愛德華生命科學 (EW) 2002 Q1 法說會逐字稿

Good afternoon my name is [Alexandria], and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Edwards Lifesciences earnings release conference call, with our host Vice President of Investor Relations Mr. David K. Erickson. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would to like to ask a question during this time, simply press * then the 1 on your telephone keypad, and your questions will be taken in the order they are received. If you would like to withdraw your question you may do so by pressing the pound key. I would know like to turn the call over to our host Vice President of Investor Relations Mr. David K. Erickson. Mr. Erickson. Please go ahead sir.

Welcome and thank you for joining us today. Just after the close of regular trading we released our first quarter 2002 financial results. And on today's call we will focus our prepared remarks on information that will complete the material included in the press release and supplemental financial schedules, and then allocate the remaining time for Q&A. Our presenters on today's call are Michael A. Mussallem, Chairman and Chief Executive Officer, and Bruce J. Bentcover, Chief Financial Officer. Before I turn the call over to Michael I like to remind you that during todays call Edwards Lifesciences management will be making forward-looking statements that are based on estimates, assumptions, and projections. Though believed to be reasonable these statements involve risks and uncertainties and actual results or experiences could differ from the forward-looking statements. These statements include, but are not limited to sales growth, net income, and earnings share per share goals for 2002. Sales of PERIMOUNT pericardial heart valves, and overall cardiac surgery market conditions, sales and clinical trials of Lifepath AAA, timing of regulatory approvals, and new product launches including MC3, Optimaze, and peripheral stents. Overall efforts aimed at stimulating sales growth the impact of foreign exchange and other risk factors that may be found at the end of the today's press release and in filings Edwards with the Securities and Exchange Commission. With that I will turn the call over to Michael A. Mussallem. Michael.

Thank you David and good afternoon everyone. We are pleased to share with you our results for the first quarter of 2002, which reflect strong gross profit margin, record investments in R&D, lower debt levels, and the achievement of key R&D milestones. Most importantly, we are well on a way to another year of strong bottom line growth as we continued to invest the new initiatives, which I will discuss in more detail during today's call. For the first quarter total sales grew 3% compared to the last year excluding the impact of foreign exchange and the perfusion services divestitures. Growth in our key product lines, cardiac surgery, and critical care were partially offset by declines in the vascular and perfusion products lines. Now we will discuss each of our four product lines in more detail. Our largest most profitable and fastest growing product line cardiac surgery grew 5.5% in the quarter excluding the impact of effects. Sales were very strong in the first quarter of last year, as a result of the US launch of our PERIMOUNT mitral valve and unusually high number of heart valve procedures creating a challenging comparison in this quarter. Additionally, results this quarter were impacted by the assumption of direct sales responsibility and the associated inventory in several small countries. Cardiac surgery sales reached record levels this quarter despite facing challenging year-over-year comparisons. Our market leading PERIMOUNT valves continue to drive the shift from mechanical to tissue valves, although some of this quarters growth was trimmed by the launch of a competitor's porcine valve in the US. In spite of trials of this competitor's valve we remained confident in side-by-side comparisons of clinical performance that our PERIMOUNT valves will ultimately be preferred. We have a number of both short and long-term initiatives focussed on broadening the understanding of the superior attributes of our valves for clinicians and their patients. Next, I would like to update you on a [_____] our heart valve initiatives. Recently we have received five 10-K approval for a device that facilitates a novel beating heart valve repair procedure trademark [Light Stitch]. Later this summer we expect to begin collecting clinical data on its effectiveness. Also in the second half of the year we expect to receive FDA approval of our S.A.V. porcine valve, currently, the market leading porcine valve in Europe. And we are ahead of scheduled with the launch of our next generation tissue valve the PERIMOUNT Magna valve, which we now except to launch in the first half of 2003. The Magna valve builds on our successful PERIMOUNT technology by offering improved hemodynamics and super anular positioning. These are just a few examples of the products that we have in development, which give us the confidence to expect that we will extend our leadership position in heart valve therapy. Yesterday, we announced to receive a five, 10-K clearance for a new valve repair system, which we call MC3. The MC3 is the first three-dimensional ring designs specifically for surgical repair of the hearts tricuspid valve and we are proud to have partner with surgeons from the Cleveland Clinic to develop this system. As you know, Edwards' pioneer heart valve repair and while the majority of repair today focusses on the mitral position improved diagnostics are resulting in more attention on tricuspid disease. We expect the tricuspid repair segment to be small less than $10 million today, but believe that is unreserved and could grow to be much larger. As a worldwide leader in heart valve therapy we have over the long run consistently grown our market share by developing and marketing valves with superior durability and hemodynamics. And we are confident that our PERIMOUNT valves will continue to drive additional global tissue valve penetration helping sustained a worldwide tissue valve market growth rate of 10% in 2002 and beyond. Now one of our 2002 growth initiatives C02, TMR, generated sales of more than $2 million a year. We continue to promote awareness and adoption of this promising therapy and recently hosted several clinician education presentations at the American College of Cardiology conference. These results that we have seen from our efforts today are encouraging and widely a modest contributor to overall cardiac surgery. We continue to expect 2002 TMR sales to be very favorable compared to 2001. Last week, we received FDA clearance and announced the completion of our first patient case using our new Optimaze surgical ablation system. The Optimaze system another of our 2002 growth initiatives improves upon the clinically successful, but difficult in time consuming [Mayes] surgical procedure for treating atrial fibrillation the most common cardiac arrhythmia. We expect to complete a clinic study this fall and remain on track for a commercial launch of this system in the US and Europe in late 2002. Now our superior PERIMOUNT technology coupled with our robust product pipeline and it returned to more normal the year-over-year comparisons gives us confidence the growth and cardiac surgery excluding the impact of foreign exchange will improve in the second quarter and return to more than 10% by the second half of 2002. Now turning to critical care. Sales in this steadily growing product line increased 4.1% in the quarter excluding the impact of foreign exchange. The greatest contributors to growth in this category this quarter were pressure monitoring and access products. And as expected we are continuing to experience growth in advanced technology catheter products with the expense of our most basic catheter product offerings. Due to continued solid results, we now expect critical care growth to be in the mid-single digits for the full year 2002 excluding [FX]. Vascular sales declined 8.1% for the quarter excluding the foreign exchange impact. As we have said before Edwards' base vascular franchise consist primarily of products to surgically treat peripheral vascular disease and continues to be impacted by the shift toward products that treat the disease less invasively. We are continuing to focus our efforts on minimally invasive technologies that can capitalize on this trend away from surgical technologies. Our Lifepath AAA device and peripheral stent initiatives are each expected to play a key role in the transition to an endovascular platform, and I am pleased to report progress in both of these areas. Since the re-launch of our Lifepath AAA physician response and clinical results have been favorable in both Europe and the US. We have recently reviewed the clinical data for patients implanted with Lifepath two years ago, which show that the product continues to perform as expected by reducing the size of the aneurysm. Now the establishment of our European sales team in clinical training is taking longer than we originally expected as such our goal to complete more than 1000 implants in Europe this year now seems aggressive. In the US we are continuing to enroll patients in our clinical trial and remain on track to complete enrollment by the end of the third quarter with a US launch in 2004. Our newest initiative peripheral stent is also progressing nicely and we remain enthusiastic about this opportunity. We are meeting our development milestones and are confident that we will have our first clinical experience by the end of the year. We continued to expect to have a broad differentiated-peripheral stent product offering ready for global release by mid 2003. For the vascular franchise as a whole we expect to report modest sales growth beginning in the second quarter and ramping up throughout the year as our Lifepath AAA program expands. This will result in a full year sales growth rate of 5%-10 % excluding the impact of foreign exchange. Next perfusion sales excluding the [Impath, Pactivath FX] and the perfusion services divestitures declined 10.4% in the quarter and once again lower the company's overall sales growth rate. This decline was due to the plan reduction in sales to [Jostra]. We continue to expect our perfusion product line degenerates sales of approximately $35-$40 million in 2002. In summary, we remain comfortable with our goal for total sales growth of 6%-9% for the year comprised of based business growth and growth in our 2002 initiatives Lifepath AAA, CO2, TMR, and Optimaze. Now I will turn it over to Bruce will discuss some additional financial results. Bruce.

Thank you Michael. Growth profit margins this quarter was 57.4% up significantly from the year ago quarter and comparable to the fourth quarter. The year-over-year improvement continues to results from the divestiture of the US perfusion service business and sales of our higher margin cardiac surgery products. For the rest of the year, we expect our gross profit margin to be comparable to these levels. Selling, general, and administrative expenses were $50.7 million or 31.2% of sales in the first quarter. This amount was slightly higher than the fourth quarter, but comparable with the percentage of sales. The sequential increase was due primarily to increased expenses for new growth initiatives. For the full year 2002, we continue to expect SG&A to be about 31% of sales. Next R&D investment reached a record level in the first quarter of $15.4 million. This is a significant increase over the same quarter last year and is consistent with our goal of increasing R&D investment to develop innovative products and technologies to enhance our overall sales growth rate. We continue to expect to increase R&D spending by 20% in 2002 and estimate R&D expenses as a percent of sales to approach 10%. Our Japan operating results, which are recorded in the other operating income lines with $3.8 million. This result reflects strong performance in the cardiac surgery product line partially offset by the impact of foreign exchange. For the rest of the year strong operating performance in Japan is expected to offset by a weaker end resulting in approximately $14 million of other operating income for the full year 2002, which is inline with our previous guidance. We are pleased to report that our complex method of recording Japan's result should come to close in fourth quarter of this year. As we mentioned in the press release we have reached in agreement and principle with Baxter to exercise our option to purchase the Japan business for a net $3.2 billion Yen or approximately $25 million. This amount is lower than the $30 million originally mentioned at the time of stent due to the now weaker end. Recall that this business has been operating under a joint venture agreement since we it was found in April 2000. The business recorded approximately $170 million of sales last year $62 million of which was consolidated in our operating results. We do not expect this transaction to have a material impact and net income as we already captured substantially all of the net profit generated by the business. We will begin reporting the results of the Japan business on a consolidated basis upon completion of the transaction. As we previously mentioned effective this quarter we adopted SFAS-142, which eliminated the remaining $14 million of annual goodwill amortization from our P&L. This allowed us to increase our long-term 15% plus net income growth goal to a rate of more than 25% in 2002. Additionally, we did not incur a one-time impairment charge as a result of adopting this standard. The elimination of goodwill amortization and higher gross margins have allowed us to increase our investments in R&D and still significantly improve our operating income margins from 14% a year ago to 19% this quarter. Net interest expense was $2.8 million in the first quarter lower than the year ago period, and the fourth quarter due to our significantly lowered debt levels and the positive impact from lower interest rates. At the end of the first quarter our total debt balance was $292 million down $19 million from the end of the year resulting in a debt-to-capitalization ratio of 38% and a debt-to-EBITDA ratio of 1.8. In 2002, we expect our quarterly interest expense to be comparable to the amount recorded this quarter. Our accepted income tax rate this quarter decreased to 26% from 27% due primarily to the elimination of non-detectable goodwill amortization resulting from the implementation of SFAS 142. We expect to maintain this tax rate for the remainder of this year. Foreign exchange negatively impacted total sales by $4.2 million this quarter compared to the same period last year, however, our hedging activity enabled to us largely offset the bottom line impact. In the first quarter, we re-purchased approximately 66,000 shares of stock under our stock repurchase program, bringing the total shares we purchase program today to approximately 93,000. Throughout the year we expect to continue repurchasing shares as well as using our strong cash flows to invest an additional growth opportunities and reduce debt. With that I will turn it back to Michael.

Thanks Bruce. Before we open it up for questions, I would like to review our financial goals for 2002. In addition, to increasing total sales by 6%-9% we plan to increase R&D spending by 20% compared to 2001 results. We also expect to generate EBITDA of $165 million and our new lower tax rate increases our net income growth expectation by 2% percentage points above our original goal of more than 25% growth over last year. This quarter we laid the groundwork for a solid 2002, and we excited about the year had of us. This will be a year of strong financial results further development of key growth initiatives and continued transformation of Edwards Lifesciences into a faster growing company. And while transformation remains a primary focus we are as always committed to reliably delivering near-term results. We look forward to sharing with you our success as they enfold this year. You know we often talk about the importance of our strong relationship with cardiovascular surgeons and at the upcoming American Association of Thoracic Surgery Conference in Washington DC they see next month, you will really get a sense of this. At AATS will be hosting a number of in-booth presentations by leading clinicians and topics such as Optimaze, C02, TMR, calcification litigation, and the MC3 our new tricuspid valve repair products. On the second day of the conference Edwards will be sponsoring a debate featuring three of the most prominent cardiac surgeons will discuss the subject of heart valve therapy. Additionally, we will be hosting our reception with management immediately preceding the debate. If you are planning to attend the AATS we encourage to you join us for this events. Please contact our Investor Relations Department for further information. And with that would be happy to answer any of your questions.

Thank you sir. I would like to remind everyone in order to ask the question please press * than the 1 on your telephone keypad at this time. If your question has already been asked and answered, you may withdraw your question by pressing the pound key. Mr. Erikson, please hold for you first question. Our first question is from [Jason Robin] of Wachovia Securities.

JASON ROBIN]: Hi good afternoon guys. One question on the Japanese business, critical care represents your largest percent of sales over there. Can you tell us somewhat about what the dynamics are behind that business? Have you begun introducing the advanced catheter line over there? And what do you see as growth expectation in japan for that business segment.

Thanks Jason. A matter of fact that is one of our strongest markets for advanced technology catheter. The uptake in Japan has been tremendous and actually it is the advanced technology catheter is much larger than the base catheters in Japan and we really have unique product offering there. So we have been able to continuously grow that product line and we also distribute some line products into the critical care environment and so have a franchise with anesthesiologist as well as in terms it. So it has probably got an overall growth rate that is similar to the critical care growth rate for the total company though Jason.

JASON ROBIN]: Okay and did the advanced catheters that they represents today are greater than 50% of the hemodynamic market over there or your sales?

Do they represent more than 50% of our sales and yes they do.

JASON ROBIN]: Okay and shifting gears to the heart valve business. Can you put some numbers around the size of the tricuspid market and number of procedures performed each year and potential patients with tricuspid disease?

Yeah and thanks for that question Jason. It is a good question. We estimate the tricuspid market right now around $10 million and there is a variety of things that are done today including Edwards market tricuspid valve that was developed Dr. Carpentier many years ago at two-dimensional repair product and also some of the repair products that are designed for the micro position than the tricuspid position plus there is a procedure called the [De-Vega] procedure that gets used in the tricuspid procedure. So, the combination also is probably about 10, but you know thought here is with the advent of more ultrasound and more precise diagnostics and I think we expect there to be a greater recognition of the occurrence of tricuspid disease and none have an opportunity to grow that market place to may be three or four times the size that is today over the next few years.

MORGAN JASON]: Okay and I you look at the number of procedures done in the tricuspid market and would you say it might be 5% of all of valve procedures or 10%?

You know that I am not sure that we know that the number is and that is 5 to 10% and I think that probably it is around 5000, but I am not sure I remember and I have to get back to you on that.

MORGAN JASON]: Okay and thank you.

Your next question is from Glenn Novarro of Credit Suisse First Boston.

Hi guys. A couple of questions for Bruce. First with respect to Q2 EPS guidance when you really quickly run the mass lower tax rate is getting you about a penny per quarter consensus for Q2 is $0.34, so one should we be moving that number up to $0.35? Secondly, the 26% tax rate is this a good number for 2003 as well, and then lastly, you talked about in the tissue business having an adverse impact from inventory issues overseas one is this and one time in nature, two what was the dollar impact, two sales, and three should these sales immediately come back in Q2?

Thanks and okay Glenn. Let me try to take off three of those and first of all in that on the tax rate, 26% certainly is what we would point you towards for the balance of this year and beyond at this point. We know nothing better at this point to give you a different rate going into 2003 so I would keep it there. As far as Q2 and the impact of the tax rate change, I think when you said that it is about a penny, a quarter because of the tax rate, I think that is probably rounding up and I think and when we look at it and what we said, on a full year basis that would add about 2% growth to net income and so you know when we gave the previous guidance more than 25% growth and net income what we are know saying is that add this 2% impact of the tax rate change to that 25% and that is the future guidance for the balance of the year. So, you know that I am not going to be precise on penny on a particular for that. In terms of your final question, which is purchasing the inventory, some of them going from the distributor relationship in these countries and it was three countries, Thailand, China, and Greece and that was the kind of contra-revenue approach and that is why it impacted sales and that is the one time advance for those countries and so the impact and you won't see the impact of those countries again in any other quarter and you would expect that and you will get revenue and we will be able to recognize revenue in those locations starting in the second quarter.

What was the impact in this current quarter?

Probably about a percent and the growth rate for the business.

Okay and great. I will get back to you with some other questions and thanks.

Your next question is from [Tim Nelson] of US Bancorp Piper Jaffray.

TIM NELSON]: Hi guys. I wonder if you could drill down little further into the cardiac surgeries and heart valve growth rate here and I will get some confidence that in fact accelerate in the back after the year. It appears to me that you know that the growth has been decelerating if you look at the last three quarters versus first part of 2001 and last part of 2000 while competition is certainly been increasing and we are reporting some very healthy tissue valve growth rates over the last three quarters. What makes us have confident that you can in fact grow faster in the back half of the year?

Thanks this is Mike. I appreciate that. I think there is a combination of things. One is we feel like comparisons are going to get certainly easier for us in the back half the year than they have been in the first part partially because we feel like we have felt the effect of the competitive launch and that is the sort of subsides that goes away and when we are just on the basis of the strength of the pericardial franchise and the strong initials that we have wrapped around that were convinced that a lot of that is going to come back to us and then when you add on top of that new product launches that Edwards has and we feel very confident that we are going to be in the 10% plus range im the back half of the year.

TIM NELSON]: Is this increasing competitive way result in any price pressure in this market area?

We still do not have a complete on price in this segment. We believe that these valves stand on a their own and a matter of fact I think the most recent competition has actually been reasonably high price so this really has not been a price issue.

TIM NELSON]: And then finally, what is happening with recent medical segment. Is that been stable or is that declining a little bit and therefore heart valve is helping I think?

No actually research medical for this quarter was probably right about at the rest of the cardiac surgery, but may have been slightly higher. So, it has been pretty much preceding the way we have and so I just remember what was in this quarter and if you think about the fact that we normally grow with 10% and I believe me we are very focused, but always growing this business at 10% and more and we are very disappointed and react aggressively when we do not see that. You know that we have some tough comparisons between the high procedures that we saw in the previous year and the fact that we were still launching our pericardial mitral last year and the assumption of this distributor business, that probably shaped off a good three points of growth and you know then some competition on top of that and we end up where we are, but what pretty convinced as this starts bouncing back immediately in Q2 and a matter of fact that we even saw that the second part of the first quarter be substantially stronger than the first part and we really think that this is going to be as I said turn back to be 10% plus in the second half of the year.

TIM NELSON]: Okay and thank you.

Your next question is from Katherine Martinelli of Merrill Lynch.

Thank you and good afternoon. First question on the cardiac surgery side of the business and Mike you had discussed in Q4 how the strategy going forward and was going to really be concentrating on increasing the penetration rates with existing accounts. Just wanted to see if we had any update on that. Do you during the quarter see any increase in the re-order rate from existing accounts that had already have the turnout launched?

Yeah and it is a good question Katherine that is exactly what we planned on doing, but you know probably what we have seen more is within some of the existing accounts some early adaptors that have been willing to try competitive valve products and so that is really and probably what we felt more than anything else and we think that most of these are happening on a trial basis and we are pretty convinced here that on head-on-head competition which we are encouraging that our performance is going to bare itself out. The CEP mitral valve in particular which we talked about and we are going to focus that valve you know just with an increasing penetration had a very strong increase in the US during the quarter and I think it was certainly an excess at 20% growth and so in terms of you know is that happening and yes it is happening.

And then just secondly with respect to the Lifepath launch in Europe and I believe on the fourth quarter call you guys were targeting 10% plus growth for the full year on constant currency and we cast the net in that 5-10% range. Is that primarily tied to the Lifepath and should we assume the 1000 goal is more in the 5-700 range for the full year, is that a better data point to be looking towards?

Yeah and I think that is a correct characterization at this point Kathy, we were saying as we think that the 1000 is aggressive. You know we had originally said that we thought Lifepath might have $6-10 million of growth and given the slow start that we got we think it is going to be approaching the low end of that and so I think that sort of a number that you through out for Europe would probably be the case and the remember that will have the US clinical units will be on top of that which will be a 100 plus whatever.

Could you just give last question I will get back into the queue could you just give any color in terms of the training or issue that they are getting used to a different stent design or valve design as the overall physician community just a little bit more hesitant given some of the stutter steps with competitive AAA devices.

You know I don't know that, I think it is we don't really say that it is one that is related to the physician community, actually found them to be very receptive. We think it's our own hiring practices Katherine. Frankly, when we are self critical, we think we are a little too cautious in terms of the way we went through our hiring process, we should have started earlier and more aggressively and because as we have gone through this hiring process we have just found that we weren't fully spent soon enough and we have even had a couple of pulse starts we have very high standards and so it costs us some early momentum, we think that is really at the core of it is more a coverage issue, then an adoption issue.

Those people in place now where that happen as though two one fold?

I would say they are mostly in place. We still actually have two hires that we are planning on.

Okay great thank you.

Good afternoon.

Couple of quick questions for you talking back again on the valve business. Can you talk about what you think the macerated growth has been in the recent term is it still holding around 10% you mentioned that for the full year, but is it staying in those levels and when you said you are if you might realize up for over 20% is that imply that you are cannibalizing some more of your own porcine sales or what are the dynamics other than the competitive issues?

Sure Ben, good question. Number one is overall we do think that tissue valves are continuing to grow at this 10% plus range and that overall heart valves are growing at 5%. Now I will tell you that in the first quarter I would guess that it did not achieve those levels. The first quarter of last year and we mentioned this on last years call just have extraordinarily high number of procedures for whatever reason and so may be not in the quarter but we think that it is the bit of anomaly and we think that during 2001 and the remainder of 2002, back at normal sort of growth rate. In terms of you know where the growth is and so we certainly did see steep declines in our porcine valves and so that was part of it and we probably could not see our aortic pericardial growth rate is fast as we are used to and that is part of what we are seen to get back on our tracks and that help and will give you a little bit of color plus the repair was not growing as fast as rest to the valve business in this quarter and was actually less than 5%.

Okay and you know other than just generally feeling confident that you are going to be able to turn this business around. Can you talk a little bit about specific steps that you are going to take for the sales report or marketing program or other things that sort of stop the momentum that Medtronics seems to have established on the tissue side?

Sure. There are several things. In sort of in regard to you know more aggressively selling a market and we are taking more aggressive marketing campaign including some clinical trials on specialty uses and a number of other things and we are doing some more careful customer segmentation that we have done in the past. We have sharpened our sales focus on the earlier doctors and we have also tired to lay out far more specifics and our own XenoLogiX tissue treatment process, which I think that we get credit by enlarged and by a large surgical community that our valves have tremendous data and have tremendous durability or long life, but I do not think that people will have full appreciation for our XenoLogiX process what continued to advance and what sort of impact that has on the valves that we are making today and the likelihood of their durability. So we are going to be rely on that and actually more in greater detail that the AATS as well. So, when you put some of those things together and you add to that the fact that probably tougher comparisons are going to sunset and we have a number of new products that are popping right now we feel pretty confident with this plus 10% in the second half is going to be that.

Okay and that is helpful. Bruce, just a quick question for you. The currency stays where it is and what do you think that full year impact of foreign exchange will be on the numbers just we have a sense of scale?

Well, I mean it is a stage where it is then we are confident you know in the guidance that we provided in the net income level you know with the tax rate change adding 2% to our more than 25% goal. The sales line in the quarter it was you know 2.5% or so in terms of impact year-over-year and I cannot really give you a figure that state its current rate whether that 2.5% would go down slightly just because certainly the end deteriorated throughout the year.

Other people have been telling us that would improved throughout the course of the year and I just turned out to see if it had done some specific calculation and thanks a lot.

Your next question is from [Arvee Hores] of JP Morgan Chase and Company.

ARVEE HORES]: Good afternoon guys. Could you layout the clinical pathway for your peripheral stent platform and perhaps talk about what trials you are going to be kind of entering into over the next couple of quarters and which stents you plan on of launching first assume biliary stent in the second half of next year?

Hello Arvee, this is Mike. Our intention here is actually the try-and-launch both balloon-expandable and self-expanding full lines in mid 2003. So, you know at this point we have got designed phases in place on the delivery systems in the stent and you know it is our intention to begin first clinical use with a biliary indication and that would be the way we get started and we follow that with clinical studies for more specific indications thereafter, but clearly our launch will be built on biliary approval.

ARVEE HORES]: Okay and can you juts give us some numbers I know you think you did, but did you give us the exact or range of growth for the pericardial versus porcine business in the quarter. It turns like pericardial is up in the single digits?

I do not know that we lay that out in specifics. We would have seen that porcine valves decline more than 10% and we would have seen probably pericardial and probably increased slightly less than 10% well in total.

ARVEE HORES]: And that you think that is probably more trailing of Medtronics porcine valve more than anything else right now just because that is the first time I think we have seen pericardial growths with single digit in the longtime?

It is two things and again I do not know if I am being very clear on this one, but these comparisons that are dried up in the past year are really pretty serious and that is the significant part of the growth issue, but you know but we will also admit that clearly competition is a portion of that as well may be slightly less than the impact of the comparison.

ARVEE HORES]: Okay and when you do launch the S.A.V. foreseen in the second half of this year or end of this year. Would you expect that just start cannibalize your pericardial sales or do you think you could still grow pericardial above 10% or how much is the porcine valve?

We do not expect the S.A.V. valves to cannibalize any sales from the pericardial valve and we think that it is possible for the S.A.V. valve to do two things. One to be a very strong competitive offering and potential track sales away from the competition, it may cannibalize from our own existing porcine valves, but that is probably not going to be what it is primarily focused on and a matter of fact that this valve will probably carry a premium price. Now, remember also that beyond this we have a got a Magna valve coming in 2003 in the pericardial line.

ARVEE HORES]: Okay and then just a final question. TMR revenues for this year you said have any significant is that $10 million and is it a good number?

I feel pretty comfortable in that range.

ARVEE HORES]: Okay and thanks guys.

Your next question is from [George Krueger] of Bank of America Securities.

GEORGE KRUEGER]: Hi guys.

GEORGE KRUEGER]: Could I ask about the and could you elaborate a little bit more on the beating heart valve procedure that is related to file 10-K? Could you tell us a little bit more about that I had not been...?

Yeah and I am happy to and a matter of fact you know may be offline we can go into greater detail because some of this a little tough to do over a conference call and the pictures worth a thousand words. But instead the traditional way that we would do a valve repair were used to actually a reinforcing ring around the outside to reshape the valve so the valve would become competent again. There is a certain inlet in Italy by the name of Alfieri who has been doing clinically a stitch that we call the Alfieri stitch, which actually stitches together the two leaflets in the center and makes the valve competent when it is closed and when it opens, it opens a little bit more like a [figurate]. So, it is not really for modelling and it is not necessarily for our patients but what is wonderful about that procedure is that it enables us to be able to reduce it a beating heart procedure. We have a device to do that that we were going to be introducing and that would be and that we call minimally invasive and you could do very quickly and easily and with the opportunity that actually it proves to be a successful therapy and that is yet to be proven on a large scale and it could may be even reduced to a percutaneous device.

GEORGE KRUEGER]: Okay and so the time line of that so you think that you might suggest that you might get a five 10-K on that?

Well what will happens is we will start some humans this summer with the thought that we expect to have a give 10-K may be late this year.

GEORGE KRUEGER]: Well, so it could be numbers for the next year?

So you know what I am mistaken here Bruce just waved to me we actually and already have that file 10-K I will have this twisted around with where we were with the products.

GEORGE KRUEGER]: So, we will register sales this year then?

Yeah and you know that could be honest and yes we will register some sales but there is going to be a lot of learning going on this year and I do not expect this to be used very wide throughout and the matter of fact we are going to control what to a great extent to clinical trials while we really get and understanding for how effective the Alfieri technique is.

GEORGE KRUEGER]: If we are going to act right now and this was asked already but if we go back to the broader issue of tissue versus mechanical and so we saw St. Jude's reports was none to great sequentially they are only up 2% and 2.3% and we think 3% when you look a [______] little bit better sequential phase but that is more to say just it is tide to procurement rather than any kind of competitive you know competitive dynamic? But I will say that Medtronic we are looking for big numbers from Medtronic in their new quarter and as is just going to just finish this month end as you know. Can you talk a little bit about that competitive positioning with respect to Medtronic and what I get that they have two tissue valves that are going quite well for them and can you talk about how you stock up against those?

Well and I would say a couple of things. You know one is you probably will know them very well and you know came up on a much smaller basis than Edwards does and so the opportunity to put up substantial growth numbers are pretty easier. In terms of the overall competitive position, we can look out the Edwards first quarter performances versus fourth quarter sequentially you would also see strong growth rate in that regard and it sort of take side of the equation you know some of the tough comparison for the first quarter last year. We are all concerned about competing with those Medtronics valves not all and we are very comfortable with it and we have been competing with those porcine valves for a longtime in Europe and will be comfortable with competing on a long-term basis with the pericardial technology as this demonstrated such important rules robustness overtime that we are confident that that will prevail.

GEORGE KRUEGER]: That is correct and one thing coming out of the conference call as the other are companies the since you talked about the idea of kind of hastening accelerating their stented tissue valve that Biocor, do you know that do you think that it does likely they could adjusting they are talking in terms of getting that into the market in the end of next year or atleast into the approval cycle in next year?

You know I can tell you what we know about this and that is that this was based on this valve that was purchased and manufactured in Brazil were not aware that there is much data that is available on and that proves that is very competitive to the pericardial valve and you know to some extent we take it as an endorsement here that other people are looking to continue to introduce the tissue valves because just was the direction that this market is obviously had it and then I think that the opportunity for that to have clinical results that comes close to the Edwards PERIMOUNT valve is highly unlikely you know that all pericardial valve are actually are not like and this is about the design.

GEORGE KRUEGER]: Right but they do claim as greater longevity as yours. Okay thanks.

Your next question comes from Mark S. Landy of Leerink Swann & Company.

Good evening guys. I just wanted to have a look may be historically, see if you can walk us through your share gains and market growth when you have introduced new products in the past, so may be if you look forward we can get try and understand the share gains as you introduce new products.

I am not sure Mark that there is on path there can you be more specific about how we could help.

Yeah I mean if have a look at the S.A.V. that is coming towards the end of this year and then I have a look at the Magna which is coming in 2003. And specifically I suppose new technologies drive market share gains. I was just wondering if we have any historical perspective when you have introduced new products what is your market share gains have been over the competition and if you can apply that to the new products that are coming to the market and may be we can get better comfort in getting back to a 10% growth rate.

Yeah it is a very good pleasure Mark you know as you might imagine not all new products were alike. So when we first brought the pericardial valve the pericardial aortic to the market it would have a different sort of uptake than did the micro pericardial valve will the S.A.V., which is a porcine valve into this market place. So I think you have seen all different profiles and I am not sure that history was going to all of that helpful. We can tell you certainly what it does it reinforces our confidence of moving our cardiac surgery growth rate into the plus 10% range and you know we have obviously done our own modeling in terms of the impact of the S.A.V. valve and we think it will be a meaningful part of the continued growth of this product line.

Thanks guys.

Thanks congratulations of both top line and bottom line. The question about the critical care business this Swan-Ganz advanced catheter and the rate at which they are replacing sales of the basic catheter and it gives us previously that was part of the key to the growth in Swan-Ganz is the conversion of the basic Swan-Ganz with advanced Swan-Ganz can you give us any comments on how that has been going.

Yeah Alex, this has been an ongoing trend that has been going for few years at this point and I guess we would say actually that the number of units we don't end up replacing one advanced unit for every base unit, but we do end more than replacing the sales and you know the pricing on advanced catheter is in the user range of $180-220 range where as the base catheter is certainly under $50. So that is effect that you get in terms of just the increase to the overall sales and at this point more that half of Edwards sales in this category is advanced technology catheters as suppose to base catheters. Is that get added out.

Yeah so if that is the case if the prices you know 6-1 then it would like that the since you are converting basic to advanced it would seem that the conclusion would be that the total number of units is declining am I misreading that.

Yes it is declining it is not 6-1 differences in price there are certainly a dramatic difference in price and may be through 4-1. But yes the number of units does decline and people are constantly searching either what happens is I think the people do less invasive surgeries what we end up seeing is may be less candidates in some of those critical care units. And so the people that are their sicker and they become good candidates for advanced technology catheters.

Okay thanks that helped. On your pressure sensors which I think are called [Truwave], that big study that came out wild back about goal directed therapy is that had an effect on the either up or down on the frequency for which you have to monitor pressure and I mean that was the conclusion I think did that study reach there is a certain set algorithms for when you measure pressure and what do you do at each point and so on.

I think our success in pressure monitoring has been primarily as a result of share gain not changes in practice patterns.

Okay can you comment just quantitatively on how much share gain you have there.

You know what I don't know if can quantify that to tell you the truth, but certainly we can do some homework done and get us some feedback.

Yeah, Mike help me with second quarter growth revenue estimates and then how what in that context you would reach 69% growth for the year given than you have talked a lot about back half growth events, so as we look to Q2 if it is 3% growth in Q1 and may be we would have a little better performance out of cardiac surgery in Q2, but I wouldn't expected that would be higher than may be more than 4-5% growth in Q2 is that well consistent with your thinking.

I will try and give you a little bit of color here. Okay just to go through this you know in cardiac surgery we said we are going to be moving from where we are now to the plus 10% range, so you can think what that might be but if we did 5.5% this quarter and we said we are going to do plus 10% the next then you can pick a cardiac surgery growth rate for Q2 in critical care we said we are going to be in the mid-single -digits. In vascular we said that we believe we are going to turn positive. So if you put that together I think you can start taking shape here what the second quarter sales growth rate might be.

And Keay let me time in as well if your question relates to the full year and our ability to get within the 69% sales growth original goal, certainly the second quarter is important that second half is even more important and so part of it is cardiac surgery and getting back to the 10% plus range, but part of it is the new initiatives too which are certainly back end-loaded as we launch these products throughout the year. So when you look at AAA not a big contribution in the fixed first quarter bigger contributions in each succeeding quarter and then some of these other products that have been mentioned during the call is welcoming later in the year.

Yeah that is helpful.

Well again it is going to be a ramp.

As you know what we tried to do is to give you some indication by giving some signal of what we think the total product area might do.

And then you are pretty confident about giving to 10% cardiac surgery in Q2 and the beyond that back.

We said more than 10% in the second half improvement in the second quarter.

Okay thanks.

Your next question is from David J. Lothson of UBS Warburg.

Good evening. I wonder if you could expand a little about the consolidation of the Japanese business do you first expected atleast for our purpose just a model as to be effective at the end of the year could you comment and remind us once again how those sales will fall by major sector and what impact do you think it will have on the overall growth of the business once it is consolidated.

Thank you Dave. Let me address that you know what we have said in terms of the actual transaction is that it will happen by the end of the year it could happen as soon as the beginning of the fourth quarter, but what we would strongly advise from a model standpoint is to leave that out of this year and really only look towards 2003 in terms of us saying fully consolidating the Japan business. In terms of the impact you know last year was $170 million revenue business that we out of which we took $62 million into our P&L on the revenue line the rest of the business was addressed through the equity method and showed up on the other operating income line. From a going forward standpoint its impact on growth it will from a growth rate standpoint it shouldn't materially impact the growth rate of the entire company. At one point in time I think as we discussed we had done this from the date we spend it probably would have contributed to increasing the growth rate, but at this point given we have gotten some of the other areas with address some of the areas it will just be a guidance that we have given for the rest of the company.

How did the sales distribute by division Bruce.

I don't have the exactly Dave, but I have put in order of size, the biggest business in Japan for us is critical care and after that we have some distributed products and we have obviously have a very fast growing cardiac surgery business there as well. What we need to do for the investment community as we need to provide that information and give you guys a basis to recapture models and we would have to able to do that before the next quarterly conference call and give you more guidance there by product line.

Thank you. Just two other brief questions the $25 million will that be treated for expense purpose is that be an extraordinary item or just a built into current expenses and then the final question is we have been hearing about a lot of products that have run into trouble because of the price levels in Japan do you anticipate any of the products that you currently there might have these arbitrary reductions what the government pays for the products.

David both Mike and I will handle your questions. Let me address the first, which is the treatment of the payment to Baxter of $25 million that is kind of be, that will be a non-P&L item that would be on our balance sheet as part our investment in that business.

Yeah in terms of what is going on in Japan and in terms of pricing we are intimately involved in that and we live it on a routine basis our biggest business critical care actually got its biannual increase last October, and if you take a look out at some of the new developments with the advent of things like foreign reference pricing, just because of the way of the products that Edwards sells in Japan, we are not likely to be impact that is all of any significant effect here over the next few years.

Thank you very much.

Our next question is from [Adam Starr] of [CRS].

ADAM STARR]: My question has already been answered. Thank you.

Thanks Adam.

Our next question is from Greg J. Simpson of A. G. Edwards.

Good afternoon Mike and Bruce. Most of my questions are answered, but Mike on the last conference call you talked about congestive heart failure as the major focus for you guys going forward, obviously that can take a variety of forms I am curious on the heels of the recent FDA panel meeting for Edwards [Heartmate] devices for long terms use. I am curious as you have thought so whether you see kind of renewed life for the core device given the Novacor device does have a very good record of reliability one of the short comings the panels member really kind of pondered away for [Heartmate] and to follow that up if you do in fact see a better opportunity for Novacor what is kind of your long-term thinking are you vision with respect to your investment in WorldHeart. Is that something you would really look to may be capitalizing on or something you looked to divest at some point in the future.

Yeah Greg thanks for the question. We continue to be focussed on congestive heart failure and look for innovative ways for Edwards to participate in that huge market place. So separate from that one of the things that we are pleased that we are the exclusive distributor for WorldHeart which means that we distribute the Novacor product and ultimately the [Heartsaver] which we hope to see for its human use later on this year and you are right on the heels of what just happened in panel in the US the durability and reliability of Novacor is obviously a strong attribute. Some of the negatives that were perceived by that device in the past around potential coagulation problems or TE effects we think they have been largely mitigated by the advancements that have taken place with regard to the design of the conduits. So that performance is doing nothing, but improving. So the track record of Novacor could be very important and in terms of our involvement with are pleased with our involvement today and we stay very close and you know that I participate actually on the board of WorldHeart's and that is the one that we stay close too and you know we are a part owner of WorldHeart and it is one of those that in terms of the long-term strategy we will see how things develop.

Okay thanks Mike.

Your next question is a followup question from Glenn Novarro of Credit Suisse First Boston.

I had a followup question on the peripheral stent platform. Can you talk to us a little bit about the advantage that Edwards peripheral stents will have versus the competition is it flexibility scaffolding delivery, what will be the benefit that differentiate your product versus the JJ stents and the Boston scientific stents that are out there. Thanks.

Thanks Glenn. It is a good question you know while we had a lot of internal debate about this and we are very very proud of our program, we are excited about it. We think it is highly differentiated, but as we have gone through our internal debate what we have decided here is that we are not going to easily lay out those details at this point in time. You know it is a very competitive market place and we would just assume to continue our development the way we are. We know that we need to have a clearly differentiated stent in terms of its flexibility, it is scaffolding, its delivery system and those are all important, and even ultimately its ability to have at stent [_____] with all of the implications with that. So we are mindful of all those things and as time goes by, we will be talking more about the specifics, though we haven't laid that out in detail yet one, but we will be more of that as time goes on.

Are there are plans to build the peripheral platform beyond stents such as various cutting balloons or radiation therapy for the peripherals.

You know what we would say that we are committed to the treatment of peripheral vascular disease which means that we are very open to adding important technologies here little help with this untreated conditions. So yes we will be looking to expand the product line where we can have a differentiated advantage.

Okay great, thank you.

Your next question is from Andrew T. Jay of Wachovia Securities.

Yes good afternoon. Three quick questions. One at the end of the last quarter you had the pericardial, mitral valve, and 500 hospitals, have you now fully penetrated the US market in terms of hospitals. Two can you let us know what receivables and inventories where, and three can you comment on the relationship with PLC and how are doing there in terms of your change in distribution of either TMR laser system.

Well Andrew this is Mike, what I will do is that let me speak to the valves and PLC and I will ask Bruce here to speak to receivables and inventory. On valves clearly I think as we talked about last quarter we are most focussed on the big accounts, that is not to say that we are not interested and we are not continued to make progress on those smaller accounts, but as you start getting to you know the 700th largest account it starts to get smaller in size and an impact. And so we don't end up measuring that we don't measure our progress that way we more measure it in terms of total sales that goes along with it.

Profitability.

And it goes along with it. And again I hope my sense of confidence has shown through. In terms of our relationship with PLC and how we are doing we are very pleased with our progress this quarter and would reinforce about how we think we are going to do this year. I think we sold about $6 million worth last year and we certainly expect to have much stronger year this year and we are continuing to see the uptake of this and we think assuming the marketing responsibilities there has been a positive not only for us, but also for the market place because you know this is about remission adoption and having the ability to use the rest of the Edwards platform to share an educational message we think has been very beneficial.

Is the sales double about this year.

You know what that probably will be at the higher end.

Let me couple your balance sheet accounts receivable at the end of March were $109.3 and that is up from a $101.5 million at the end of the year and inventories were 86.1 in the March quarter compared to $86.6 at yearend.

Now on the receivables Bruce is that up because of the acquisition of distributors, is there any what we can give.

It is really just due to we have higher sales in March of this year versus December of last year and it is really not much more than that. You do have any followup on the balance sheet and receivables.

No I am okay. Thank you.

We do have a program and we are it is one of our key things that we are managing to this is and cash flow is always important to us. Specifically, this year we are taking a hard look at both receivables and inventory have DSO targets in place internally as well as turns. That is around the world that we are doing that.

But Bruce if receivables went from $101.5 to a $109.3 million.

Correct.

Sales went from a $162 million which you reported which was $162.3 million there was not a lot of sales growth there receivables grew faster than sales.

So of it seasonal, Andrew, you would expect that we will have on a DSO basis DSOs went up from the fourth quarter of last year to the March quarter of this year and some of that is seasonality and some of that is the purchase of these inventories, but that is not big factor because it is three relatively small countries that we are talking about, but we would expect over the course of the year for the DSOs to improve on a year-over-year basis to show pretty good improvement both on receivables, management, and inventory returns as well.

Thank you.

Your next question is a followup question from [Tim Nelson] of US Bancorp Piper Jaffray.

TIM NELSON]: Hi just talk a little bit more about Japan and also your debt levels. And I would assume that your interest levels are flat for the rest of the year and are you planning on reducing more debt. And then second could you help explain why the Japan purchase is a better choice for cash there has been debt reduction.

On debt levels Tim, we are certainly comfortable with where we are at the $292 million and the debt-to-capital, I mean it is as we have set all long we are using your cash flow to invest in growth initiatives for the future now to purchase some stock back to offset the dilution from our option program and also to repay debt and repaying debt you will not see the dramatic improvement that we you have seen kind of spends a day, because part of that has been alternatives, it is the pay down of debt is kind of the default use of cash flow as we don't have good investment opportunities. We hope to have more of those going forward and we are comfortable at this level versus levels we were at a year ago which is not to say that you wont see further debt but we are not planning anything dramatic there. In terms of your question on Japan and why is that $25 million better than paying down debt, the answer is I think there is many factors there. One we have a finite period of time in which we can exercise our option to purchase the Japan cardiovascular assets that begins in August of this year and ends in March 2005 and somewhere in that time period we have to do it, in terms of making through that on a ongoing sustainable basis Japan is part of the Edwards going forward. So we have to do it is a question of timing, we think it makes lot of sense for a couple of reasons. One is certainly transparency I think when we talk to the investment community and others we know go through this long complex explanation of talking about our businesses and Japan is one of our key businesses and I am not sure it gets the focus that it should given the accounting methodology that we have to use to just managing that business. These are out assets these are cardiovascular assets and just having them rather than on a joint venture structure, but directly own we think make a whole lot of sense and I have to go back to that we need to do it within the time period anyway.

TIM NELSON]: So with that would imply you can grow that business in and your control better than you can.

We have to say we have been growing yes on the margin yes.

TIM NELSON]: Okay thanks.

Thanks just quickly which of your four categories does the greater the $2 million CO2, TMR, PLC, revenues off in the first quarter. Second question if there is anything you can tell us about the Optimaze product versus the what we think is a competing product from [Cardini].

So Alex the PMR sales show up in cardiac surgery and I don't think you mean [Cardini], [Cardini] you would think of as a cardiology product, so this would be a product that would be introduced through a catheter in the cath lab, where as our product that actually been used in an open surgical procedure adjunctive to heart valve surgery initially and ultimately adjunctive to CABG. So why you are in there you would treat the patient who is also suffering from arrhythmia.

Okay both are treatments for atrial fibrillation is just a cardiology versus a cardiac surgeon approach.

That is correct.

And then one other thing the Japanese business which Bruce commented is a substantial portion of your business and that we probably don't focus on as much as we should, my understanding is that there are other companies products that you distribute there that are a material part of the business that do in Japan, is there anything you can tell us about whose products you are distributing in the largest numbers there in the presenting analysis cardiology products that are making a much real impact either direction on your distribution business in Japan.

Sure Alex you know what I will mention there is that there are a number of in there probably either 10 companies the largest of which is Datascope. We distribute there intraaortic balloon pump product line and I think still up on our website from our August investor relations activity is some of our presentations and I think related out kind a bit more details so you can refer back to it. But just go down the list we are still a distributor of [Lowtro Bentley oxygenators] we distribute pace makers from Medtronic PTCA catheters for Unicath and oxygen monitor for [Tarumo].

Which of those are really material overall they are......

And are those increasing over time or those products doing well in Japan.

Well we will probably have to get more specific about each one of those I would say collectively their growth rate is slow.

Okay great and then the last quick question, the perfusion business in your plan reduction and sales is that what your reduction down to $9.5 million in first quarter is that level of reduction what we should expect for the rest of the year in perfusion.

We have said and this is consistent with previous guidance so that is a $35-40 million product line category for us in a full year basis.

Okay Thank you.

So Erickson there are no further questions.

Okay. Well thanks for your questions and your continued interest in Edwards and I will back to you David.

Thank you for joining us in today's call, if you have missed any portion of it, a telephonic replay will be available for 72 hours, and to access you can dial the following phone numbers 800-642-1687 or 706-645-9291 and the pass code is 354-1309. I will repeat those numbers 800-642-1687 or 706-645-9291 and the pass code is 354-1309. Alternatively, an audio replay will also be archived on the four investors section of our website at www.Edwards.com. Thank you very much.

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