.S. market declined in the low-single digits, which is slightly worse than Q2. Our business declined 10% in the U.S., and while we lost nearly 1 point of share sequentially, we did hold share versus the major spine competitors on a comparable basis. A large part of our share pressure continues to come from certain smaller spine companies such as physician-owned distributors, which utilize business models and tactics that are coming under increasingly negative public scrutiny. Looking ahead, we are somewhat optimistic, given the positive trends we saw in the last month of Q3 and that have continued so far into Q4. Now while we cannot be certain as to the drivers of these trends, and the market pressures remain with reimbursement in price, we do know that our new products are gaining traction. Our product and procedural innovation combined with better sales execution is becoming more visible to surgeons and generating measurable growth in our new product lines. While our Q4 core metal results are likely to still be down year-over-year, assuming current revenue trends continue, we do expect better performance in Q4. Let's now discuss BMP, where U.S. INFUSE sales continue to deteriorate. In Q2, the year-over-year revenue decline was in the upper teens, which worsened to 30% in Q3. We saw an incremental decrease a few weeks after negative and highly controversial data was presented at NASS in the beginning of November. This impact was more than we expected at the start of Q3. While the largest declines were realized in late November and December, the declines have been in the 20% to 30% range since the beginning of January. Until we get definitive answers from the Yale study in the first half of FY '13, there will be considerable uncertainty around our INFUSE financial results. As I said previously, we believe in the safety and efficacy of INFUSE for approved indications. But we want to address any controversies by understanding the facts' that is why we commissioned the Yale university study, a very credible third party, to systematically analyze all available data. In summary, while individually each part of Spine has explainable reasons for their performance, collectively, the year-over-year declines are simply not sustainable over the long term. While we continue to believe in the potential of this market, we urgently need to see meaningful signs of improvement from our current initiatives. If we do not, we will need to reassess our strategy and approach for this business. Before leaving Spine, I do want to highlight the performance for our International Spine business, which should not go unnoticed. International sales now make up nearly 30% of Spine, and they continue to grow in the mid-single digits. As we work to stabilize our U.S. Spine business, I expect International Spine to be a consistent and solid contributor to our company's growth. Let me now turn to the other 2/3 of our business that is performing very well and growing at 9%. This sustained performance continues to demonstrate that innovation can drive growth even in the current market environment, both in the U.S. and around the world. In these businesses, our innovative products are, in many cases, capturing the interest of physicians, patients and hospital administrators. This ultimately allows us to enhance our pricing and grow our market share. An example of this is our Revo MRI pacemaker, a significant advancement in pacing that has contributed to over 4 points of share gain in the U.S. The market is putting a premium on Revo's unique MRI technology, which has revitalized pacing and shows us that new innovation can deliver growth even in a market that is already substantially penetrated. In addition to Revo, we have other exciting technologies, like the SYMPLICITY system for renal denervation, the CoreValve transcatheter valve, the RestoreSensor spinal cord stimulator and the Enlite CGM sensor that are commercially available in many markets today and are driving growth. Furthermore, I'm pleased that our Resolute Integrity drug-eluting stent received FDA approval late last week. This next-generation platform offers best-in-class deliverability and is the only drug-eluting stent approved for use in patients with diabetes. And finally, our international regions, again, delivered solid mid-single digit growth, including strong double-digit emerging market growth. Taken together, our portfolio of exciting new products and improving comparisons in our challenging markets should position us well to deliver improved growth over the long term. More generally, we remain focused in the 3 key areas I've been emphasizing over the past 8 months: Improving execution, optimizing innovation and accelerating globalization. Crisp and consistent execution remains critical to delivering better and more predictable business performance. Some of the efforts in improving execution are starting to show results. For example, even with the revenue challenges this quarter, the team rapidly made the appropriate operational changes to deliver the bottom line. We continue to optimize our innovation process with a sharpened focus on customer economic value. We have started to operationalize this initiative in the following ways: First, we're incorporating customer economics in the commercial messaging for our key existing products; second, we're assembling specific data to quantitatively measure the economic value of selected offerings to providers and payers; third, we are engaging strategic customers in comprehensive Medtronic-wide partnerships to demonstrate the economic value that Medtronic can provide on a broad scale; and finally, we're incorporating customer economic value as a key criteria in our investment selection process. This is only the beginning, but we firmly believe that incorporating customer economic value is key to succeeding in the new healthcare environment. Let's now discuss globalization. Our biggest near-term opportunity in emerging markets is in our existing therapies, which primarily address the premium segment, and these therapies have similar margins to what we routinely achieve in developed markets. To provide some perspective, just improving penetration of these therapies in emerging markets to a level similar to those in developed markets represents over $5 billion in annual opportunity. Longer term, the value segment is an additional opportunity. And we are beginning to take initial steps to realize it. We're laying the necessary groundwork to be the leaders in emerging value segment through our previously discussed $1 billion product cost-reduction initiative, combined with new business models and our investments in emerging market infrastructure. Through this structured approach, we're putting in place plans to grow our emerging market revenue to 20% of overall company revenue over the next few years. In closing, I want to address our capital allocation strategy. We continue to generate significant free cash flow, generating over $1 billion this quarter. We remain committed to returning 50% of our free cash flow to shareholders, which still allows us to make the necessary investments back into our business. I have given our business leaders clear direction to drive more discipline into our external investments, including the need for minimal to no EPS dilution. To the extent we don't identify targets that meet our strict value-creation criteria, we will look for ways to return excess cash to our shareholders. However, we're somewhat restricted today by the fact that the majority of our cash resides outside the U.S. I've tasked our organization to look at ways to improve our U.S. cash flows. Our dividend policy remains an important part of our return to shareholders. We were pleased that Standard & Poor's added us to their S&P 500 Dividend Aristocrat index, an elite group of companies that has consistently raised their dividends over several decades. Let me now ask Gary to take you through a more detailed look at our results, and at the end of the call I will make some brief closing comments. Gary?

Thanks, Omar. Third quarter revenue of $3,918,000,000 increased 2%, as reported, and 1% on a constant currency basis after adjusting for a $13 million favorable impact of foreign currency. While Physio-Control was part of Medtronic throughout Q3, we are treating it as a discontinued operation and our Medtronic revenue results do not include revenue from Physio-Control. Q3 revenue results, by region, were as follows: Central and Eastern Europe grew 28%; growth in South Asia, Latin America and the Middle East and Africa was 18%; greater China grew 12%; growth in our Western Europe and Canada region was 5%; Asia-Pacific grew 2%, including flat results in Japan; while the U.S. declined 3%. Emerging markets grew a combined 16% in Q3 and represented 10% of our total sales. It is important to point out that our results in greater China were negatively affected this quarter by the Chinese New Year, which fell in our Q3 this year while last year it was in our Q4. Accordingly, we would expect our greater China growth accelerate in Q4. Q3 GAAP earnings and diluted earnings per share were $935 million and $0.88, an increase of 1% and 2%, respectively. After adjusting for certain acquisition-related items, Physio-Control divestiture-related items, as well as the noncash charge for convertible debt interest expense, third quarter earnings and diluted earnings per share on a non-GAAP basis were $888 million and $0.84, a decrease of 4% and 2%, respectively. After adjusting for the onetime tax benefits we received in Q3 of last year, our non-GAAP diluted earnings per share increased 9%. In our Cardiac and Vascular Group, revenue of $2,029,000,000 grew 1%. Results were driven by growth in Endovascular and Peripheral, Structural Heart, AF Solutions, Renal Denervation, Pacing and Coronary, offset by declines in ICDs. CRDM revenue of $1,192,000,000 declined 3%. Worldwide ICD revenue of $674 million declined 9%, and we estimate that the worldwide ICD market declined in the low double digits. Despite the continued market slowdown on a year-over-year basis, we believe the U.S. ICD market is showing signs of sequential stability. In addition, the combination of our Protecta ICD, with its shock reduction and lead integrity alert technologies along with the long-term proven performance of our Sprint Quattro defibrillation leads, which are also now available with a convenience of a DF 4-connector, continues to perform well, both in terms of share and pricing. Pacing revenue of $467 million grew 3% in a market that declined in the low-single digits. Our U.S. Pacing business grew 8%, driven by the ongoing success of our Revo MRI SureScan pacemaker. Revo continues to command a mid-teens percentage price uplift, which is offsetting pricing pressure in the pacing market. Our AF Solutions business grew in excess of 40%, driven by the ongoing successful U.S. launch and the continued adoption in Europe of our Arctic Front cryoballoon. We are taking share in the AF market. Although we would expect more moderate double-digit growth in Q4 as we anniversary the U.S. launch of Arctic Front. Our Cardiovascular businesses had another strong quarter with revenue of $837 million, growing 8%, with 4% growth in the U.S. and 10% growth in international markets. Coronary revenue of $382 million grew 3%, and we maintained our #1 coronary stent position in markets where we had regulatory approval for both our Resolute Integrity drug-eluting stent and Integrity bare-metal stent. Worldwide drug-eluting stent revenue in the quarter was $195 million, including $37 million in the U.S. We were pleased to received FDA approval of Resolute Integrity late last week, which we believe will be a meaningful driver of revenue growth and significant share gains. To put the U.S. opportunity into perspective, in Europe, where Resolute Integrity is on the market and we have more competitors than in the U.S., our DES share is over double our U.S. share. Resolute Integrity is only – is also the only DES that has been approved for use in patients with diabetes, which is about 1/3 of the U.S. patient mix. In the international markets, we continue to take DES share due to Resolute Integrity's deliverability and clinical performance. In bare-metal stents, Integrity BMS allowed us to take another 3 points of share this quarter in the U.S. Turning to Renal Denervation, we continue to make progress on this multi-billion opportunity in hypertension and expect to generate $35 million to $40 million of revenue in FY '12. On the commercial front, we introduced our SYMPLICITY system into new centers in Europe and Latin America, and remain focused on expanding reimbursement into additional countries. We also continue to make progress in our U.S. pivotal study and are tracking towards U.S. approval in FY '15. Structural Heart revenue of $265 million increased 10%, driven by growth in transcatheter valves. We continue to split the TCV market with our competitor and have clear market leadership in transfemoral, the largest TCV segment. While the market in Europe was somewhat softer at the end of the calendar year, we continue to focus on deeper penetration in existing centers; access to new centers; new product introductions; and new access routes, including the subclavian and direct aortic approaches. Direct aortic had positive multicenter data at the STS conference and is becoming an attractive option for surgeons looking for an alternative to the transapical approach. We are seeing strong interest in our new 31-millimeter CoreValve, which treats a patient population that previously could not be treated by transcatheter valves. And we expect to expand our offering with CE Mark approval of our 23-millimeter CoreValve this spring. In the U.S., we are pleased with the progress of our CoreValve pivotal trial. Enrollment in the extreme-risk arm is complete and we continue to enroll these patients through continued access. We expect to finish enrollment in our high-risk arm this summer. Turning to Endovascular and Peripheral. Revenue of $190 million grew 17%. In the U.S., revenue growth of 25% was driven by the continued success of the Endurant abdominal stent graft. We have now anniversaried the launch of this product and would expect more moderate growth in Q4. Late in Q3, we received CE Mark approval for Endurant II, our next-generation AAA stent graft, which we expect will solidify our position as the market leader in the space. In peripheral, strong clinical data was presented earlier this month for our complete SE SFA, and we expect to receive an SFA indication in the U.S. later this summer. In drug-eluting balloons, we continue to post strong double-digit growth in Europe, and we continue to make progress on bringing this technology to the U.S. Now turning to our Restorative Therapies group. Revenue of $1,889,000,000 grew 1%. Growth was driven by solid performance in Surgical Technologies, Diabetes and Neuromodulations, offset by continuing challenges in Spine. Spine revenue of $784 million declined 10%. In core Spine, which includes core metal constructs, IPDs and BKP products, revenue of $596 million declined 6%. Core metal construct products declined 5%. The global core market remains challenged and slowed sequentially, with year-over-year growth now in the low-single digits. The U.S. market is also declining in the low-single digits, with mid-single digit pricing declines offsetting low-single digit procedure and mix growth. We have a number of initiatives underway to improve our performance, including the upcoming launch of POWEREASE, training surgeons on our new MAST MIDLF procedure, continuing to offer differentiated navigated spine surgery solution, as well as the continued rollout of Solera. While sales of Solera are growing at 10% and garnering a double-digit price uplift, we still have less than half of the total sets in the field today. However, we continue to roll out new sets including the 5.5, 6.0 larger rod diameters to treat complex spine and deformity, the portion of our product line most affected by competitive offerings. Over the coming quarters, we expect Solera to become over 40% of our core metal revenue mix, which should help to drive improvement in our spine performance. BKP revenues declined 7%. We have now posted sequentially flat results for 3 quarters in a row, which is relatively encouraging given the declines we have seen in this business over the past several years. In the U.S., we are seeing a modest uptick in BKP procedure volumes and our new products, including the recent launch of the Xpander 2, balloon appear to be stabilizing price. Biologics revenue of $188 million declined 20% in the quarter. BMP sales declined 26% in the quarter, including a 30% decline in the U.S. However, it is important to note that INFUSE is one of our lower margin products, muting its impact on our bottom line. Despite the increased pressure on INFUSE, we were encouraged to see double-digit growth in other biologics, including mid-teens growth in the U.S. We continue to see strong growth in our differentiated DBM offerings, including MagniFuse, a high-performance allograft formulation that was part of our Osteotech acquisition. Turning to Neuromodulation. Revenue of $419 million increased 4%, led by double-digit growth in neurogastro. In pain, we were pleased to receive FDA approval for the RestoreSensor spinal cord stimulator with our proprietary AdaptiveStim technology. We were unable to fully launch this product until the last week of the quarter due to a supply disruption resulting from the flooding in Thailand. This issue is now resolved and Q4 is off to a great start. We expect this breakthrough technology to drive growth and take share in the U.S. market. In DBS, we continue to see very little impact from competition in international markets and we saw strong double-digit new patient growth in the U.S. In neurogastro, the U.S. launch of InterStim Therapy for bowel control continues to go well and is contributing to the success of InterStim. Diabetes revenue of $367 million grew 8%, driven by double-digit growth in CGM. Our International Diabetes business grew 16% as we continue to see great adoption of our newest products in these markets. An example of this is our Enlite Sensor, which is driving very strong CGM growth in international markets, due to its improved comfort, accuracy and ease of use. Surgical Technologies revenue of $319 million grew 22%, including $31 million from our Advanced Energy business, which is the combination of our acquisitions of PEAK and Salient. Our integration activities continue to go well, and Advanced Energy is now a $120 million business, growing double-digits on a pro forma basis. Excluding Advanced Energy, Surgical Technologies had strong organic growth of 10%, with solid performances across all businesses. We delivered another good performance in capital equipment, led by our Fusion navigation system for image-guided surgery and the S7 surgical navigation system. In addition, we continue to see robust sales of disposables, especially in ENT power and monitoring. Turning to the rest of the income statement, I would like to note that my comments exclude the impact of Physio-Control. The gross margin was 76.2%, up 40 basis points from the third quarter of last year. While the gross margin did have a 30-basis-point benefit from FX, we continued to offset pricing pressure through our $1 billion cost of goods sold reduction program. We would expect our gross margin in Q4 to be in the range of 75.5% to 76%, which recognizes more of a negative impact from currency, as well as potential obsolescence of Endeavor, as we quickly ramp up the U.S. launch of Resolute Integrity. Third quarter R&D spending of $364 million was 9.3% of revenue. We remain committed to investing in new technologies and evidence creation to drive future growth, and expect R&D spending to be approximately 9% of revenue in Q4. Third quarter SG&A expenditures of $1,371,000,000 represented 35% of sales, which is a slight improvement year-over-year after adjusting for onetime executive separation cost last year. We expect Q4 SG&A in the range of 32.5% to 33% of revenue, which reflects the impact of several initiatives we are focusing on to leverage our expenses while at the same time investing in new product launches. Amortization expense for the quarter was $84 million compared to $86 million in the third quarter last year. For Q4, we would expect amortization expense in the range of $80 million to $85 million. Net other expense for the quarter was $67 million, flat compared to the prior year. Net losses from our hedging programs were $33 million during the quarter. As you know, we hedge much of our operating results to reduce volatility in our earnings. Net other expense this quarter also includes $21 million in expense from the Puerto Rico excise tax, which is almost entirely offset by a corresponding tax benefit I will discuss in a moment. Net other expense this quarter was favorable to our expectations, driven by lower than expected payments of spine royalties and the Puerto Rico excise tax as a result of slower end market volumes. Looking ahead, based on current FX rates, we anticipate Q4 net other expense will be in the range of $50 million to $60 million, including hedging losses in the range of $15 million to $20 million. Net interest expense for the quarter was $33 million compared to $70 million in the prior-year period. Excluding the $21 million noncash charge for convertible debt interest expense, non-GAAP net interest expense was $12 million. At the end of Q3, we had approximately $9.4 billion in cash and cash investments and $10.2 billion of debt. For Q4, we anticipate non-GAAP net interest expense will be in the range of $20 million to $25 million. Let's now turn to our tax rate. Our third quarter effective tax rate, as well as our adjusted non-GAAP nominal tax rate in the third quarter was 19.8%. Included in this rate is an $18 million tax benefit associated with the U.S. foreign tax credit from the Puerto Rico excise tax, which mostly offsets the charge recorded in other expense. Exclusive of onetime adjustments, we expect our FY '12 adjusted non-GAAP nominal tax rate in the range of 19.5% to 20%, which includes the tax credit associated with the Puerto Rico excise tax. Our Q3 GAAP results included a onetime deferred tax benefit related to the estimated gain on the sale of Physio-Control. It is worth noting that the timing of the tax benefit does not correspond to the timing of the sale gain which will be recorded in Q4, but will not impact our non-GAAP earnings. In Q3, we generated approximately $1 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 $769 million in dividends and repurchased $780 million of our common stock. As of the end of Q3, we had remaining authorization to repurchase approximately 75 million shares. Third quarter average shares outstanding on a diluted basis were 1,060,000,000 shares. In Q4, we have already started our share buybacks to offset the dilution from our Physio-Control divestiture and have bought back over $400 million thus far. Let me conclude by commenting on our revenue outlook and earnings per share guidance for the remainder of fiscal year 2012. This morning, we reiterated our revenue outlook and tightened our FY '12 earnings per share guidance. We believe a constant currency revenue growth rate of 1% to 3% remains reasonable. While we cannot predict the impact of currency movements, to give you a sense of the FX impact if exchange rates would remain similar to yesterday throughout Q4, then our Q4 revenue would be negatively affected by approximately $20 million to $40 million. Turning to our guidance on the bottom line. At this point in the year, we are comfortable tightening our earnings per share guidance range. We now expect FY '12 earnings per share in the range of $3.44 to $3.47, which after adjusting for $0.04 to $0.06 of dilution from the Ardian acquisition and $0.10 of onetime tax benefits we received in FY '11, implies FY '12 earnings per share growth of 7% to 8%. Based on our guidance, current FY '12 earnings per share consensus of $3.45 appears reasonable. As in the past, my comments on guidance do not include any unusual charges or gains that might occur during Q4, nor do they include the impact of the noncash charge for convertible debt interest expense. Finally, one housekeeping item. We will be hosting our annual institutional investor and analyst meeting this year on the morning of Friday, June 1. The meeting this year will be held in New York City. With that, Omar and I would now like to open the phone lines for Q&A. [Operator Instructions] If you have additional questions, please contact our Investor Relations team after the call. Operator, first question please.

Your first question comes from the line of Matthew Dodds with Citigroup.

Start with you Omar. In the opening comments you sounded less optimistic, at least near term, on Spine versus ICDs. And when you look at Spine, the issue that's really been hampering the U.S. businesses, the – a lot of it's the pods. I mean, if they're allowed to continue operating as they are today, is it realistic to believe you can turn this business with technology in the next 12 to 18 months?

Well, look, first of all the pods are still a small segment, a small portion of the overall revenue. Although clearly, they're meaningfully affecting our overall share. Now if the pod gains -- continues to gain critical mass and becomes bigger and bigger, then we've got to understand what that operating -- that business model is and understand it more clearly, because right now, it's coming under increasingly negative public scrutiny. We don't think some of those practices are appropriate and, therefore, we don't do such things. Now if it becomes really big, then that means that there's some level of acceptance, in which case we need to re-examine our business model in that area and change our strategy. But clearly, if it gets really big, it's something we have to pay attention to.

Okay, And then just one quick follow-up for Gary. On the ICD business in the U.S., there's going to be a lot of questions on that. Just quickly on the O.U.S., can you say where the market's slowing internationally? Is it Europe or Japan in your view?

I think what our data would say is that's primarily in Europe. And by -- but even there I would say, Matt, it's probably in Southern Europe more than anything.

Your next question comes from the line of Bob Hopkins with Bank of America.

Just first a clarification. Gary, on the quarter you reported $0.84. How much did Physio contribute to that $0.84 in the quarter?

Well, I think the quarter was, $15 million was the profits from operations that were included in that number. So as we expected all year, I mean, the Physio acquisition obviously was complete or the sale was completed here in the beginning of our fourth quarter. Our expectation was that results for the first 3 quarters, obviously, are in our guidance and in our results. And then for Q4 here, our expectation is, as we talked about, is that we will be buying back stock to offset the impact of not having that profits in our numbers. So overall, the impact was, from operations, that's in the $0.84 is about $15 million. The gain, the tax gain that we're backing that out, that's a nonrecurring item.

Okay. And then a follow-up question on Spine. It seems like your commentary is basically suggesting to us that we've seen the lows in your Spine growth. And you, obviously that business shrank 10% this quarter. But you made an interesting comment that things in the last month of the quarter looked better. So can you quantify that for us? How much better were things in that final month? What was the year-over-year growth rate in the final month given that you called it out, and just love to talk a little bit more about spine.

I don't – Bob, this is Gary. I don't even have the absolute number in my mind as far as where the month is. I know that trend-wise, just from seeing the data, we saw improvement as we went through January and the average daily revenue, that it was improving. Now it was still down obviously, so it wasn't -- we're not saying that it was growing during that period of time, but the decline versus the prior year was much less and we saw that improving in Q3, and we've seen that so far even as we went through here in Q4. And the biggest part of that was actually both on core metal and also INFUSE. As Omar said in his comments, the biggest impact from INFUSE, being declined, we actually -- it was stronger in November and December. It was somewhat less of a decline in January, and we've seen that little bit here even as we start our Q4. That being said, the business is still down, it's just not down as much as, obviously, we saw here in Q3.

I think the comments that I made on that was primarily around the fact that if the decline stabilizes, which is what we've been seeing, then at some point in the coming quarters the comparisons versus prior year will become favorable. And that's really -- and we are optimistic that, that will in fact happen. Now INFUSE is its own thing here, because that has different dynamics and that can lead to uncertainty at any time, until we get this Yale study resolved.

At then what was core metal down x Kyphon in the quarter?

For worldwide, it was mid-single digits.

Your next question comes from the line of David Lewis with Morgan Stanley.

Gary, I wonder if you can give us a little more granularity on gross margins. It was, obviously, the strongest quarter we've seen in basically 6 quarters, and I know there's some currency give-and-takes as well as some divestitures. But it looks like some of that strength will carry forward in the next quarter, and your gross margin guidance for the year probably comes at the higher end of the range. So can you just help us understand maybe as you look back over the last 4 quarters, what's driving the GM strength, and do you think some of those trends are sustainable?

Well, yes. First of all, I mean, I want to make sure it's clear that, obviously, the gross margin we're talking about excludes Physio; which Physio, pulling that out actually improves the overall gross margin for the company by -- it'll vary by quarter, but say 50 basis points approximately overall. So that just ratchets everything up. Now that being said, you're absolutely right. Even with that, the last several quarters, we've been holding relatively steady on the gross margins. And we do expect that, that will continue as we go into the fourth quarter here. We have been able to offset the pricing pressures we've seen in the marketplace with, obviously, introducing new products that are seeing our pricing pressure probably less than even what's going on in the market. We mentioned that in CRDM and even in some cases, even in some of the Spine products. With these new products, we are seeing some price uplifts. That's obviously helping us. But the main thing, I think, is obviously the differentiator for Medtronic has been the fact that we've been -- the cost out. We've been taking $1 billion of cost out of our product cost over the last 5 years. We have objectives to continue to do that going forward and have laid out the plans. And so it has been our expectation that we're going to -- that we can maintain these gross margins even in this tight pricing environment. And so that is our expectations. I did highlight in my comments that, in Q4, the positive FX benefit is not quite strong as what we've seen over the last several quarters. So that's why we were a little bit more cautious in our guidance here for Q4.

Okay. And maybe just a quick follow-up. I know it's too early to think about fiscal '13 guidance. But just basically taking Omar's comments, as well as some of your comments, Gary, is it sort of reasonable to assume as we head into fiscal '13, we see non-ICD Spine performance sort of where it's been, a slight improvement in ICD spine performance? And do you remain kind of reasonably comfortable this remains a upper-single-digit EPS growth business?

Yes. Again, we're not obviously giving guidance for FY '13 yet, David. And we will do that, obviously, in the May discussion. But, I mean, I think the comment with respect to Spine and ICDs is even applicable as we -- based on Omar's comments and mine even as we get into Q4 here. We do believe that these markets are starting to stabilize and as a result, the comparisons for us get easier as we kind of get into some of the next quarters here, Q4 and into FY '13. And if our other businesses continue to do well, which they should especially the new product launches of Resolute Integrity, RestoreSensor, et cetera, we should see those businesses continue to perform strongly, that, that would start to have an impact on improvement in our overall revenue growth. And from there, then we'll clearly continue to focus on driving and delivering the bottom line, that's a few percentage points faster than the top line. That'll be our expectation as we go into the future years, as we've talked about previously. But we're not giving guidance yet, as far as what that revenue or earnings per share for FY '13 is.

Your next question comes from the line of Mike Weinstein with JPMorgan.

Just first a clarification, Omar or Gary. The third quarter non-GAAP $0.84 you reported. You announced on the last quarter call that you would call out Physio-Control as a discontinued operation. You did not include it in revenues this quarter, but you are including the EPS benefit in the $0.84?

That is correct, Mike. This is Gary. As we did, and as you recall last quarter, we didn't know exactly when the deal would close and we've been, obviously, including Physio all year in our guidance along -- as we went forward. We did highlight the fact that, once we did saw it, we thought we could offset the profit loss by buying back stock. But obviously until we actually have the acquisition closed, we couldn't buy back stock to offset that. So the assumption is, is the operating results from Physio, their operating earnings are in our results but the revenue, because it is a discontinued operation, does not show above the line. We did, in the press release and in our comments here, we did try to highlight what the revenue from Physio was, just so people would have an understanding of that. But that's how we've done it. So the operations are in our guidance, none of the gain, none of the gain aspect related to selling of the asset will be included in the results. But clearly, the operations were.

Okay. Let me move forward then, 2 items. So one, Gary, should we assume, given the commitment to return the 50% of free cash flow to shareholders and the need to rebalance your U.S. versus O.U.S. cash generation, that the tax rate, underlying tax rate for the company moves higher from here in FY '13 and 14?

Mike, we don't know for sure how -- what's going to happen on that. We're obviously trying to do things to not impact the tax rate. Our first things are, obviously, looking at -- Omar has a lot of initiatives out underway on working capital to reduce inventory levels, to improve our focus on capital expenditures. So focusing on areas where we can try to improve the cash mix, without -- from an operating perspective, without actually addressing it from a tax side equation. We are doing the analysis, as we indicated in some of the recent presentations. We are doing some analysis to say what if we did repatriate certain earnings from certain countries, and what would that do to the overall tax rate. Because some countries obviously have tax rates that are closer to the U.S. and there's a minimal impact in that regard. So we have not made any assumptions right now. We have not made any decisions in that regard. And I don't know what the tax rate for -- I can expect for FY '13 will be. But if we have to meaningfully do some things in that regard, yes, you could see a slight uptick in the tax rate. But obviously, we're going to try to minimize that to the extent we can. So we're trying to do this without addressing that aspect currently and we'll see how successful we are prior to going to the tax rate.

Okay. Then last question, and maybe this is one just for Omar, but whoever can jump in here. Can you just talk about the pipelines at both CoreValve and Ardian? I think there's some increased concern that competitors are really targeting this product specifically and that they'll introduce products that could potentially leapfrog either of them in Europe in 2013. So could you just give us a better sense of what is in the pipeline for both of those product lines?

Look, let me take a shot and then let Gary also talk about it. First of all, our investment strategy in both those product lines are pretty high. I mean we are determined to maintain leadership and will maintain leadership by investing in technologies, by creating our own leapfrog technologies which we've got in our own pipeline, in both of those areas, as well as driving getting enhanced clinical data through increasing the number of indications. So in both of those areas, those are priority investments for us. And I'm telling you that we're determined to keep our lead, we're not going to give this thing up.

Yes, Mike, I can add a little bit. I mean, I think -- I don't have all the details on the product technology in either one of those. But Omar is absolutely right, we continue to invest. CoreValve, obviously, as I had my comments where there's several different things. We're obviously expanding the number of sizes that are in the marketplace, which will broaden the market. We are, obviously, coming at it from a different approach, the direct aortic approach versus the transapical. We continue to look at new delivery systems, TISA has a recapture built into it. So there's a lot of different things that are being done on CoreValve to enhance the product line overall. And so we believe that we'll be very, very competitive in that marketplace as we have been, obviously, up to this point in time. Ardian, the same thing. The reality is, obviously, those products are just being launched. There are several new technologies that we're taking with, along with what we acquired from Ardian, and the business unit has several different technologies that we'll probably be able to discuss a little bit more at the Analyst Meeting in June and walk you through, for both these businesses, kind of where we're at. But Omar is absolutely right. We are continuing to invest very heavily in these businesses, in new technology that will actually be second-, third-generation types of products.

And then maybe one other point on that. We've got a breadth of technologies across Medtronic. And we've got -- our CBG business has a pretty dedicated focus in making sure that technologies that are available in one business are translated to another, to give us increased competitiveness. And that's not a minor advantage, that's something that we will leverage as we go forward.

Your next question comes from the line of Kristen Stewart with Deutsche Bank.

I was just wondering, Omar, if you could just comment on whether, with several months under the belt now, if there's anything that you see that really changes more of the strategic direction of the company?

Well, a number of things. First of all, I laid out the key areas for focus for us, which I've talked about many times: Improving execution, optimizing innovation and accelerating globalization. Right now, I'm focused on still collecting data, but more so, operationalizing these areas. And as we operationalize them, I'm finding that these are, in fact, the right things to do. We need even more detail in each of those areas. The focus on economic value, I find incredibly important in this environment. And partnerships with major U.S. providers, and also understanding the bare ramifications of customer economic value, are things that are very important. And if anything, the importance of this has been highlighted to me even further in the last few months. And globalization, the thing for me that was new in the past 3 to 4 months was the realization of how much an opportunity there is in the [indiscernible] with our existing therapies around the world. That's just a stunning number. And based on that, one of the areas that actually has changed is a higher priority in finding ways to make sure that these existing therapies are adequately penetrated in these emerging markets. And then taking a step back on the value segment and approaching that with a little more time, it gives us a little more time to address the value segment and I think that's appropriate. So I think minor tweaks or whatever perspective you may have on it, major or minor tweaks to the overall strategies, which I think I are right ones. Execution is critically important, and again, our productivity in terms of R&D spending is very high in my list and I think using customer economic value as a central point in our investment criteria is important, and I just talked about globalization. I think these 3 are the pillars that we're building our operations around. And as we go forward, we're fine-tuning them and operationalizing them to a fair amount of granular detail.

Okay. And then at the Annual Investor Conference, will you give longer-term guidance or will it just be for fiscal 13?

This is Gary. We haven't, obviously, decided yet what we'll do on that. But my guess, at this point in time, is that it'll probably just be for FY '13. But we'll have to decide. I mean, it gets back to how comfortable we are where the markets are at, to be honest with you. The market volatility has been probably the biggest issue for us over the last few years which, obviously, gives us concern about giving long-term guidance, just not knowing exactly where the markets are at. So we haven't decided yet, we'll see where we're at the analyst meeting. Obviously, we'll be at that -- by that point, we'll have given guidance for FY '13. Whether we're providing longer-term guidance will depend on whether we see our markets fully stabilizing.

And also, how quantitatively we can understand the impact of some our initiatives, which that's not the necessarily that simple. But we will try to give you as much data as possible and be as quantitative as we can.

Your next question comes from the line of David Roman with Goldman Sachs.

Just want to ask one clarification question on the CoreValve trial, whether you could file separately for the extreme-risk indication or whether you had to file the high-risk and extreme-risk together and what, then, that meant for approval for each indication?

David, this is Gary. From what I understand is that we can file each one of them separate. And so that, basically, with the extreme-risk arm, obviously, enrollment done and once we have all the results that, that can be filed separately without having the high-risk.

Okay. And then maybe just one follow-up for Omar and then one for you, Gary. Over the past couple quarters, it sounds like your willingness to look toward divesting businesses or reassessing kind of the strategic portfolio at Medtronic has become a little bit more flexible than when you first presented to us back in August and this time, in your prepared remarks, you cited Spine. Maybe just elaborate a little more what specifically you're waiting for to look at other strategic alternatives for Spine or businesses where the opportunities for innovation or incremental growth just aren't there. And then for Gary, how should we start thinking about the med-tech tax, which you'll be one of the first companies to present that in your guidance for fiscal '13 and what initiatives are you undertaking to offset the dilution from that required expense?

Okay. First, a clarification on what I mean by reassess strategy. I mean sure, inorganic alternatives of all sorts exist. But I'm going to look at organic alternatives as well. Reassess the way in which we're growing our Spine business. Things don't work for several quarters or certain strategies not delivering the results we expect, you've got to do some things different, but organic alternatives are also absolutely our cards. I think I made it clear a few months ago, the way in which we're looking at our whole portfolio, and not only at the major business level but within these businesses, is essentially look at each of the sub-businesses that we have and ask 3 questions: Are we in an attractive market? Do we have a team -- do we feel that we have the capability to win in that attractive market? And by win, I mean, can we become a leader? And three, what is the overall value that Medtronic adds to that specific business? And quantify that as much as possible. These are the 3 questions we intend to ask for every sub-business we have in our portfolio. And we're, today, putting the processes in place to do this in a consistent and as quantitative a manner as we can. And based on that analysis, which we will perform periodically, maybe 2x a year, we will make decisions. And those decisions will guide the nature of our portfolio. So I want to be as consistent and logical about this as possible with a view towards a clear and consistent long-term strategy, as opposed to a knee-jerk, what happened in the last few months or whatever, because we're here for the long term. And we've got to make the right decisions that favor the long-term benefit for Medtronic and our ability to participate in growth markets and win in those markets and also add value from our breadth. So that's the process that we're embarking on and we'll probably share with you a few more details, at least on the process, at the investors meeting and more importantly will put it in place as we go forward.

David, just back to the question on the medical device tax. Obviously, we're still, as all companies are, still working on understanding the exact impact of this. And you're correct, we'll be one of the first ones that will include that in our guidance because we'll have 4 months of it in our FY '13 results. It's still only draft regulations out there at this point in time. But our expectation, based on what we are seeing and hearing, is that the net impact of this is probably about $125 million to $175 million for us per year. So in FY '13, you could assume there could be about a $40 million to $60 million impact for 1/3 kind of, of that year overall. We're obviously looking, the businesses and ourselves, we're looking at a lot of different ways to figure out how much of that, if any, can we pass on. How do we offset the cost associated with that. So we've looked at this basically one of the costs we're going to have to cover as we put together our plans for FY '13, and as we put together our initiatives on a long-term basis. This is just a cost of -- it's going to be a cost of doing business here in the U.S. and we're going to have to make the trade-offs and there's probably going to be things that we can't do as a result of that. But our assumption is this is a cost that we're going to have to incur.

Your next question comes from the line of Larry Biegelsen with Wells Fargo.

Gary, one clarification. Were those numbers that you gave for the med-tech tax before or after tax?

Those were after tax, Larry.

Let me focus first on the transcatheter valve market. Gary, you mentioned a slowdown in -- outside the U.S. in your fiscal third quarter. Could you talk about what you saw there? Was it new competitors? Was it pricing? And did you see a pickup in January? I mean, was this kind of just temporary due to budget in Europe? That's my first question.

Yes. Larry, our sense is it's primarily -- it was more procedure-related than anything and it's primarily just because of the capitated budgets that many of the countries in Europe, obviously, deal with. And so what our sales force would tell us and what we saw was -- the data would tell us was they actually saw a little bit of a slowdown, it's just these budgets were fully utilized and so you saw a reduction in procedures. And also, especially in some of the -- I think it was more, again, in Southern Europe versus even the Northern European countries. So we're not saying that we -- we don't think the market's going to completely slowdown or not going to come back, but clearly because of the capitated budgets and the fact that they were just completely used into the calendar year, we saw it slow down a little bit. It was still growing but, obviously, a little bit slower growth.

I mean some of the other markets you talked about a pickup in January. Are you willing to talk -- did you see a pickup in that market in January or does that slowdown continue?

I don't know if the slowdown continued. I wouldn't say it bounced back as much as we saw in some of the other businesses, which we tend to see more often. For example, this happens in a lot of our product lines, whether it's pacing or ICDs, it's not just transcatheter valves. But I would say that we probably saw that bounce back a little bit more in some of those other markets. That might be just due to the fact that those are more mature businesses and the hospitals know to handle that. We don't know, but we didn't see, necessarily, a bounce back in the growth rates in January yet.

And lastly, Gary, in the U.S. there were some concern about increased seasonality in calendar year Q4 2011. It sounds like, in the U.S., you didn't see a drop-off in January due to increased seasonality, is that fair?

No. I don't -- we didn't see anything, really, from a seasonality in January for our purpose. I mean, I think historically we have a couple of businesses and that there is a little bit of a seasonality that comes into a case because of the higher deductibles, et cetera, that people will all of a sudden be getting into. So for example, our Diabetes business always sees November, December being a little bit stronger and January is a little bit softer historically. But the comparisons year-over-year, I mean, we saw the same growth. But that's kind of a normal phenomenon that we'll see. They see a little bit more seasonality than probably our other businesses because of that deductible issue.

Your next question comes from the line of Adam Feinstein with Barclays Capital.

Maybe just, I apologize, the question has been asked a lot about the strategy and just thinking out longer term, and appreciate all of the details you guys have given. But with respect to just the portfolio, a lot of the questions were about maybe thinking about selling off businesses and you talked about your thought process in terms of looking at the markets and looking at whether you could win. But think about it slightly different I guess, in terms some of these businesses being high-growth businesses that Medtronic could create significant shareholder value, and maybe some of these segments could trade at 5x to 6x revenue stand-alone public entities. So you're not selling those businesses, but clearly just creating value where maybe now you're not getting full value for some of the higher growth segments. So I guess how are you thinking about that in terms of just the thought process? And do you think you're getting fair value for some of the higher growth segments?

Yes. I think that's what I was tried to address when I said looking at the overall value of Medtronic. So we're going through a fairly granular and quantitative approach where we're really looking at each of our businesses, high-growth and not. Where we're seeing – where we're assessing, what are the unique aspects of being part of Medtronic. In other words, very clearly, are there technologies that we have in one business that we can transfer over to another business, that's unique to Medtronic and our portfolio of products? So that makes a value that we are providing that the business, on its own, would not have. Are there areas where we've taken technologies and actually created new products, which are linked in front of the customer? And so the physician practitioner actually uses 2 of our technologies together in a way that's unique? Or do we have plans to create such products which, again, for a company on its own would have difficulty doing? Do we have operational and simply, cost synergies that are strong and provide extreme value from a profitability and reinvestment perspective for that company. So we look at a fairly granular set of criteria, and the 4 or 5 such criteria, which we want to look at by sub-business within our portfolio, and in a consistent fashion, grade that. And if at any time we find that the, overall, Medtronic is not adding enough value to that sub-business and that business can be better off in its own, then that becomes a candidate for divestiture, absolutely. By the way, the same rationale we expect to apply for acquisitions. So the way in which we do acquisitions also quantify and see their fit with Medtronic and what we can add. So those questions apply to our entire inorganic strategy.

Just to give you an example. I mean, with the Physio-Control divestiture, we're just in process of going through, obviously. I would say Physio-Control is probably the farthest removed of all our businesses. And I would tell you, as we go through this process, it's surprising how much we learn where there are more synergies than we even ourselves understand. And so Omar's point of going back, we're finding out there were a lot more cost synergies than we expected, et cetera. And so it's more difficult that you envision just to go out and especially divest of business onto itself if there's not someone there with the infrastructure to support it going forward. So we have to understand all that aspects of it. But it's not just a cost component, as Omar indicated, it's also back to all the technology and the customer relationships and what that means. But we are going through this in a very systematic approach across every one of our products.

Okay. I appreciate the detailed response. And maybe just a quick follow-up. So based on that, as you think about selling to the hospitals, in terms of selling bundled products and just the opportunity there. Just curious, in terms of just how do you see hospital purchasing going in the future and certainly having that broader portfolio? Just your thoughts there.

The broader portfolio, obviously, helps there. But look, that is not the only factor, like I mentioned earlier. In fact, if we can use technology in some way, it's actually a far more differentiated approach from our competition in many ways. However, the fact that we have a breath of our products to a hospital is clearly an advantage. And we think that, in the U.S., hospitals, by and large, will be looking at that much more expansively than they've been before. In my discussions with different CEOs, there's considerable interest in partnerships with Medtronic, primarily so that we can create economic value for the hospital together through the technologies that we have. They realize that for the hospitals to run efficiency and profitably, they need to partner with broad technology providers and solution providers which -- and we're pretty good candidate for that. And by the way, that's true outside the U.S. as well. It has been the case in Europe for a while, where hospitals look at companies from a much broader perspective. And certainly, in some of the emerging markets as well, as hospitals are being set up, the administrative management of the hospital usually looks to companies who have a breadth of offerings. So we think that that's an advantage, but I do want to point out that's not the only advantage, by any means. I think the technology advantage and the customer focus advantage where the physician-focused advantage are, in many ways, even greater than the bundling opportunity. But like I said, that cannot be minimized here.

Your next question comes from the line of Sara Michelmore with Brean Murray.

Maybe a question on the Diabetes business. It did look like the U.S. business there had taken a step down from the last quarter. So wondering if there's anything going on there. And was also looking for an update, I know you have a lot of new products internationally that have helped the growth rate there and what the status is in terms of getting those products to the U.S. market.

Yes. This is Gary. The U.S. revenue, with the Diabetes business, grew about 3% in the quarter and so it was, obviously, below what we've seen in international. And that's not unusual, we've seen that over the last several quarters. Our international growth has been more than in the U.S. But you're right, it was a little bit softer this quarter. Little bit, we saw a little bit slower pump growth at the end of the year here. And overall, CGM and everything else was doing fine, but the pump growth was a little bit slower than what we expected. We don't think there's any big issue there, we just think it's more due to the slowing economy. I mean, the economy still has an impact on this business and we think that's part of the issue that we saw here in the U.S. overall. So we're not expecting a long-term trend in that regard. But I think you're going to continue to see the U.S. being a little softer, obviously, than the international market where we do have all the new products. Now with respect to the new products coming to the U.S., both -- and I'm assuming you're talking about really, Veo, which is the low-glucose suspend feature, and the Enlite, which is our new sensor, we're working with the FDA on that right now. We're making good progress on the IDE for the U.S. Enlite product. And we're continuing to have conversations with the FDA on working to get Veo into the marketplace overall. So we're excited about getting those products to the marketplace as quickly as possible. But that's still a ways out.

And then just a follow-up on the Restore product in the U.S. Is there any way to quantitate what you think that cost you in the quarter? And was interested what your latest thinking was in terms of the growth of the pain market in the U.S.?

Well, as we said, I mean I think the pain market in the U.S. from our data, which we think is kind of growing the mid-single digits overall. We obviously did not have the Restore sensor, really, even though it was approved, we weren't really able to launch it fully until, as I had indicated in my comments, until the very last week in the quarter. We had a supply issue on some of the components in the products coming from Thailand. So that really hampered our ability to launch the product fully in Q3, and if anything, probably actually hurt us because you had people waiting to get that new product. The good news is that, that is resolved. We have launched those products fully now in Q4. And the business is off to a very good start. So we expect we are going to gain share back with the Restore sensor and starting here in Q4.

Your final question comes from the line of Joanne Wuensch with BMO Capital Markets.

Two parts. One, you talk about inventory management of ICDs by the hospitals. Are we at the end of that? And then the second piece of it is, if I heard in there directly, you talked about minimizing dilution from M&A. Did I hear that correctly? And if so, have you have changed your strategy for M&A?

Well, let me take the first one and then Omar can take the dilution question. With respect to the destocking comments and the just inventory levels overall, Joanne, what I would say is I think this fluctuates. I mean, as we've indicated before, about 5% of our revenue or about 20% of the CRDM revenue was kind of in bulk purchases that we have with hospitals. And that's going to fluctuate 10%, plus or minus, kind of in any given quarter. And we saw it was lower this quarter for ourselves. I mean, I think the competitors mentioned somewhat of the same thing in some of their comments. So I mean now is it in a new low or could that continue? I don't think any of us know for sure. But that's going to, obviously, be up to hospitals and what kind of situation they are in their inventory levels overall. So it's a kind of a normal fluctuation that occurs in our markets. The good news for us is the implants, the daily implants, as we indicated in our comments in Q3 and here in Q4, continuing to grow and sequentially grow and are actually up over the prior year, as we indicated in our comments. So that ultimately has to have an impact on where those inventory levels are at. So from our perspective, that's where we focus and then the inventory levels are going to fluctuate depending on what the hospitals want to do.

On the dilution question, look, to put this in perspective, Medtronic has done several major acquisitions in the past few years which have been dilutive. Now these have been good deals. They are strategic for us. They in many ways can change the way in which medicines perform and are appropriate for us. However, it takes time for us to realize the benefits that these deals have promised. And we're in the middle of realizing those benefits, they're in plan but they take time. In the meantime, our organic growth has slowed. As so to do more dilutive deals without any real discipline around it, obviously, doesn't make any sense. So at this stage, what we have in our portfolio, our focus is to translate the deals that we've already done into real benefits, to realize the benefits that were promised, and we need to demonstrate that to our shareholders and for us. And at the same time, we're willing to look at other attractive deals, which may well have dilution. But if they have dilution, then we need to find offsets in the business to fund them. I think, again, there are always exceptions to this, so I don't want to make any hard and fast rules here. But our general direction here is that, I really don't want any significant dilution from any inorganic activity in the near term and that doesn't mean that the deal itself cannot be dilutive. But if it is, then the business, either by itself or collectively, Medtronic has to find an appropriate offset.

Okay. If I can follow up quickly. Physio-Control will add how much to gross margins on a go-forward basis, the sale of that?

What we've vindicated, I think, it varies by quarter obviously, depending where we're at. But you're talking somewhere around 50, 60 basis points.

That concludes our question-and-answer session. I hand the program back over to Mr. Omar Ishrak for closing remarks.

Okay. Thank you. Thanks for your questions. And before I end today's call, I would like to comment on Medtronic's ability to play a leadership role in the changing healthcare environment. And I've touched some of this in the Q&A, but let me just summarize. In the few quarters that I've been at Medtronic, it has become clear to me that a large shift is occurring in our industry that goes straight to the core of our industry's business model. Med-tech has tried for decades by engaging primarily with the physician, who in most instances evaluated the merits of our products solely on their clinical value. While clinical value and our physician-customers will always remain important, there are additional decision factors and decision-makers that are playing an expanded role in the purchase of med-tech products and services. This has significant ramifications for our industry, and Medtronic is focused on modifying our strategies to align all the activities in our value chain to this new environment. This affects selecting the products and services that we choose to develop, capturing additional evidence and the economic value of our portfolio, modifying how we market our products and services, adapting the structural skill set of our sales force, and optimizing our operational efficiency. Change is never easy. And while not all companies will be able to evolve, there will always be winners and losers in any environment. Our breadth and our customer relationships are unique advantages that allow us to deliver value to the overall healthcare system, and we will emerge stronger, leading our industry in providing better and more cost-effective solutions to many more people around the globe. With that, and on behalf of our entire management team, I would like to thank you again for your continued support and interest in Medtronic.

This concludes today's conference call. You may now disconnect.