愛德華生命科學 (EW) 2002 Q2 法說會逐字稿

Good afternoon. My name is [Toni] and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Edwards Lifesciences second quarter earnings results conference call. 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 like to ask a question during this time, simply press star, then the number one on your telephone key pad. If you would like to withdraw your question, press the pound key. Thank you. Mr. Erickson, you may begin your conference.

Welcome and thank you for joining us. Just after the close of regular trading today, we released our second quarter 2002 financial results, and on our call today, we?ll focus our prepared remarks on information that will complement the material included in the press release and supplemental financial schedules, and then allocate the remaining time to Q&A.

Our presenters on today?s call are Mike Mussallem, Chairman and Chief Executive Officer; Bruce Bentcover, Chief Financial Officer; and Andre-Michel Ballester, Corporate Vice President Europe and Intercontinental.

Before I turn the call over to Mike, I?d like to remind you that during today?s 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.

This statements include, but are not limited to -- sales growth, net income and earnings per share goals for 2002, expected sales of the cardiac surgery product line, sales and clinical trials of Lifepath AAA, new product launches including S.A.V., MC3, Optimaze and peripheral stints, timing of regulatory approvals, overall efforts aimed at stimulating sales growth, the impact of foreign exchange -- and other risk factors that may be found at the end of today?s release and in filings made by Edwards with the Securities and Exchange Commission.

With that, I?ll turn the call over to Mike Mussallem. Mike.

Thank you, David. Today we are pleased to share with you our results for the second quarter. These were highlighted by a substantial increase in sales growth compared to last quarter, earnings per share exceeding analyst consensus estimate, and the receipt of FDA approval for two important heart valve therapy products, a result of our intensified R&D efforts. Additionally, we repurchased a large number of shared under our stock repurchase program and we received a $20 million settlement from Medtronic resulting from patent infringement litigation.

On the bottom line, excluding non-recurring items in both periods, net income grew a health 27 percent. Total sales for the quarter grew 5.8 compared to last year, and growth was positive in all four of our product lines, excluding the impact of FX and the perfusion services divestitures.

Now, I?ll discuss each of the product lines in more detail. We?re especially proud of cardiac surgery sales this quarter, which are returning to a more normal level of growth. Compared to last year, sales in this product line grew 9 percent, excluding the impact of FX and were sequentially higher than last quarter. This strong growth was a result of the continued strength of our market leading valve replacement and repair products, which as expected, returned to more than 10 percent growth in the quarter. While growth was up strongly across all regions in cardiac surgery, we?re particularly pleased with our U.S. performance.

During the quarter, we received FDA approval for two heart valve therapy products which strengthened our already robust heart valve therapy product portfolio. The first approval was our MC3 tricuspid repair system, the first three dimensional ring designed specifically for the tricuspid valve, which we talked to you about in last quarter?s conference call. The initial U.S. clinical response to this new therapy has been very favorable and we look forward to expanding the need awareness to the tricuspid repair internationally. We expect to introduce the product into Europe in the third quarter of this year.

The second approval was the PMA for our Carpentier-Edwards S.A.V. porcine valve. Of course, our market leading Perimount valves offer qualities that are superior to all other heard valves. However, for those customers who preferred the use of porcine valves, our new S.A.V. offers unique features and benefits that have made it a leading porcine valve internationally. S.A.V.?s design makes it easy to implant and provides improved hemodynamics over other porcine valves. Additional, the S.A.V. has the added benefit of our proprietary XenoLogiX anti-calcification treatment. We have just begun selling the S.A.V. this month and its approval enhances what was already the strongest tissue valve portfolio in the U.S.

Now turning to our heart valve product pipeline. One of our R&D strategies is to extend and defend our core product line and our Perimount magna valve is a key part of this effort. The magna?s novel state-of-the-state design builds on our superior pericardial technology in clinical performance. Additionally, our tests show improved hemodynamics and durability. This valve has a number of features covered by a family of new patents that distinguish it from our existing pericardial valves. We are currently ahead of schedule and we?ll begin launching the magna valve in Europe at the European Association of Cardiothoracic Surgery Conference in Monte Carlo this September and we remain on track for U.S. launch in the first half of next year.

As the world wide leader in heart valve and repair, Edwards will continue to grow its market share by developing valves with superior performance in introducing novel products with the potential to expand the market. We remain confident that our paramount valves will continue to drive the ongoing shift from mechanical to tissue helping sustain a 10-plus percent worldwide tissue valve and repair market growth rate.

Now, I?ll talk about some of our new cardiac surgery products. Initial clinical evaluations of life stitch are beating heart valve repair initiative have been slightly delayed in order to incorporate design enhancements. We now expect our first human use of this novel therapy by year end.

Our CO2 TMR growth initiative generated more than $2 million sales in the quarter. These results were in line with our expectations and we?re encouraged by the growing acceptance of this technology. Two recently published articles that reinforce the long-term efficacy of TMR are expected to enhance the awareness and adoption of this therapy. And while only a modest contributor to overall cardiac surgery sales, we continue to expect TMR to report strong year-over-year growth in 2002.

During the quarter, we successfully completed the first phase of our clinical study protocol evaluating our Optimaze surgical oblation system for treating cardiac arrhythmia. We believe the Optimaze [indiscernible] ablation laser technology will provide significant improvement in ease of use and versatility over the ablation devices currently available. This initiative is proceeding on schedule and we continue to expect commercial launch of this product in the U.S. and Europe later this year.

To summarize cardiac surgery, our superior Perimount technology, recent product releases, and more normal year-over-year comparisons continue to give us confidence that the underlying growth in this product line will return to more then 10 percent in the second half of 2002, and reach 10 percent for the full year.

Now turning to critical care. Total sales in this product line grew 2.8 percent over the year-ago period and were sequentially higher than last quarter, excluding the impact of FX. This product line is a consistent performer and the trends this quarter are similar to those that we?ve experienced in past periods. As the global leader in acute hemodynamic monitoring, we?re particularly encouraged by the strong sales growth in emerging international markets. For the year, we continue to expect the underlying critical care growth rate to be in the mid-single digits.

Vascular sales increased 2.7 percent this quarter excluding FX. This positive growth is primarily the result of initial sales of our Lifepath AAA endovascular graph which has begun to offset the declining sales of our base vascular products.

The clinical results we?ve seen so far from our Lifepath AAA device are very positive. Our clinical trials in the U.S. are on tract; however, in Europe, our sales have not been as strong as we had hoped we would be at this point in time. And in light of this, we now expect to complete four to five hundred life path implants this year and we?ll discuss this issue in more detail in a few moments.

Our newest initiative, peripheral stents is progressing well and remain very enthusiastic about this opportunity. We?re meeting our development milestones and expect our first clinical use of our balloon expandable stent in this year?s third quarter. Our plans continue to call for the global launch of a broad, differentiated peripheral stent product offering in mid 2003. For our vascular franchise as a whole, we expect to report second half 2002 underlying sales growth rate of approximately 10 percent.

This quarter?s perfusion sales, excluding the impact of FX and the perfusion services divestiture, were essentially unchanged compared to last year, but continue to lower the company?s overall sales growth rate. We continue to expect our perfusion product line to generate sales of approximately $35 to $40 million in 2002.

To summarize, we remain comfortable with our goal for underlying sales growth of 6 to 9 percent for the year comprised of base business growth and growth in our 2002 initiatives. C02 TMR, Optimaze and Lifepath AAA.

Now starting today and from time to time in the future, I?ll be asking members of Edwards? executive team to participate in these calls in order to provide you with a greater understanding of their particular area of responsibility. I?ve asked Andre-Michel Ballester, who heads our Europe and Intercontinental Operations, to join us today. He?s going to share with you a little more detail about our AAA initiative, as well as our strong performance in emerging markets. Andre-Michel.

Thank you, Mike. Let me first discuss our AAA initiative. We believe there are two factors impacting our performance in Europe. First, as you heard from us last quarter, establishing our sales team in this region took longer than we planned. Our strategy has been to add talented people with experience selling endovascular systems. And this has proven to be a challenging task. I?m pleased to report that our European sales force is now substantially in place. They are actively promoting the unique features of Lifepath that we believe make it superior to competing products. I?m encouraged by my conversations with many physicians who have used our Lifepath system. They are very positive about it.

The second, and perhaps more significant reason for the slow update, is market dynamics. [indiscernible] clinical experiences with competing products over the last couple of years, have resulted in clinicians currently taking a more cautious approach in their use of AAA devices. This, coupled with the European reimbursement structure, has made Europe a small market opportunity today than previously anticipated.

Additionally, although our early clinical performance has been very good, it?s been challenging for us to gain broad acceptance of our unique [indiscernible] design in advance of publishing long-term clinical data. Despite these challenges, we remain confident that Lifepath, with its secure and controlled balloon expandable deployment, will demonstrate strong clinical results that will ultimately drive greater sales in the European market.

By comparison, we believe the U.S. market is notably different than the European market. And this is where the potential for real success lies. First, in the U.S. The U.S. market is much larger than Europe and offers a more favorable reimbursement environment. Second, we will enter the U.S. with solid, long-term clinical data. By such, we?re still very enthusiastic about the U.S. opportunity of Lifepath. We are right in track to complete enrollment of a 100 patients in our [indiscernible] study by the end of the third quarter. We are considering expanding this trial to include an additional 50 patients in order to expedite the PMA approval. In any event, we continue to expect a U.S. launch in 2004.

Now, I?d like to spend a few moments talking about our intercontinental region, which for us includes all international markets outside of Canada, Western Europe, and Japan. While this region currently represents less than 10 percent of our total sales, it is an important area for future growth. Our cardiac surgery, critical care, and perfusion product lines comprise most of our sales in the region, and all have reported strong growth rates in recent quarters.

In this market, Edwards benefits from having well-established product brand and distribution channels. Just as in the [indiscernible] market, our cardiac surgery product line benefits from the trend towards tissue valves and our products command premium pricing based on their quality and performance.

In critical care, Edwards is driving the development and growth of the acute hemodynamic monitoring market, duplicating the trends experienced in the U.S., Europe and Japan over the past two decades. And in general, the needs for our products in these emerging markets is increasing as populations continue to age and more money is spent treating cardiovascular disease. In all, we?re excited in the potential in these markets and believe that they would present a growing and profitability opportunity for Edwards.

Now, I?ll turn it over to Bruce, who will discuss our financial results.

Thank you, Andre-Michel. Our gross profit margin this quarter was 56.9 percent, up significantly from the year-ago quarter and down slightly from the first quarter. The year-over-year increase was a result of the divestiture of the U.S. perfusion services business and sales of our higher margin cardiac surgery products. The modest sequential decrease was primarily attributable to one-time factors. For the rest of the year, we expect our gross profit margin to be slightly above this level.

Selling, general, and administrative expenses of $54.3 million were 31.4 percent of sales this quarter and comparable to our first quarter as a percent of sales. A significant amount of the dollar increase from the first quarter is related to additional expenses for our current growth initiatives. For the remainder of the year, we expect [indiscernible] to be a slightly higher as a percentage of sales than this quarter due to investments in additional growth initiatives.

Next, R&D investment increased 23 percent from the year-ago quarter to $16.6 million, or 9.6 percent of sales. This increase is primarily related to our investment in peripheral stents and is consistent with our increasing R&D spending to develop products and technologies to enhance our growth. We continue to expect to increase R&D spending by 20 percent in 2002.

Our Japan operating results, which are recorded in the other operating income line, were $3.6 million this quarter. These results reflect strong operating performance offset by one-time expenses. For the remainder of the year, solid operating results in Japan, coupled with the stronger yen, will result in approximately $16 million of other operating income for the full year of 2002.

We are on track to exercise our option to acquire the Japan-based business, which is currently operating as a joint venture with Baxter. The transaction price will be approximately $25 million net, which excludes an estimated $30 million of accounts receivables previously securitized by Baxter. This transaction is expected to occur during the fourth quarter and is subject to regulatory approvals.

If fully consolidated, the Japan business would have added approximately $50 million to reported sales for the first half of this year. We don?t expect this transaction to have a material impact on our ongoing net income, as we already capture substantially all the net profit generated by the business. As part of this transaction, we expect to incur one-time stent expenses of approximately $3 million.

To give you a clearer picture of how Edwards will look when the Japan business is fully consolidated, we will provide you with several years of historical sales by product line and make this available on our website by the end of the next week.

Net interest expense was $3 million this quarter, lower than the year-ago period due to our significantly lower debt levels and the positive impact from lower interest rates. During the quarter, we repaid $14.8 million of debt. However, due to the impact of the stronger yen, our total debt balance at the end of the quarter increased slightly to $297 million. At this level, our debt to cap ratio remains at 38 percent. We expect interest expense for the second half of 2002 to be slightly lower than the amount recorded in the first half of the year.

The impact of foreign exchange on this quarter?s sales was negligible compared to the same period last year. If foreign currencies remain at current levels, we would expect an approximately two and a half percent favorable impact on reported second half sales, and a minimal impact on our bottom line. At the end of the quarter, accounts receivable was $114 million and inventories were $89 million, representing slight increases from March 31. Additionally, at June 30, our date sales outstanding and inventory turns were both comparable to last quarter?s levels. Reducing DSO and increasing inventory turns represent one of management?s key performance objectives for 2002. We expect progress on both of these measures in the second half of this year.

During the quarter, we recorded a one-time $20 million cash payment from Medtronic, which results from a patent infringement lawsuit related to certain heart valve repair and replacement products. The pretax came after legal expenses was $14.6 million and was recorded in the other income and expense line. As part of the settlement, we granted Medtronic a royalty bearing license on two heart valve repair products.

In the second quarter, we took advantage of the lower share price and we purchased 786,000 shares of stock for $18.4 million under our existing stock repurchase program. From the start of the program last December through the end of this quarter, we?ve repurchased a total of nearly 880,000 shares. While we expect to use our strong cash flows to continue repurchasing shares and reducing debt, our priority remains investing in additional growth opportunities.

With that, I?ll turn it back to Mike.

Thanks Bruce and Andre-Michel. Before we open it up to questions, I?d like to review our financial goals for 2002, which remain unchanged. We expect to increase total underlying sales by 6 to 9 percent, and net income by more than 27 percent, while we increase R&D spending by 20 percent. We also expect to generate [indiscernible] of $165,000 million. With half of the year behind us, we feel confident that we can accomplish these goals. Additionally, we continue to be comfortable with analyst consensus estimates for the remainder of 2002.

With our accelerating cardiac surgery growth rate and increasing momentum of new products, we continue to anticipate a year of strong sales growth, financial results, and transformation of Edwards Lifesciences into a faster growing company. And while transformation remains a primary focus, we?re committed to reliably delivering near-term results.

On another note, I?d like to encourage you to mark your calendars for Thursday, November 7, when we?ll host our 2002 investor conference. At this event, which we?re going to hold in New York, we plan to share with you more detail about our peripheral stent initiative, our strategy for accelerating growth, and our expectations for 2003. We?ll certainly be providing more information about this event in the near future and we really look forward to seeing you there.

And with that, we?d all be happy to answer your questions.

At this time, I would like to remind everyone in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Andrew Jay of Wachovia Securities.

Hey, good afternoon, gentlemen. It?s actually Jason sitting in for Andrew. Congratulations on a great quarter.

Two quick questions for you. First off, I know last quarter you had mentioned you were going to step up your marketing efforts on the -- in the cardiac surgery business for heart valves. I was wondering, how is sort of that bearing fruit? We?ve seen an acceleration in growth this quarter, but can you give us a sense of sort feedback from the field what the reps are doing and is that in fact, one of the drivers that we?re seeing this quarter?

Hi Jason. This is Mike. Yeah, absolutely. I think that our strong sales and marketing efforts certainly had a bearing on this quarter?s growth rate. One of the things I?ll remind you is that last quarter we referred to a very tough year-over-year comparisons and they certainly moderated somewhat in this quarter. But, as well, I can tell you that we took very seriously the challenges that we felt in the U.S. as it related to tissue valves in our market share and we very aggressively stepped up our efforts. And we think that some of what we?re seeing right now is just the front end of that. We expect to see more momentum and as I mentioned, I expect our back half growth rate to be in excess of 10 percent in cardiac surgery.

And on the repairing side, has the settlement sort of changed; A, the dynamics of the market there? Are we seeing pricings sort of stabilize? Have you been able to sort of get an upcharge the tricuspid ring? Can you direct some of the dynamics affecting the ring market this quarter?

Well, I can tell you that in general, the repair market -- this was a good quarter for the repair market. For Edwards, I think repair probably grew in the high teens. So it was a strong quarter for repair. I don?t know whether the settlement had anything to do with that performance at this point in time or not, Jason. It may be a little premature to assume that. But I can tell you that the MC3 is a premium priced product and we did see a pretty good uptake on that. As a matter of fact, it certainly met and exceeded our expectations.

Okay, great. And now one quick question for Bruce. You mentioned there were a couple of one-time factors impacting gross margin this quarter. Could you possibly elaborate on that any?

Yeah. First of all, thanks Jason. And first of all, you know, we?re talking the difference between 57.4 percent last quarter and 56.9, so it?s not a huge difference in gross margin. But the slight impact that we had from one time -- there were some inventory reserves and then we got less help from our foreign exchange hedges given the strength of the foreign currencies in this quarter versus the first quarter of this year.

So those factors, could you -- would gross margin may have been a couple flat sequentially or possibly up slightly year-over-year.

Yeah, flat I would say.

Okay. All right, super. Thank you very much.

Our next question comes from Alex Arrow of Ladenburg Thalmann.

Congratulations. Nice quarter. I wanted to follow-up with another question on the Medtronic settlement. I?m surmising by the fact that you have not revealed the royalty rate -- but that?s not something that you can reveal -- but, can you give us guidance on whether that?s going to be material -- the ongoing royalty in additional to this one-time payment.

Hi Alex. This is Mike. You know, we, by the very nature of the settlement, we can?t disclose the royalty rate. So we can?t share with that you.

In terms of its materiality, I don?t know that it?s material to the overall valve business. That?s quite a large business, but it certainly is something that?s noticeable and we think it would be something that would be noticeable to the people that are paying the royalty.

Okay, great. And then also related to Medtronic, they?ve been making some progress, we think, in their tissue valve business -- some significant progress. At the same time, you?re probably continuing to take market share away from the mechanical valves and, you know, St. Jude was down 3 percent for its June quarter. So, can you give us any color on how the market share is shifting between your Perimount versus the new tissue valve competition from Medtronic, and then the old competition that you?re taking from --

Yeah, that?s a good question. You know, I think as we referred before, with the introductions that Medtronic made of the new valves in the U.S., we felt that they took some share from us in the past. And we felt that that was about coming to a close. And we?re pleased to say that in this quarter, we saw our pericardial valves grow in excess of the growth rate of the overall tissue valve market, which by its very nature, suggests that it?s taking share. And I don?t expect us to have slip back. As I indicate, I think that we?re now going to return back to the growth levels that we have become accustomed.

Is part of that because of the magna valve, and can you tell us how does the magna valve differ from the traditional Perimount?

Yeah, you know, it really doesn?t have anything to do with the magna valve. Even without the magna valve introduction, we?ve returned. And, you know, magna is not even going to be introduced in Europe until September, and it won?t be introduced till next year. So really, has nothing to do with what?s going on right now. The pericardial valve I think is on the strength of its performance is what?s driving this.

What you get with the magna valve is improved hemodynamics. And so you get the ability here to in effect, almost get a larger size valve and the same size implant. So, a patient can get better hemodynamics than they got in the past and still get the wonderful performance of the pericardial technology. And because we?ve had a chance to roll in a whole plethora of improvements that we?ve had in this and as I?ve mentioned, there?s a number of patents that go along with this, it?s really state of the art pericardial technology.

Can you comment on what the price point will be, if you?ve00decided that?

No. Actually, I don?t know that it?s appropriate for us to comment, but it?s certainly going to be premium priced over the current Perimount valves.

Okay. And then last question. Just a clarification. You?d given us some ebada guidance which you said was unchanged from the past and I didn?t write it down fast enough. What was your ebada guidance?

The goal for ebada was 165,000,000.

165 for which year?

That?s for this year.

Okay. Thank you very much.

Thanks.

Our next question comes from Kurt Krueger of Bank of America Security.

Could I ask a little bit about the growth you had in cardiac, which was I guess, 9 percent year-on-year. Could you tell us what the contributors to that were -- if you run down that list of repair, the two types of valves you make or three types of valves you make -- and shed some details -- or shed some light on that.

And then secondly, have you noticed any effect of the problems that the Allograft Tissue valves have had in terms of publicity and concerns about infection, that helped you at all?

I?d be happy to answer those questions, Kurt. You know, first of all, as it relates to the overall growth rate, you know that the lion share of our cardiac surgery business is heart valves and repair. And both heart valves and repair, and particularly tissue valves, were up strongly in the quarter. So, I think what we quoted here is a combination of tissue and repair, is up in excess of 10 percent and repair was probably even stronger yet.

If also in that category are some distributed cardiac assist products, and those were below the reported growth rate, as were research medical surgery product line. So those things were somewhat detractors from the growth. But overall, very strong sales quarter.

And I don?t know if that gives you enough color there, Kurt. But just to comment on the issues that are going on with some Allograft. Number one is, I don?t think it has anything to do with -- about our current growth rate in the second quarter. And, I can certainly comment on the safety of Edwards valve products and say that we have no concerns. We have a stellar safety record. Our products are terminally sterilized, which makes them dramatically different than Allograft?s, and we have not seen, nor do we expect to have, any negative issues that have been coloring the Allograft situation.

Thanks, Mike. Actually, I was thinking of it more on the reverse of that, that their problems might benefit you and I wondered if you had got an antidotal comments from your sales force about their ability to sell against Allograft.

Yeah. You know what, it hasn?t happened yet. You know that they certainly -- that?s a smaller segment than most of the valve segment, and it is for younger patients. And so it will remain to be seen what happens in the future. I would tell you that I think that some of the more enlightened surgeons may indeed switch two pericardial valves, but there?s also some body of surgeons out there that may prefer mechanical valve for the younger patients.

Okay. And going back to my first part of that question. I realize that the Perimount is strong. Was it conservatively stronger than your porcine?

Oh yeah, absolutely. Our porcine valves continue to be in decline, Kurt. So, those valves were negative, you know, almost probably double digit negative growth rates.

Okay, thanks Mike.

Your next question comes Glenn Novarro of Credit Suisse of Boston.

Hi guys. Good quarter. I know it?s early, but can you elaborate a little bit on the acceptance of the S.A.V. and the tricuspid valve. Is it meeting or exceeding expectation in terms of the rollout? Can you talk about the number of accounts these valves have been launched into. And then maybe if you can provide some sales expectations for the full year.

And then secondly, Bruce, you said that S.A.V.?s percentage of sales would be higher in the back end of the year. I?m assuming these growth initiatives are associated with the peripheral sales force. Can you talk to us -- can you confirm that and then talk to us how big this sales force is going to be and how it will grow over the next couple of quarters. Thanks.

Okay, Glenn. Let me kick off by saying congratulations on the birth of your child. I understand this was discussed on past conference calls and you thinking of naming your child Edward.

I think Harry [Cramer] wanted me to name the child after him. So, he had first dibs, but I got to tell you, we named the child Jack. Very simple name, but thank you.

Congratulations Glenn anyway. Well, let?s go into this. The tricuspid repair. You know, overall, this is a relatively small segment today. We think it ultimately can grow to be maybe a $10 million market. We thought that this was going to be a relatively slow ramp and it?s actually been a little steeper ramp than we thought. We?ve had 50 accounts and they?re reordering already. And so that?s off to a good start.

The S.A.V. valve, we intend to price this at a premium to other valves -- certainly to other porcine valves. And we particularly plan not for this to be one that cannibalizes Edwards? products, because I would imagine the Edwards people that are -- Edwards? customers that are buying porcine valves may be price sensitive. But maybe for some of those customers that are buying competitor?s valves at a premium price, they may be able to find that they have a better valve alternative here.

So that would be sort of the high level positioning for these valves, if that answers the first part of your question.

Can you give us a sense of what you expect the sales to be of these valves this year or if you don?t want to be that exact, you know, if valve sales are going to be north of 10 percent, will this be a 1 percent contributor to that 10 percent, a 2 percent contributor?

You know, that?s a good question. What I am comfortable saying is that we expect to have cardiac surgery attain 10 percent for the full year. So you can tell that means that we think the cardiac surgery is going to be more than 10 in the back half of the year to get us there. I would say that I would expect both these to be relatively small. You know, S.A.V., because of the premium pricing here, this may not be more than a million dollar contributor this year and I don?t know if tricuspid?s going to be much more than that either.

Okay, great. And then, Bruce, if you just want to comment on the S.V.A. growth and the growth initiatives.

Sure. Yeah, what we want Glenn, was S.V.A. was a 31.4 percent in this quarter, slightly higher for the second half of the year. Something to note there is, slightly higher for the second half, probably higher in the third quarter than the fourth quarter just because of lower seasonal sales in the third quarter, so you should just note that.

And in terms of additional growth initiatives, the reason behind the slightly higher percentage is percentage of sales. It?s a little bit of peripheral stents. It?s not all peripheral stents. It?s the other initiatives that we already have in place. It?s the full load of AAA in Europe going forward, which wasn?t there in the first half. It was probably there for the most part in the second quarter. It?s, you know, Optimaze. It?s a number of these other initiatives that we?ve talked about before besides just peripheral stents which is, you know, a partial contributor to that increased rate.

Glenn, maybe I can add something here. One, you know, going forward, obviously we?re going to have a key initiative here around peripheral stents, which is going to require Edwards to build some infrastructure. And we?re still working through our strategic and operating plans for 2003 and beyond and haven?t really landed on the exact fashion that we will ramp that up. So, it?s a little premature for us to give you exact numbers on that. But certainly, I would expect that they?ll be an expense load that goes along with this. But we think it?s certainly worth it and that the sales and profit opportunity are substantial in peripheral stents.

Just a follow up. Have you finished building out the AAA sales force in Europe? I know that was not done as of the end of the first quarter.

This is Andre-Michel. Yes, we have finished building our sales force and we are very proud of the quality of the people and the talent that we?ve been able to attract to the AAA business.

And how many folks did you hire for that sales force?

Well, we have eight people specialized on Lifepath right now and a total of 25 on vascular.

Okay. All right, great quarter guys. Thank you.

Your next question comes from Mark Landy of Leerink Swann. Mr. Landy, you may proceed with you question.

Good afternoon, guys. How are you?

Good.

Great quarter. Just in terms of the valve market. It appears that the cannibalization of the mechanical valve, tissue valve [indiscernible] proceedings ahead of schedule. That leaves more room for you and Medtronic to duke it out. Did you see softening from Medtronic or do you think that you just took more share, or you know, just the market was larger than what you thought it would be.

That?s, you know, I?m not sure that if I?m going to answer this just right, Mark, but let me take an attempt here to try to make some sense out of this for you.

Do we think there?s a continuous shift from mechanical to tissue valves? Yes, we certainly do. So, we?re not only seeing growth in our mitral position, we?re seeing growth in our aortic position. So you?re continuing to see that shift.

At the same time, I think we shared with you in the past that there was an introduction effect that goes along with bringing a new valve on and when a new valve comes on the market, especially when it comes from a competitor that?s quite skillful, they can often develop a strategy of having clinical trials run or trials run. And during that clinical trial period, you know, it?s just -- when you loose each valve, it impacts valve sales growth. And I think those, as we indicated, we thought that those things would -- that many of those would run their course. And I think we?re seeing that come to fruition. So, you know, basically we?re seeing some of these customers migrate back to Edwards, if that?s what you?re wondering.

So, hopefully that helps complete the picture. We don?t think that this is only an effect of tissue -- of mechanical going to tissue, but we also think that the share shifting is sort of swinging back.

So Mark, without trying to sound obnoxious, would one be led to assume that you?re not playing these games and the shift that we see right now is going to kind of be a fair market shift in terms of them kind of coming towards the end of a trailing and you just continuing the way you normally do business.

Well, you know, I think our projections sort of speak for themselves, Mark. Without saying that we are projecting that cardiac surgery is going to grow in excess of 10 percent in the back half of the year, I think that?s a pretty dramatic difference from what you saw over the past three or more quarters from Edwards. And hopefully, that sort of reinforces how strongly we feel about where we are in the share positioning.

You know, it was an incredible performance and I think it came earlier than was expected.

In terms of the growth rate, could you share for us what the growth rates in the U.S. was relative to that in Europe?

Well, I can tell you that the U.S. growth rate this quarter was very comparable to our global growth rate, okay. And so, we saw growth rates that were, I think in Europe, was probably similar. I think, yeah, it was also comparable to our global rate. So, both the U.S. and Europe were both right in that same 9 percent range.

Okay. This is the last question probably for Bruce. You know, at these lower levels, Bruce, are we going to see continued share repurchasing?

I think, Mark, we have. You know, you could see the activity in the second quarter, which was partially the result of lower levels and that continued into the third quarter.

Okay. I know that you don?t like to provide us with kind of a guidance on shares outstanding, but should we be reducing those, keeping them flat, or increasing them maybe due to some options or something odd like that?

Well, I would say that, you know, for one thing, on our website we give you some guidance because we -- you know, for diluted shares there?s this factor of share price. And so we have the schedule on our website that kind of takes you given, you know, your assumption of the share price, here?s what diluted shares outstanding will be. So I encourage you to look at that.

In terms of additional repurchase activity, our total authorization here is two million shares. And through two -- well, through the second quarter, we?re at roughly 900,000. So we have more room left under that. And our intent for the program was to repurchase to offset dilution. So we?ll continue there.

But I guess, the best guidance, Mark, is absent a call on share price, would be to keep shares outstanding at these level from a modeling standpoint.

Thanks very much. Good quarter guys.

Your next question comes from Michael Winestein of JP Morgan.

Thank you. Can you hear me?

Yes. Sure can, Mike.

Okay. A lot of ground was already covered. Just wanted to circle back on Lifepath. Maybe talk a little bit about -- I guess a couple different things here. 1. What data are you gathering that will help support the development of the product competitiveness in Europe and help maybe drive the European sales growth over the next half dozen quarters before we start thinking about a U.S. market entry, one. 2. Maybe give us a sense from what the spending looks like to support Lifepath this year and next year. Basically I?m looking at okay, right now, obviously you?re making an investment in building that clinical program. It?s diluted earnings now and [indiscernible] right now, what?s it costing you versus what the potential upset would be if when it happens, you know, a couple years out. And then third, maybe give us any insight from a regulatory standpoint on the two competitors who are trying to get into the U.S. market right now, but seems to be taking them a fair amount of time. Anything you heard might be helpful. Thanks.

Maybe I?ll Andre-Michel to jump in and provide some of this color since he?s really been leading the introduction of Lifepath in Europe.

Mike, thanks for the question. Let me just take the first one for some of the data. What I think when you look at the performance of the AAA device, you look at two aspects of the performance. One is fixation and the other one is sealing. So basically, what you want to demonstrate is ability to stay in place so no migration and second, the ability to seal the aneurysm, therefore, low level of [indiscernible] leak as well as a significant reduction of the volume of the aneurysm sack.

So these are the kind of data that we are gathering today, and we think that based on our preliminary data, we have a good chance of being on top of the pack as far as [indiscernible] results is concerned. But again, what we really expect is we need probably one year follow up on the graph to really be confident that this clinical data will convince customers.

On the -- let me -- I know the competition and maybe I?ll turn it to Mike on the cash flow because it?s really a corporate kind of issue. On the competition and their activities in the U.S., well, you know, they are still seeking PMA, and they are obviously kind of doing their own stuff. We don?t typically have any more insight that you guys have on this at this point.

Were you specifically asking about the Medtronic [indiscernible] in the marketplace today or is it new competitors?

No, no, the new guys. In terms of -- if you?re hearing the thing on what it?s going to take for them to get on to the market.

Okay. Well, just to give you some sense here of our Lifepath spending. We spend in excess of probably as a cash flow drain, in excess of $5 million per year on Lifepath, and I would expect that to stay negative for the next couple of years. And so I really think it?s the U.S. introduction that turns that around.

And Mike, can you give us also an estimation -- since we?re throwing out numbers -- of the investment in the back half of this year or maybe for this whole year, on the peripherals business?

I would guess that the peripheral business for a full year would be in the $5 million range.

Okay.

And that?s sort of on a ramp, Michael, as you might imagine. So, you probably saw some of that here in the first half, with the bulk of it in the back.

Okay. Last question here. With the markets being what they are and becoming increasingly difficult, not only for public companies but for private companies to go back for financings, are you seeing more opportunities strategically at this point, or are you seeing assets that are looking more attractively price?

Yeah. I don?t think there?s any doubt it, Mike, that as you stated very clearly here. The private market is tough right now, which makes valuations far more attractive than they have been in the past. So, we probably are looking at a higher quality of deal than we?ve looked at in the past. And as you know, this is potentially an important element of our growth strategy and we do have a very active and rigorous program looking at opportunities.

Okay. Thanks.

0:46:38 Operation: Your next question comes from Katherine Martinelli of Merrill Lynch.

Oh, great. Thanks. First question, just a housekeeping detail, and I apologize if I missed it. Just what the FX hit was in the quarter and what you were looking for for the full year.

Right. The FX on the sales lines, Katherine, FX was only slightly negative. You know, a couple tenths of a percent.

Okay.

And for the full year -- well, for the second half, at current exchange rates, we would say that it could be positive by two and a half, because they have a two and a half percent positive impact at current rates for the second half of this year.

Okay. And I assume -- I think you guys said that you were hedged, so no real earnings impact?

Right. I mean, clearly it?s somewhat favorable, but it is -- it?s clearly favorable in the top line, and you don?t get a lot of it on the bottom line because of our full hedged position.

Okay. And then on the Lifepath, and I assume you?ll get into some of this later in the year, but on your November 7 analyst day. But in terms of given some of the issues you?re seeing with reimbursement and just overall more [indiscernible] conservative practice by the physicians, are you expecting slower ramp to carry into next year and would that impact the ability to hit the target of at least mid teens net income growth, if you do have to reign in some of the expectations for the Lifepath in Europe for ?03?

Well, you know, it?s a good questions, Katherine. And as I said, we really haven?t completed our detail planning for next year. And we have options in terms of what we want to do. As I said, I expect our sales growth rate to be in that 6 to 9 percent this year and I don?t see any reason why that shouldn?t increase again next year, particularly since Lifepath will continue to grow. Our other initiatives will be kicking in more, which includes a fib and peripheral stents. So, I?d say we?re certainly not prepared to walk away from any of our aspirations at this point in time. But, I?ll also tell you that, you know, this is one that we?re going to look at very carefully.

Would it be fair to say that you would do things in terms of slowing the pace of R&D, or are those goals pretty much etched in stone and you might rethink earnings before you would do something like that?

I don?t see necessarily a retrenchment in our R&D being something that?s in the cards. I mean, we?ve been aggressively growing R&D the last two years, actually close to the 20 percent range. I don?t expect us to continue growing R&D at that sort of rate. But I would expect us to see probably maintaining the R&D as a percentage of sales going forward regardless.

Okay, great. Thank you.

Your next question comes from Tim Nelson of U.S. Bank Corp Piper Jaffrey.

Hi guys. As the leader of the valve market, can you give me your estimate of the actual overall market growth for repair and replacement this quarter. I know that it seems to be picking back up after some tougher comparisons.

Yeah. I guess we probably think that that overall growth rate for that segment was probably close to -- probably in excess of 10 percent -- pretty close to 10 percent.

For tissue valves?

For tissue and repair.

For tissue and -- what about the total valve procedure market?

Total -- the whole thing? I think it?s pretty comparable to where it?s been. You know, maybe it?s -- it should be close to 5 percent, maybe a little under.

Okay, 45 percent, great. And then can you give us the specific sales number for Lifepath this quarter?

I don?t know that we?re sharing the specific number. As a matter of fact, I?m not sure that we have it in front of us.

Okay.

I can tell you that we probably, in the first half of the year, placed over 150 grafts, if that helps.

Okay. And then for Andre-Michel. You talked about the market size for AAA shrinking or coming down a little bit in Europe. Can you give us some more granularity on that. How big is it and how fast is it growing?

Well, you know, it?s probably a little slower than we expected it to find it. But it?s about 8,000 units this year, and probably the size of the market in dollars is roughly $50 million. And we expect this market to grow at 10, 15 percent per year. So, it?s a little smaller than anticipated, but it?s still a healthy, growing market.

Great. Thanks a lot. Good quarter.

Thanks, Tim.

Your next question comes from Keay Nakae of Wedbush Morgan.

Yeah. My first question is for Andre-Michel. In the U.S. clinical trial for Lifepath, you mentioned an extra 50 patients. Can you give us a little more detail about what that is regarding.

Okay. This is Andre-Michel. We?re trying to [indiscernible] bets here. Our original strategy is to enroll 100 patients. We?re looking into an alternative strategy to maybe enroll 50 more patients to speed up the regulatory process. But in any case, we?re still targeting a U.S. launch late ?04, as we previously said.

Yeah, I hope we didn?t confuse anything, Keay. You know, just because we had made the commitment that we expect to have 100 patients logged by September, I mean, we still expect to do that. You know, if we do change the strategy and decide to enroll 150, it would take us longer, but we do that in anticipation of potential accelerating the approval.

Okay. And then Mike, if you can just drill down a little bit on the sales and marketing effort. Relate it to your tissue valve sales. We did see a nice rebound here. Can you give us a sense of what?s going on. Let?s start on the sale side. You know, are there new marching orders or was it more of, you know, kind of a sales incentive contest or something like that? I?m just trying to get a sense for how sustainable this is. At least on the sales side.

Well, I think what?s happened here, Keay, is that we simply have focused on what?s going on. Our sense of it here is that there was a segmentation strategy that was employed -- one of our competitors. And rather than basically selling on the basis of data, which we had always been successfully, basically talked about a lot of the features and the positives to come. And if we actually, sort of position the Edwards offering in that same sort of light, it compares very favorable to the alternative. So, when we?re able to take a look at the XenoLogiX logics process, when we?re able to take a look at the advantages that it has for a patient, it simply comes out on top.

So, most special incentive programs. You know, no special deals or anything like that, Keay, if that?s what you?re asking about.

Yeah, I guess what I?m trying to get to is we know Medtronic software is pretty aggressive and we know that your approach has been, you know, a little bit more relying on the data. So, I guess what I?m looking for is a sense that they have a new mandate to be a little more aggressive.

Well, I mean, in terms of just, does it get our attention when we don?t grow our cardiac surgery business 10 percent, big time. And we talk about that a lot and we say that if there?s no reason why we shouldn?t have that sort of position given our product offering, of course. But, I will tell you that I think that this is simply a very strong focusing effort on the part of our sales team. You know, when we talk about getting aggressive, we get aggressive. We continue to get aggressive with our data. This is still a data driven cell and we just continue to use many of the same tools we have in the past. And I think we just have weathered the introductions.

Okay. And then I just want to go back to my first question and the 50 extra patients. Typically, when we see companies in clinical trials trying to increase the number of patients involved, it?s trying to help them bolster their ability to show a statistical significant difference. Is that what we?re looking at here or is it something else?

Absolutely not. That doesn?t have anything to do with it. I think this has more to do on whether we could include some of the original Lifepath patients or not. But, no, we?re very pleased with sort of the clinical results and the suggestion here of adding 50 patients has, I hope has nothing about coloring the sort of performance we think we?re getting today.

Okay. Hey, thanks a lot and great quarter.

Thanks, Keay.

Our next question comes from Jason Bedford of Adam, Harkness and Hill.

Hi guys. Congratulations on a nice quarter. Most my questions have been asked. But, just on the life stitch product. I believe you plan on rolling that out in limited release in the second half of this year. When should we expect a full launch of that product?

Yeah, that?s a good question, Jason. You remember this Life stitch is the first in what we think will be a few generations of this product. The idea of being able to repair a beating heart valve, is something we have been reaching for here over the recent past, and life stitch is the first introduction of this. And we said that we?ll have the first human use now before year end. And so it?s a little more, it?s a quarter slip. Let?s put it that way.

We had never counted on this to really generate substantial sales, but for this to be an accelerator of our learning and to validate the concept. You know, what we really think is exciting if we can validate the concept, is to eventually reduce this to an intervential procedure that can be done by catheter. And that one is still a couple years off. But this is the important first step in that direction.

Okay, great. And just for Bruce. Just a couple housekeeping questions. What was DNA, cap X,and free cash flow in the quarter?

Let me get that for you.

Thank you.

All right. Let me give you free cash flow for the six months which is the schedule that I have in front of me.

Sure.

It?s, well -- net cash. Let me give you the components of that. Net cash, operating activity 42.7. And cap X, again this is all for six months, 16.4. So 26.3 of free cash flow in the first half and that would include the Medtronic. The other part of your question.

Just the DNA.

The depreciation and amortization?

Yeah.

Okay. That would be for the six months, depreciation was 14 million, amortization 5.3.

Great, thanks. Nice quarter guys.

Your next question comes from Greg Simpson of A.G. Edwards.

Good afternoon, guys. Congratulations. Everything?s been asked for the most part, but I did want to hit you a little bit of the detail on the cardiac area and cardiac sales. Can you give us a little better idea, Bruce or Mike, with respect to the contribution that valve repair made in the quarter as compared to valve sales. Not the overall growth, but contribution to growth?

The contribution to growth -- when you refer to that Greg, are you looking for sort of a -- are you trying to get the sales dollars?

Well, you could do it that. Yeah. I?m trying to figure out how much of the overall growth was from repair.

Okay. Let?s see. We?d say overall, we?re repair -- repair probably is in the high teens, but you know, it?s a much smaller segment.

Well, yeah, Mike. That?s what I?m trying to get to, I guess, is the scale there and what the contribution to the overall growth was.

Yeah. I mean, you probably can think about repair being, you know, maybe 15 percent of that overall valve business. So, you can sort of scale it from there.

Okay, great. That gets me where I need to go. And then also, Bruce, for you, you gave the accounts receivable number, but I?m afraid I missed it. Could you give that one more time?

Sure. Accounts receivable for the quarter end, 114.4.

Okay. All right, thank you. Congratulations again.

Thanks, Greg.

Your next question comes from Robin Swanberg of SunTrust Robinson Humphrey.

Hi guys. Nice quarter. Everything has been asked. I did want to ask about gross margin. You?ve given some near-term guidance. What about for ?03. What are we looking at for gross margin guidance in ?03?

Thanks, Robin. You know, we?re not going to give guidance, specific guidance on ?03. We can talk about aspirations. And what we?ve said in the past, you know, beyond thing. Because when we came out of last year, we said gross margins, while well in excess for this year, for 2001, and that was due to cardiac surgery growth and not having perfusion services in the numbers this year. That going out of the fourth quarter, that we would kind of maintain those levels. And those were in the 57 percent range. And so we?ve done that certainly for the first half and are looking to do that for the second half as well.

In terms of further movement in our gross margin beyond 2002, what we have said is that we think we have a 50 basis point to 100 basis point opportunity going forward just on the basis of, you know, cardiac surgery growth and the makeup of the business. And so we would tell you that going out of 2002, certainly some gross margin expansion of that over magnitude is possible.

Great. Thank you.

You?re welcome.

You have a follow-up question from Alex Arrow of Ladenburg, Thalmann.

Thanks. One thing we haven?t mentioned is the critical care business. In the past, you?ve given us some guidance as to the breakdown between the traditional Swan-Ganz and the new advanced Swan-Ganz, that have continuous monitoring as opposed to point in time monitoring. And to us, building models becomes pertinent because one of them is about five times the price point of the other, if I understand correctly. Anything you can give us on how those two portions of the critical business are changing places. Is it continuing like it was before?

Yeah, thanks Alex. You know what, the only reason that I didn?t say it is that I thought I was starting to sound like a broken record, because this critical care business is so consistent, we routinely have, you know, the base business shrink and the advance business grow and in fact, that again, happened this quarter. The base business did shrink and the advance business did grow.

Can you be any quanitation about that?

Well, I would say in general, maybe the base business actually shrank a little bit more in this quarter than in our typical quarter. But I don?t know that I would consider that a trend. I would say that would be maybe more peculiar to this quarter.

Okay. Thanks a lot.

Thanks.

Your next question comes from Jeff Doinoff of Hahn Capital Management/

Mike, you kind of talked around this, but I just wondered if maybe you could provide a little bit more color on the competitive environment between porcine and pericardial. You obviously agree that pericardial is a superior product, but beyond the marketing, why are some docs reluctant to make the switch? Is it comfort level from a procedural standpoint and is there anything that you?re doing along those lines as well?

Okay. It?s a good question, Jeff. Well, a couple of things to remember. One is, most docs prefer pericardial technology. I mean, there?s no doubt in terms of what?s the leader. It?s not like this is a, you know, a flip of the coin. I would say people would prefer pericardial technology to porcine technology. That maybe three or four to one, easily. Maybe, five to one. So, it is clearly recognized.

Now, why would somebody choose porcine technology. There could be a few reasons. One is, you have to pay more for pericardial technology and that is the reason that some folks decide that, hey, maybe on an older patient I can get by with the porcine technology. And the other is, there just may be some notion -- for example, some folks like stentless valves. And in a patient where you want to replace an aortic route, you may decide that a stentless valve is a good valve. And others, it just may be a relationship issue between the company and the position.

You know, besides that, now it starts -- start reaching a little bit. Some -- I have to admit that some physicians find it easier to implant the porcine valve. And so, for an older, sicker patient, they may decide that that?s the alternative.

I?m sort of working down the list if that?s helpful, Jeff.

Yes, thank you very much.

Your final question comes from Andrew Jay of Wachovia Securities.

Good afternoon. Great quarter. Just a quick question. PLC and the PRM business, is that up sequentially and just any insight you can give on your prospects for that business going forward.

Yeah, it is up sequentially, Andrew. Thanks for the question. You know, it?s nominal sequentially up. We still think that this business will put up probably good growth. I think we did something like six last year and we?re projecting that it might do $10 million this year. That?s probably not bad estimates. Okay. And we would hope that we?d continued growth beyond, that?s for sure.

Excellent. Thank you very much.

At this time, there are no further questions.

Thanks everybody for your questions and your continued interest in Edwards and we?ll turn it back to you, David.

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