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(in millions)		Three Months Ended September 30, 2008												Three Months Ended September 30, 2007
		U.S.				International				Total				U.S.				International				Total
Drug-eluting
TAXUS®		$	112			$	159			$	271			$	240			$	201			$	441
PROMUS™			97				28				125								7				7
			209				187				396				240				208				448
Bare-metal			19				31				50				28				31				59
		$	228			$	218			$	446			$	268			$	239			$	507

 

In July of 2008, Abbott Laboratories launched its XIENCE™ V everolimus-eluting coronary stent system, and, simultaneously, we launched our PROMUS™ everolimus-eluting coronary stent system, supplied to us by Abbott. As of the closing of Abbott’s acquisition of Guidant’s vascular intervention and endovascular solutions businesses, we obtained a perpetual license to use the intellectual property used in Guidant’s drug-eluting stent system program purchased by Abbott. We believe that being the only company to offer two distinct drug-eluting stent platforms provides us a considerable advantage in the drug-eluting stent market and has enabled us to sustain our worldwide leadership position. However, under the terms of our supply arrangement with Abbott, the gross profit margin of a PROMUS stent system is significantly lower than that of our TAXUS stent system. Therefore, if sales of our PROMUS stent system continue to increase in relation to our total drug-eluting stent system sales, our gross profit margins will continue to decrease. In addition, we are reliant on Abbott for our supply of PROMUS stent systems. Any production or capacity issues that affect Abbott’s manufacturing capabilities or the process for forecasting, ordering and receiving shipments may impact our ability to increase or decrease the level of supply to us in a timely manner; therefore, our PROMUS stent system supply may not align with customer demand, which could have an adverse effect on our operating results. At present, we believe that our supply of PROMUS stent systems from Abbott is sufficient to meet our current launch plans. 

Further, our supply agreement with Abbott for PROMUS stent systems extends through the fourth quarter of 2009 in Europe (subject to a possible extension by the European Commission) and through the end of the second quarter of 2012 in the U.S. and Japan. We are incurring incremental costs and expending incremental resources in order to develop and commercialize additional products utilizing everolimus-eluting stent technology and to support an internally developed and manufactured next-generation everolimus-eluting stent system. We expect that this stent system, the PROMUS™ Element™ stent system, will have gross profit margins more comparable to our TAXUS stent system and will improve our overall gross profit margin once launched. We expect to launch PROMUS Element in Europe in late-2009 and in the U.S. and Japan during mid-2012. Our product pipeline also includes the TAXUS® Liberté® and TAXUS® Element™ coronary stent systems. We received FDA approval for our TAXUS Liberté stent system in October 2008. We plan to launch the TAXUS Liberté stent system in the U.S. in the fourth quarter of 2008, following the launch of our new TAXUS Express2™ Atom™ drug-eluting coronary stent system, which was approved by the FDA in September 2008. We expect to launch our TAXUS Liberté drug-eluting stent system in Japan during the first half of 2009, and our first-generation PROMUS everolimus-eluting coronary stent system during the second half of 2009 in Japan. We expect to launch our TAXUS Element stent system in Europe during the fourth quarter of 2009 and in the U.S. in mid-2011.

During the third quarter of 2008, U.S. sales of our drug-eluting stent systems declined $31 million, or 13 percent, to $209 million from $240 million during the third quarter of 2007, due primarily to a decrease in our share of the market as a result of recent competitive launches, including the XIENCE V stent system in July 2008 and Medtronic, Inc.’s Endeavor® zotarolimus-eluting coronary stent system in the first quarter of 2008. We believe that our share of the U.S. drug-eluting stent market was 45 percent for the third quarter of 2008, as compared to 56 percent for the third quarter of 2007.  In addition, the average selling price of our TAXUS stent system in the U.S. for the third quarter of 2008 declined approximately seven percent as compared to the

 

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same period in the prior year. We expect that unit prices may continue to be impacted as a result of increased competition. Our international drug-eluting stent system net sales decreased $21 million, or ten percent, for the third quarter of 2008 as compared to the third quarter of 2007. The decrease was driven primarily by declines in our share of the drug-eluting stent market in Japan. The third quarter of 2007 represented the first full quarter of sales of our TAXUS Express2 drug-eluting stent system in Japan, resulting in significant initial market share gains. Our market share declined in the fourth quarter of 2007, but has remained stable at approximately 45 percent in Japan for the last three consecutive quarters.

Historically, the worldwide coronary stent market has been dynamic and highly competitive with significant market share volatility. In addition, in the ordinary course of our business, we conduct and participate in numerous clinical trials with a variety of study designs, patient populations and trial end points. Unfavorable or inconsistent clinical data from existing or future clinical trials conducted by us, by our competitors or by third parties, or the market’s perception of these clinical data, may adversely impact our position in, and share of the drug-eluting stent market and may contribute to increased volatility in the market. In addition, the FDA has informed stent manufacturers of new requirements for clinical trial data for pre-market approval (PMA) applications and post-market surveillance studies for drug-eluting stent products, which could affect our new product launch schedules and increase the cost of product approval and compliance.

 

We believe that we can sustain our leadership position within the worldwide drug-eluting stent market for a variety of reasons, including:

·	our two drug-eluting stent platform strategy, including our TAXUS® paclitaxel-eluting and PROMUS™ everolimus-eluting coronary stent systems;

·	the broad and consistent long-term results of our TAXUS clinical trials, including up to five years of clinical follow up, and the favorable results of the XIENCE/PROMUS clinical trials to date;

·	the performance benefits of our current and future technology;

·	the strength of our pipeline of drug-eluting stent products, including opportunities to expand indications for use;

·	our overall position in the worldwide interventional medicine market and our experienced interventional cardiology sales force; and

·	the strength of our clinical, marketing and manufacturing capabilities.

However, a further decline in revenues from our drug-eluting stent systems could continue to have a significant adverse impact on our operating results and operating cash flows. The most significant variables that may impact the size of the drug-eluting stent market and our position within this market include:

·	the entry of additional competitors into the market, including the recent approval of two competitive products in the U.S.;

·	our ability to successfully launch next-generation products and technology features, including our TAXUS® Liberté® paclitaxel-eluting stent system, in the U.S. market;

·	physician and patient confidence in our technology and attitudes toward drug-eluting stents, including the continued abatement of prior concerns regarding the risk of late stent thrombosis;

·	changes in drug-eluting stent penetration rates, the overall number of PCI procedures performed, average number of stents used per procedure, and average selling prices of drug-eluting stent systems;

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·	variations in clinical results or perceived product performance of our or our competitors’ products;

·	delayed or limited regulatory approvals and unfavorable reimbursement policies;

·	the outcomes of intellectual property litigation;

·	our ability to retain key members of our sales force and other key personnel; and

·	changes in FDA clinical trial data and post-market surveillance requirements and the associated impact on new product launch schedules and the cost of product approvals and compliance.

Cardiac Rhythm Management Products

Cardiac rhythm management (CRM) product revenue represented approximately 29 percent of our consolidated net sales for the third quarter of 2008, as compared to approximately 25 percent for the third quarter of 2007. We estimate that the worldwide CRM market will approximate $10.8 billion in 2008, as compared to approximately $10.1 billion in 2007, and estimate that U.S. implantable cardioverter defibrillator (ICD) system sales will represent approximately 40 percent of the worldwide CRM market in 2008, as they did in 2007.

The following are the components of our worldwide CRM product sales:

 

(in millions)		Three Months Ended September 30, 2008												Three Months Ended September 30, 2007
		U.S.				International				Total				U.S.				International				Total
ICD systems		$	291			$	132			$	423			$	261			$	111			$	372
Pacemaker systems			86				63				149				82				63				145
		$	377			$	195			$	572			$	343			$	174			$	517

 

Our U.S. sales of CRM products for the third quarter of 2008 increased $34 million, or 10 percent, as compared to the third quarter of 2007.  Our U.S. sales benefited from growth in the U.S. CRM market and from the successful launch of our next-generation COGNIS™ cardiac resynchronization therapy defibrillator (CRT-D) and TELIGEN™ ICD systems in August, as well as the launches of our CONFIENT™ ICD system, the LIVIAN CRT-D system, and the ALTRUA™ family of pacemaker systems earlier in the year. Our international ICD system sales increased $21 million, or 19 percent, in the third quarter of 2008, as compared to the third quarter of 2007, due primarily to an increase in the size of the international ICD market.  However, our net sales and market share in Japan have been negatively impacted as we move to a direct sales model in Japan and, until we fully implement this model, our net sales and market share in Japan may continue to be negatively impacted.

Worldwide CRM market growth rates over the past two years, including the U.S. ICD market, have been below those experienced in prior years, resulting primarily from previous industry field actions and from a lack of new indications for use. While we have begun to see increased rates of market growth and expect that growth rates in the worldwide CRM market will improve over time, there can be no assurance that the market will return to its historical growth rates or that we will be able to increase net sales in a timely manner, if at all. The most significant variables that may impact the size of the CRM market and our position within that market include:

·	our ability to increase the trust and confidence of the implanting physician community, the referring physician community and prospective patients in our technology;

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·	future product field actions or new physician advisories by us or our competitors;

·	our ability to successfully launch next-generation products and technology in the U.S. market, including our next-generation INGENIO™ pacemaker system;

·	the successful conclusion and positive outcomes of on-going clinical trials that may provide opportunities to expand indications for use;

·	variations in clinical results, reliability or product performance of our and our competitors’ products;

·	delayed or limited regulatory approvals and unfavorable reimbursement policies;

·	our ability to retain key members of our sales force and other key personnel;

·	new competitive launches;

·	average selling prices and the overall number of procedures performed; and

·	the outcome of legal proceedings related to our CRM business.

We continue to execute on our product pipeline, with more than a dozen new CRM product approvals thus far in 2008. We plan to launch our next-generation pacemaker, the INGENIO™ pacemaker system in both the U.S. and Europe in the second half of 2010 or first half of 2011. We believe that these launches position us for sustainable growth within the worldwide CRM market.

Regulatory Compliance

In January 2006, legacy Boston Scientific received a corporate warning letter from the FDA notifying us of serious regulatory problems at three of our facilities and advising us that our corporate-wide corrective action plan relating to three site-specific warning letters issued to us in 2005 was inadequate. We have identified solutions to the quality system issues cited by the FDA and have made significant progress in transitioning our organization to implement those solutions. The FDA reinspected a number of our facilities and, in October 2008, informed us that our quality system is now in substantial compliance with its Quality System Regulations. The FDA has approved the majority of our requests for final approval of Class III product submissions previously on hold due to the corporate warning letter and is currently reviewing our requests for Certificates to Foreign Governments (CFGs). We have since received approval to market the following new products in the U.S.:

·	TAXUS® Express2™ Atom™ Paclitaxel-Eluting Coronary Stent System, designed for treating small coronary vessels;

·	TAXUS® Liberté® Paclitaxel-Eluting Coronary Stent System, our second-generation drug-eluting stent system; and

·	Carotid WALLSTENT® Monorail® Endoprosthesis, a less-invasive alternative to surgery for treating carotid artery disease.

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incremental medical device and vigilance reporting, which could adversely impact physician perception of our products.

Strategic Initiatives

In 2007, we announced several new initiatives designed to enhance short- and long-term shareholder value, including the restructuring of several of our businesses and product franchises; the sale of non-strategic businesses and investments; and significant expense and head count reductions. Our goal is to better align expenses with revenues, while preserving our ability to make needed investments in quality, research and development (R&D), capital improvements and our people that are essential to our long-term success. We expect these initiatives to help provide better focus on our core businesses and priorities, which will strengthen Boston Scientific for the future and position us for increased, sustainable and profitable sales growth. Our plan is to reduce R&D and selling, general and administrative (SG&A) expenses by $475 million to $525 million against a $4.1 billion baseline, which represented our estimated annual R&D and SG&A expenses at the time we committed to these initiatives in 2007. This range represents the annualized run rate amount of reductions we expect to achieve as we exit 2008, as the implementation of these initiatives is taking place throughout the year; however, we expect to realize the majority of these savings in 2008. In addition, we expect to reduce our R&D and SG&A expenses by an additional $25 million to $50 million in 2009.  

Restructuring

In October 2007, our Board of Directors approved, and we committed to, an expense and head count reduction plan, which we anticipate will result in the elimination of approximately 2,300 positions worldwide. The plan is intended to bring expenses in line with revenues as a part of our initiatives to enhance short- and long-term shareholder value. We initiated activities under the plan in the fourth quarter of 2007 and expect to be substantially complete worldwide by the end of 2009.   Refer to Quarterly Results and Note G – Restructuring-related Activities to our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report for information on restructuring-related activities and costs.

Divestitures

During 2007, we determined that our Auditory, Vascular Surgery, Cardiac Surgery, Venous Access and Fluid Management businesses were no longer strategic to our on-going operations. Therefore, we initiated the process of selling these businesses in 2007, and completed their sale in 2008, as discussed below. We received pre-tax proceeds of approximately $1.3 billion from the sale of these businesses and our TriVascular Endovascular Aortic Repair (EVAR) program, and eliminated an additional 2,000 positions in connection with these divestitures.

In January 2008, we completed the sale of a controlling interest in our Auditory business and drug pump development program, acquired with Advanced Bionics Corporation in 2004, to entities affiliated with the principal former shareholders of Advanced Bionics for an aggregate purchase price of $150 million in cash.  In connection with the sale, we recorded a loss of $367 million (pre-tax) in 2007, attributable primarily to the write-down of goodwill. In addition, we recorded a tax benefit of $6 million in the first quarter of 2008 in connection with the closing of the transaction. Also in January 2008, we completed the sale of our Cardiac Surgery and Vascular Surgery businesses for net cash proceeds of approximately $705 million. In connection with the sale, we recorded a pre-tax loss of $193 million in 2007, representing primarily a write-down of goodwill. In addition, we recorded a tax expense of $56 million in the first quarter of 2008 in connection with the closing of the transaction. In February 2008, we completed the sale of our Fluid Management and Venous Access businesses for net cash proceeds of approximately $415 million.  We recorded a pre-tax gain of $234 million ($129 million after-tax) during the first quarter of 2008 and a tax benefit of $17 million in the third quarter of 2008 associated with this transaction.

Further, in March 2008, we sold our EVAR program obtained in connection with our 2005 acquisition of TriVascular, Inc. for $30 million in cash. We discontinued our EVAR program in 2006. In connection with the

 

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sale, we recorded a pre-tax gain of $16 million ($35 million after-tax) in the first quarter of 2008.

In June 2008, as part of our initiative to monetize non-strategic investments, we signed definitive agreements to sell the majority of our investments in, and notes receivable from, certain publicly traded and privately held entities for gross proceeds of approximately $140 million. In connection with this investment monetization initiative and the sale of other non-strategic investments, we recognized net pre-tax gains of $15 million ($9 million after-tax) in the third quarter of 2008, partially offsetting pre-tax losses of $96 million recognized in the second quarter. Refer to our Other, net discussion, as well as Note D – Investments and Notes Receivable to our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report for more information on our investment portfolio activity.

Quarterly Results

Net Sales

 

In the first quarter of 2008, we reorganized our international structure in order to allow for better utilization of infrastructure and resources. Accordingly, we have revised our reportable segments to reflect the way we currently manage and view our business. We now have three reportable segments based on geographic regions: the United States; EMEA, consisting of Europe, the Middle East and Africa; and Inter-Continental. We combined our Middle East and Africa operations, previously included in our Inter-Continental segment, with Europe to form a new EMEA region and merged our former Asia Pacific region into our Inter-Continental segment. We exclude net sales related to divested businesses from the net sales of our reportable segments. The following tables provide our third quarter and year to date net sales by region and the relative changes on an as reported and constant currency basis. We have reclassified previously reported 2007 results to be consistent with the 2008 presentation.

 

										Change
		Three Months Ended								As Reported				Constant
		September 30,								Currency				Currency
(in millions)		2008				2007				Basis				Basis
United States		$	1,125			$	1,111				1%				1%
EMEA			472				426				11%				4%
Inter-Continental			369				378				(2%)				(8%)
International			841				804				5%				(2%)
Sub-total			1,966				1,915				3%				0%
Divested Businesses			12				133				N/A				N/A
Worldwide		$	1,978			$	2,048				(3%)				(6%)

 

										Change
		Nine Months Ended								As Reported				Constant
		September 30,								Currency				Currency
(in millions)		2008				2007				Basis				Basis
United States		$	3,330			$	3,397				(2%)				(2%)
EMEA			1,509				1,352				12%				1%
Inter-Continental			1,147				1,048				9%				(1%)
International			2,656				2,400				11%				0%
Sub-total			5,986				5,797				3%				(1%)
Divested Businesses			62				407				N/A				N/A
Worldwide		$	6,048			$	6,204				(3%)				(7%)

 

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The following tables provide our third quarter and year to date worldwide net sales by division and the relative changes on an as reported and constant currency basis. In addition to the sale of certain of our businesses in the first quarter of 2008, we began integrating our Electrophysiology business with our CRM business in order to better serve the needs of electrophysiologists by creating a more efficient organization. Further, we integrated our remaining Oncology franchises into other business units. We have reclassified previously reported 2007 results to be consistent with the 2008 presentation.

 

										Change
		Three Months Ended								As Reported				Constant
		September 30,								Currency				Currency
(in millions)		2008				2007				Basis				Basis
Interventional Cardiology		$	694			$	740				(6%)				(9%)
Peripheral Interventions			143				147				(3%)				(6%)
Cardiovascular			837				887				(5%)				(9%)
Neurovascular			88				81				7%				2%
Peripheral Embolization			23				25				(3%)				(6%)
Neurovascular			111				106				5%				0%
Cardiac Rhythm Management			572				517				11%				8%
Electrophysiology			40				36				10%				8%
Cardiac Rhythm Management			612				553				11%				8%
Endoscopy			238				217				9%				6%
Urology			109				100				9%				8%
Endosurgery			347				317				9%				7%
Neuromodulation			59				52				15%				15%
Subtotal			1,966				1,915				3%				0%
Divested Businesses			12				133				N/A				N/A
Worldwide		$	1,978			$	2,048				(3%)				(6%)

 

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										Change
		Nine Months Ended								As Reported				Constant
		September 30,								Currency				Currency
(in millions)		2008				2007				Basis				Basis
Interventional Cardiology		$	2,158			$	2,257				(4%)				(9%)
Peripheral Interventions			452				445				1%				(3%)
Cardiovascular			2,610				2,702				(3%)				(8%)
Neurovascular			272				260				4%				(3%)
Peripheral Embolization			68				71				(3%)				(6%)
Neurovascular			340				331				3%				(4%)
Cardiac Rhythm Management			1,715				1,580				9%				5%
Electrophysiology			116				109				7%				4%
Cardiac Rhythm Management			1,831				1,689				8%				4%
Endoscopy			710				637				11%				6%
Urology			318				295				8%				6%
Endosurgery			1,028				932				10%				6%
Neuromodulation			177				143				24%				23%
Subtotal			5,986				5,797				3%				(1%)
Divested Businesses			62				407				N/A				N/A
Worldwide		$	6,048			$	6,204				(3%)				(7%)

 

We manage our international operating regions and divisions excluding the affect of changes in foreign currency, and we manage market risk from currency exchange rate changes at the corporate level. To calculate revenue growth rates that exclude the impact of currency exchange, we convert actual current-period net sales from local currency to U.S. dollars using standard foreign exchange rates. The regional constant currency growth rates in the table above can be recalculated from our net sales by reportable segment as presented in Note N – Segment Reporting to our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report. Growth rates are based on actual, non-rounded amounts and may not recalculate precisely.

U.S. Net Sales

 

During the third quarter of 2008, our U.S. net sales increased by $14 million, or one percent, as compared to the third quarter of 2007. The increase related primarily to an increase in CRM product sales of $34 million, driven by market growth and new product launches during 2008, including the COGNIS™ CRT-D and TELIGEN™ ICD systems in August, as well as the launches of our CONFIENT™ ICD system, the LIVIAN CRT-D system, and the ALTRUA™ family of pacemaker systems earlier in the year. Further, we increased net sales from our Endosurgery division by $14 million driven by growth in both the Endoscopy and Urology franchises, as well as $6 million in our Neuromodulation division due to market growth and continued physician adoption of the Precision Plus™ spinal cord stimulation technology. Partially offsetting these increases was a decrease in Cardiovascular division sales of $44 million, due primarily to lower sales of our drug-eluting coronary stent systems. See the Business and Market Overview section for a more detailed discussion of the drug-eluting stent market and our position within that market.

During the first nine months of 2008, our U.S. net sales decreased by $67 million, or two percent, as compared to the first nine months of 2007. The decrease related primarily to a decrease in Cardiovascular division sales of $201 million, due primarily to lower sales of our drug-eluting coronary stent systems. This decrease was partially offset by an increase in CRM product sales of $77 million, driven by market growth as well as new product launches during 2008, including the COGNIS™ CRT-D and TELIGEN™ ICD systems in August, as well as the launches of our CONFIENT™ ICD system, the LIVIAN CRT-D system, and the ALTRUA™ family

 

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of pacemaker systems earlier in the year. Further, we increased sales from our Endosurgery division by $34 million, driven by growth in both the Endoscopy and Urology franchises, as well as $30 million in our Neuromodulation division, due to market growth and continued physician adoption of the Precision Plus™ spinal cord stimulation technology. 

International Net Sales

 

During the third quarter of 2008, our international net sales increased by $37 million, or five percent, as compared to the third quarter of 2007. The increase was attributable primarily to the favorable impact of currency exchange rates, which contributed $54 million to net sales. Within our international business, sales of our CRM products increased $21 million and our Endosurgery sales increased $16 million. Our Cardiovascular division’s sales decreased $5 million, with lower sales of our drug-eluting coronary stent systems largely offsetting increased sales of other Cardiovascular products. See the Business and Market Overview section for a more detailed discussion of the drug-eluting stent market and our position within that market.

During the first nine months of 2008, our international net sales increased by $256 million, or 11 percent, as compared to the first nine months of 2007. The increase was attributable entirely to the favorable impact of currency exchange rates, which contributed $258 million to our sales growth for the first nine months of 2008, as compared to the same period in the prior year. Within our international business, our Cardiovascular division’s sales increased $109 million. We also increased sales of CRM products by $65 million and Endosurgery sales by $62 million.

Gross Profit

 

For the third quarter of 2008, our gross profit was $1.323 billion, as compared to $1.473 billion for the same period in the prior year. Our gross profit margin for the third quarter of 2008 decreased to 66.9 percent from 71.9 percent for the third quarter of 2007. For the first nine months of 2008, our gross profit was $4.209 billion, as compared to $4.498 billion for the same period in the prior year. Our gross profit margin for the first nine months of 2008 decreased to 69.6 percent from 72.5 percent for the first nine months of 2007. The following is a reconciliation of our gross profit margin and a description of the drivers of the change from period to period:

 

		Three Months				Nine Months
Gross profit margin - period ended September 30, 2007			71.9%				72.5%
Shifts in product sales mix			(3.6)%				(2.5)%
Net impact of foreign currency			(1.6)%				(1.0)%
Impact of inventory charges			(1.6)%				(0.5)%
Reduced Project Horizon spending			0.5%				0.8%
Reduced manufacturing variances and scrap charges			0.8%				0.0%
All other			0.5%				0.3%
Gross profit margin - period ended September 30, 2008			66.9%				69.6%

 

The primary factor contributing to a shift in product sales mix toward lower margin products was a decrease in sales of our higher margin TAXUS® drug-eluting stent system during the third quarter and first nine months of 2008. During the third quarter of 2008, the shift in sales away from TAXUS stent systems was primarily due to increased sales of PROMUS™ stent systems in the U.S., following the July 2008 approval of PROMUS. Under the terms of our supply arrangement with Abbott, the gross profit margin of a PROMUS stent system is significantly lower than that of our TAXUS stent system. For the third quarter of 2008, sales of our PROMUS stent system represented 32 percent of our worldwide drug-eluting stent system sales, as compared to two percent for the third quarter of 2007.

In addition, our gross profit margin for the three and nine months ended September 30, 2008, as compared to

 

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the same periods in the prior year, was negatively impacted by the settlement of foreign currency hedge contracts on intercompany and third party transactions offsetting the benefit of foreign currency fluctuations. Our gross profit margin for the third quarter of 2008 was also negatively impacted by inventory charges during the third quarter of 2008, consisting of a $23 million charge related to an FDA warning letter received by one of our third party sterilizers, and a $9 million charge related to a free technology offering to certain CRM patients. Partially offsetting these decreases was lower spending associated with Project Horizon, our corporate-wide initiative to improve and harmonize our overall quality processes and systems, which ended as a formal program as of December 31, 2007.  In addition, our gross profit margin was positively impacted by lower manufacturing variances and favorable absorption of manufacturing variances, and lower levels of scrap related to certain of our products.

Operating Expenses

 

In 2007, we announced several new initiatives designed to enhance short- and long-term shareholder value, including the restructuring of several of our businesses and product franchises; the sale of non-strategic businesses and investments; and significant expense and head count reductions. Refer to the Business and Market Overview section for more on our cost improvement initiatives, including the anticipated cost reductions and expenses associated with these initiatives.

The following table provides a summary of certain of our operating expenses:

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2008			2007			2008			2007
		$	% of Net Sales		$	% of Net Sales		$	% of Net Sales		$	% of Net Sales
Selling, general and administrative expenses		610	30.8%		719	35.1%		1,925	31.8%		2,205	35.5%
Research and development expenses		252	12.7%		271	13.2%		749	12.4%		835	13.5%
Royalty expense		51	2.6%		48	2.3%		144	2.4%		151	2.4%
Amortization expense		131	6.6%		155	7.6%		410	6.8%		467	7.5%

 

Selling, General and Administrative (SG&A) Expenses

 

During the third quarter of 2008, our SG&A expenses decreased $109 million, or 15 percent, as compared to the third quarter of 2007. As a percentage of net sales, our SG&A expenses decreased to 30.8 percent of net sales, as compared to 35.1 percent for the same period in the prior year. A decrease in our SG&A expenses of approximately $120 million was attributable primarily to lower head count and spending as a result of our business divestitures and expense and head count reduction plan. This decrease was partially offset by an increase in SG&A expenses of $12 million attributable to foreign currency exchange.

During the first nine months of 2008, our SG&A expenses decreased $280 million, or 13 percent, as compared to the first nine months of 2007. As a percentage of net sales, our SG&A expenses decreased to 31.8 percent of net sales, as compared to 35.5 percent for the same period in the prior year. A decrease in our SG&A expenses of $340 million was attributable primarily to lower head count and spending as a result of our business divestitures and expense and head count reduction plan. This decrease was partially offset by an increase in SG&A expenses of $60 million attributable to foreign currency exchange.

Research and Development (R&D) Expenses

• Volatility in the coronary stent market, competitive offerings and the timing of receipt of regulatory approvals to market existing and anticipated drug-eluting stent technology and other stent platforms;

• Our ability to launch our next-generation drug-eluting stent system, the TAXUS® Liberté® coronary stent system, in the U.S., and to maintain or expand our worldwide market positions through reinvestment in our two drug-eluting stent programs, including PROMUS™ Element and TAXUS® Element;

   

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• Our ability to manage the mix of our PROMUS™ stent system revenue relative to our total drug-eluting stent revenue and to launch on-schedule a next-generation everolimus-eluting stent system with gross profit margins more comparable to our TAXUS® stent system, and to maintain our overall profitability as a percentage of revenue;

• Abbott’s ability to obtain approval for its XIENCE™ V everolimus-eluting coronary stent system in Japan and Abbott’s payment to us of the associated milestone obligation;

• Our share of the worldwide drug-eluting stent market, the impact of concerns relating to late stent thrombosis on the size of the coronary stent market, the distribution of share within the coronary stent market in the U.S. and around the world, the average number of stents used per procedure and average selling prices;

• The overall performance of, and continued physician confidence in, our and other drug-eluting stent systems, our ability to adequately address concerns regarding the perceived risk of late stent thrombosis, and the results of drug-eluting stent clinical trials undertaken by us, our competitors or other third parties;

• The penetration rate of drug-eluting stent technology in the U.S. and international markets;

• Our ability to respond to the challenges presented by the entrance of additional competitors to the U.S. drug-eluting stent market;

• Our ability to manage inventory levels, accounts receivable, gross profit margins and operating expenses and to react effectively to worldwide economic and political conditions;

• Our reliance on Abbott’s manufacturing capabilities and supply chain, and our ability to align our PROMUS stent system supply from Abbott with customer demand through our forecasting and ordering processes; and

• Our ability to retain key members of our cardiology sales force and other key personnel.

• Our estimates for the worldwide CRM market, the recovery of the CRM market to historical growth rates and our ability to increase CRM net sales;

• The overall performance of, and referring physician, implanting physician and patient confidence in, our and our competitors’ CRM products and technologies, including our COGNIS CRT-D and TELIGEN ICD systems;

• The results of CRM clinical trials undertaken by us, our competitors or other third parties;

• Our ability to successfully launch our INGENIO™ pacemaker system in the U.S. and to expand our CRM market position through investment in our current and next-generation CRM products and technologies;

• Our ability to retain key members of our CRM sales force and other key personnel;

• Competitive offerings in the CRM market and the timing of receipt of regulatory approvals to market existing and anticipated CRM products and technologies;

• Our ability to continue to implement a direct sales model for our CRM products in Japan; and

• Our ability to avoid disruption in the supply of certain components or materials or to quickly secure additional or replacement components or materials on a timely basis.

• Any conditions imposed in resolving, or any inability to resolve, our corporate warning letter or other FDA matters, as well as risks generally associated with our regulatory compliance and quality systems;

• Our ability to minimize or avoid future FDA warning letters or field actions relating to our products;

• Changes in FDA clinical trial and post-market surveillance requirements and the associated impact on new product launch schedules and the cost of product approval and compliance;

• The effect of our litigation; risk management practices, including self-insurance; and compliance activities on our loss contingencies, legal provision and cash flows;

• The impact of our stockholder derivative and class action, patent, product liability, contract and other litigation, governmental investigations and legal proceedings;

• Our ability to effectively respond to inquiries resulting from increased governmental and regulatory scrutiny on the medical device industry;

• The on-going, inherent risk of potential physician advisories or field actions related to medical devices;

• Costs associated with our on-going compliance and quality activities;  and

• The impact of increased pressure on the availability and rate of third-party reimbursement for our products and procedures worldwide.

• Our ability to complete planned clinical trials successfully, to obtain regulatory approvals and to develop and launch products on a timely basis within cost estimates, including the successful completion of in-process projects from purchased research and development;

• Our ability to manage research and development and other operating expenses consistent with our expected revenue growth;

• Our ability to develop next-generation products and technologies within our drug-eluting stent and CRM businesses, as well as our ability to develop products and technologies successfully in addition to these technologies;

• Our ability to fund and achieve benefits from our focus on internal research and development and external alliances as well as our ability to capitalize on opportunities across our businesses;

• Our ability to prioritize our internal research and development project portfolio and our external investment portfolio to keep expenses in line with expected revenue levels, or our decision to sell, discontinue, write down or reduce the funding of certain of these projects without significantly adversely affecting our new product pipeline;

• Our ability to integrate the acquisitions and other alliances we have consummated, including Guidant;

• Our decision to exercise, or not to exercise, options to purchase certain companies with which we have alliances and our ability to fund with cash or common stock these and other acquisitions, or to fund contingent payments associated with these alliances;

• The timing, size and nature of strategic initiatives, market opportunities and research and development platforms available to us and the ultimate cost and success of these initiatives; and

• Our ability to successfully identify, develop and market new products or the ability of others to develop products or technologies that render our products or technologies noncompetitive or obsolete.

• Dependency on international net sales to achieve growth;

• Risks associated with international operations, including compliance with local legal and regulatory requirements as well as changes in reimbursement practices and policies; and

• The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses and resulting margins.

• Our ability to implement, fund, and achieve sustainable cost improvement measures, including our expense and head count reduction initiatives and restructuring program, intended to better align operating expenses with expected revenue levels and reallocate resources to better support growth initiatives;

• Our ability to generate sufficient cash flow to fund operations, capital expenditures, and strategic investments, as well as to effectively manage our debt levels and minimize the impact of interest rate fluctuations on our earnings and cash flows;

• Our ability to recover substantially all of our deferred tax assets;

• The impact of examinations and assessments by domestic and international taxing authorities on our financial condition or results of operations;

• Our ability to access the public and private capital markets and to issue debt or equity securities on terms reasonably acceptable to us; and

• Our ability to regain investment-grade credit ratings and to remain in compliance with our financial covenants.

• Risks associated with significant changes made or to be made to our organizational structure, or to the membership of our executive committee;

• Risks associated with our acquisition of Guidant, including, among other things, the indebtedness we have incurred and the integration costs and challenges we will continue to face;

• Our ability to retain our key employees and avoid business disruption and employee distraction as we continue to execute our expense and head count reduction initiatives; and

• Our ability to maintain management focus on core business activities while also concentrating on resolving the corporate warning letter; managing the challenges of the financial and credit market upheaval; and executing strategic initiatives, including expense and head count reductions and our restructuring program; in order to streamline our operations and reduce our debt obligations.