愛德華生命科學 (EW) 2003 Q1 法說會逐字稿

Good afternoon my name is Molly and I will be your conference facilitator. At this time I would like to welcome everyone to the Edwards Lifesciences first quarter 2003 results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' 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 keypad. If you would like to withdraw your question press star then the number two on your telephone keypad. Thank you Mr. Erickson you many begin your conference.

Welcome and thank you for joining us. Just after the close of regular trading today, we released our first quarter 2003 financial results. On our call today we will focus on prepared remarks on information that will compliment 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 Mike Mussallem, Chairmen and CEO and Corinne Lyle CFO. Before I turn the call over to Mike, I would like 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. These statements include sales growth, R&D investments, net income, earnings per share and free cash flow goals for 2003. Expected sales and/or clinical results for products or therapy's including PERIMOUNT Magna, MC3, endovascular value repair, Optimize, Lifepath AAA and peripheral stents. The timing of clinical trials and regulatory approvals, the impact of foreign exchange and other risk factors that may be found at the end of today's press release and in filings made by Edwards with the Securities and Exchange Commission. With that I will turn the call over to Mike.

Thank you David. We are pleased to share with you our first quarter results, which reflect robust top line growth, a higher gross profit margin, increased investments in R&D and strong bottom line growth. Total underlying sales for the quarter grew 8.5% compared to last year, growth in our Cardiac Surgery and Critical Care product lines was very strong with Cardiac Surgery again posting a mid-teens growth rate. Total sales growth was also favorably impacted by more than 1% with the assumption of direct sales responsibility in the associated inventory in several small countries last year. Declines in Perfusion and other distributed products slightly offset the quarter's growth. Now I will discuss each of our product lines in more detail. As a reminder the unusually 31% reported sales growth rate includes the impact of the Japan consolidation and foreign exchange including just the Japan consolidation our sales growth was 14.9%. However, to provide a more meaningful comparison I will exclude the impact of both of these items from my remarks.

Cardiac Surgery sales growth continues to be very strong with an underlying increase of 14.2% this quarter compared to the last year. These results were driven by mid-teen sales growth of our PERIMOUNT heart value and repair products. Especially strong result in Japan and the rest of the world markets as well as healthy sales of several of our newest Cardiac Surgery products. PERIMOUNT sales continued to be robust primarily due the ongoing worldwide conversion for mechanical valves. Our pericardial valves have increasingly become the valve of choice for even younger patients due to their significant quality of life advantages. In Japan where the conversion of PERIMOUNT valves is already substantial, we also continue to benefit from a competitors exit from the foreseeing (ph) market in June of last year. This has resulted in heart valve sales growth rate in Japan well in excess of 50% for the third quarter in a row. Cardiac Surgery sales also benefited from the European and Canadian launch in September of our Magna valve. Although its premium price was a barrier to rapid adoption in Europe, clinical experience with the state-of-the-art valve has been very encouraging. We remain very enthusiastic about Magna's potential in the US and continue to anticipate its launch in the second half of the year pending FDA clearance. Given this valve's unsurpassed hemodynamics and durability we believe Magna will become the leading tissue valve in the US in the next few years. Sales of heart valve repair products were also very strong in the quarter.

We attribute this to the growing adoption of our market leading mitral valve repair portfolio and the recent launch of our MC3 Tricuspid Repair System in Europe and the US. By the end of the year, we expect to launch another innovative surgical repair system. We are committed to offering innovative options for patient suffering from valve disease. As successful of the therapy is today, open heart surgery is the only option for valve repair and replacement. And we believe capital based options for patients could dramatically expand this market. For this reason we consider endovascular valve technologies to be one of the most important future advances in heart valve therapy. During the quarter, we acquired the endovascular mitral valve repair intellectual property and related assets from the [Inaudible] , a European based medical device company. This capital based technology many enable mitral re-modeling via the coronary sinus, one of the most promising approaches to endovascular valve repair. We believe this innovative program compliments our existing edge-to-edge repair initiative providing us with another opportunity to pioneer endovascular valve repair. We are currently engaged in pre-clinicals with both programs and expect to begin clinical trials within the next 12 months.

During the quarter we received Japanese regulatory approval to distribute the Novacor left ventricular system. The [Inaudible] up demand in Japan for this product which contributed approximately $1m to the sales this quarter will not repeat in future quarters. Our CO2 TMR initiative reported more of than $3m of sales this quarter and was a contributor to Cardiac Surgery growth. We continue to expand adoption of this therapy through physician education to increase awareness of the clinical effectiveness of this technology. Interest in the surgical treatment of atrial fibrillation continues to build and the initial clinical result of our Optim A system(ph) are encouraging. As we complete the transfer of this program to Edwards, we choose to incorporate several enhancements. We expect our Optim A system (ph) to be available for a limited US release beginning in June with additional units available in the third quarter. In conclusion, we expect Cardiac Surgery underlying growth rate to continue to be 10 plus percent. Now turning to Critical Care underlying sales in this product line grew 7.4% this quarter. This increase was primarily due to position continuing converging to more advance technology catheter products. Significant growth in emerging markets in Japan as well as strong hemo-filtration sales were also contributor of this quarter.

The US and European launch of [Inaudible] our newest advance technology catheter continues to progress. We've seen strong co-initiative interest and have began programs to encourage changes in practice related to early step of treatment. Critical Care's growth rate also benefited from a favorable comparison to the year ago period, which included the assumption of direct sales responsibility in the associated inventory in several countries. For the remaining quarters of the year we expect the underlying Critical Care growth rates to be in low-to-mid single digits. Till the first quarter underlying vascular sales increased 4.2% compared to last year to primarily to sales of our Lifepath AAA graft as well as positive momentum in base vascular products in developing markets. European Lifepath sales are progressing well and in fact we had a sizable increase in the number of AAA's in plans in this market. We continued to receive positive feedbacks from positions in Europe who are using Lifepath and are beginning to appreciate the differentiated performance of our product. In the US, we completed our phase II clinical trail at the end of last year. In the first quarter we spend most of our time securing hospital approvals to initiate our phase III trial which limited our Lifepath implants. Therefore, the number of US implants will increase during the year. Additionally, we expect clinical data to be presented at several upcoming vascular meeting beginning with the Society of Vascular Surgeon's Conference in June.

We remain optimistic about our long-term potential for Lifepath particularly in the US and are on-track for a US launch in last 2004. The peripheral stent market continues to be an attractive opportunity and we are eagerly anticipating the launch of our balloon and self-expanding stents. Life stents patented helical design offers excellent flexibility in radial strength, which differentiates it from competing products. We are preparing for the stage hiring of our US sales team and plan to leverage our existing vascular sales channel in Europe. In June we expect to begin marketing trials and we remain on track for a phase product launch in the US and Europe starting this summer. We expect Life stent sales to begin contributing to vascular growth in the fourth quarter. While we are very focused on launching our first Life stent products, we are also developing enhancements to the Stud platform including additional sizes and features followed by the pursued of additional indication-specific regulatory approvals in 2004. By the year-end we expect to start clinical studies of a PTFE coverage stent, we believe the unique features of our covered stent products may prove particularly useful for a variety of indications. For our vascular franchise as a whole, we expect underlying sales to grow approximately 10% 2003. Underlying profusion sales were down 6.6% in the quarter compared to the same period 2002.

The decline in this product line sales continue to result primarily from the planned reduction in the low margin distributed product sales. Throughout 2003, we expect our profusion product line to generate sales of $13m to $14m per quarter. Sales of other distributed products were $11.2m in the quarter a 5.4% underlying decrease due to a strong year ago quarter in Japan. We expect other distributor product sales to be between $10m and $12m per quarter this year. Overall, we expect the combination of continued strong base business growth and our new initiatives to result in total underlying sales growth of 7%-9% in 2003. If foreign currencies remain at recent levels, we would expect to see an additional 2 to 3 percentage points of reported growth for the year. Now, I will turn the call over to Corinne Lyle, Edward's CFO as of March 17th and it is a pleasure to have her with us in this capacity. Corinne.

Thank you Mike. Our gross profit margin was 58.1% this quarter a year-over-year improvement resulting from increased sales of higher margin cardiac surgery products, partially offset by the impact foreign exchange. For the full year, we continued to expect our gross profit margin to be 58 plus percent. SG&A expenses were $71.4m for the quarter or 33.6% of sales. As expected, SG&A was considerably higher than the year ago period due largely to the Japan consolidation. Also contributing to the increase, with greater spending for growth initiatives as well as stronger international currencies that impacted expenses outside the US. For the rest of the year, we expect SG&A as a percentage of sales to be comparable to this quarter. This quarter, we increased R&D by 23.4% to $19m or 8.9% of sales. This increase is attributed primarily to investments and experienced talent related to new platforms in our cardiac surgery and vascular franchises. Japan consolidation also contributed to some of the year-over-year increase.

For the full year 2003, we expect to increase R&D investment above the underlying sales growth rate. Total debt at the end of quarter increased to $277m from the $245m reported at year-end. This increase resulted primarily from the $20m acquisition of the [Inaudible] endovascular mitral valve repair program in February and the repurchase of shares under our stock repurchase program. Our debt-to-cap ratio at quarter end was 34%. Also, last month, we renewed our 364-day bank debt facility which complements our larger five-year facility. Net interest expense was $2.7m this quarter, lower than the year ago in the sequential quarter. Although debt increase in the quarter interest expense was lower because our average daily debt downs was higher in the fourth quarter 2002 than in the first quarter of this year. The remainder of the year we expect interest income expense to be comfortable to current level. In the quarter other income was $3.6 million due primarily to favorable affects in tact related to the Japan acquisition.

Our Japan entity is owned by a European subsidiary and this transaction created a [Inaudible] yen obligation that resulted in a gain. We have reduced this exposure and would not expect again of this magnitude to occur in the future. This quarter changes in the foreign exchange rates compared to the same quarter last year benefited sales by approximately by 6% or $12 million. As might mention if foreign currency remains at recent levels we would expect affect results in less of an impact of sales going forward and approximately 2 to 3% point favorable impact on full year reported sales. Due to ahead in program we expect the minimal impact on our bottom line for the remainder of the year. At the end of this quarter accounts receivable were $125 million and inventories were $116 million. Including receivables that are part of our [Inaudible] program, pay scales outstanding were 76 and inventory turns with 3.1, while DSO was higher than the typically low fourth quarter, both measures have improved compared to the year ago quarter. Managing DSO and increasing inventory turns remain early to focus growth this year.

During the quarter we bought back clearance 314,000 shares under the stock repurchase program for approximately $8 million. The day we have repurchased more than 1.6 million shares of the 2 million shares off right totaling around 40 million. In the quarter of the company reported 11.8 million pre-cash charge for any process earn the expenses associated with the previously announced 20 million acquisition of [Inaudible] property and other assets related to [Inaudible] endovascular microvalve repair program. And with that I turn it back to Mike.

Thanks Corinne. Over all, I am very pleased with the strong results we hosted for the first quarter was committed to transforming Edwards into a higher growth company and were determined to [Inaudible] transpiration of double-digit sales growth was consistently delivering about average increases in net income. Our financial goals for 2003 are unchanged and include growing underlying sales by 7 to 9% and net income by 14 to 16 percent. We also expect to increase R&D investments added above the sales growth rate and generate $85 to $90 million in free cash flow. And finally, I would like [Inaudible] our comfort with the consensus estimates for the remainder of the year. Another note I would like to remind you, mark your calendars for the upcoming American Association of Thoracic Surgery conference in Boston next month. At this conference, we will be hosting inbuilt demonstrations of our PERIMOUNT Magna valve as well as other of our latest Cardiac Surgery products.

On Monday, May 5, we will be sponsoring a debate featuring leading clinicians who will discuss the future role of the cardiac surgeon versus the intervention of cardiologist in treating valvular and coronary artery disease. Immediately before the discussion, we will be hosting an analyst reception with management and several leading positions. If you are planning to attend AATS conference, we encourage you to request the invitation from our Investor Relations Department. And with that we will be happy to answer your questions.

At this time, I would like to remind everyone, in order to ask a question please press star and then the number one on your telephone keypad now. We will pause for just a moment to compile the Q&A roster. Your first question comes from Sheetal Mehta of Bear Stearns.

Good afternoon. Just a couple of questions. It looks like you have had some very impressive Cardiac Surgery numbers over the last couple of quarters in the teams, though you guys are clearly gaining some share in the tissue segment. Can you talk a little bit about what kind of market dynamics you are seeing out there, like can you estimate what kind of share you have now and how much you gained over the last couple of quarters, that will be first question and then I will ask my second.

Sure. We don't think that there is anything, and thanks for the question Sheetal, we are not sure there is anything very different going on in the heart valve market overall. We still think the market is growing overall at about a 5% rate. So when we have heart valves growing in the mid-teens like this, it means that we are clearly gaining share, I would say maybe most noteworthy are the kind of share gains that are going on outside of the US, we are particularly strong in Japan, and you know what's going on there, but I would say also in Europe and intercontinental markets we saw a very strong quarter.

Okay great. And then, my other question is more than not sure how you can comment on this, but one of your competitors in the AAA market is I guess with last week commented that there are going to be evaluating some strategic options when it comes as a result of lower AAA numbers in the first quarter. And they didn't really say any specifics but just wanted to get your impressions on what your take is on that, clearly the AAA market is challenging, how we are going to go about that, and if they do decide to withdraw from the market, how do you think that will impact the market overall, thanks.

Thanks for the questions Sheetal. I don't think our view is changed on this, we've always been believers that the best product wins, and we think much of what you are seeing play out here is sort of a gravitation to the best product. And so I think although the competitor [Inaudible] had an early lead, this is not necessarily a market about begin first, but about having a product that really performs for these patients, we know that there have been struggles on that. We continue to be optimistic that Lifepath can be that and we look forward to having more data that demonstrates, what we hope is true differentiation between our product performance and what's out there and so we are undeterred in terms of our quest for this market and we think of that, it's really good for patients and they would really benefit from an affective endovascular procedure.

And I am sorry. Could you remind me when could we expect to see some AAA data, did you mention later this year?

Well this coming June at the Society of Vascular Surgeons meeting, we are pretty convinced that there is going to be at least one really good paper that lays out where life path is, both a look at where the early patients were that we had three years, we have about three years of data and that we discontinued and also sort of early data from the 2002 Phase II clinicals, but you know that's not going to be very expensive, but I think pretty much all we have has a good chance of being presented in June.

Great. Thank you very much.

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

Good evening guys.

Hi Mark.

Great quarter.

Thanks.

Mike, just a question on Japan. You got the wins at your back, when do you expect that to kind of come to an end? And may be if you can just give us the size of that may be of the size of the Japanese market and what they sense that is, just has been trying to get an understanding of what it is?

Okay. Yes, thanks for that Mark. The Japanese belt market we think is somewhere in the neighborhood of $100m. Okay, so you should think about that. I think right now, our run rate is probably in the neighborhood of $40m of annual sales. So, that's what you can think about. When the competitor exited in June of last year and that's when we saw the dynamics change, our hardware (ph) business is probably growing 20% plus before that and then it accelerated dramatically following that exit. So, we are going to have one more quarter of pretty substantial differences. But then, that should very much moderate as the impact of that exit comes into place. Does that answer your question?

Yes. Mike on the gross rates that kind of plays into, but on a dollars basis I am certain when that competitor gets back into the markets, what is your expectation for market share then? Would you lose some of that back to that competitor or how do you see that playing out?

Well, that's a very good question. We'd take off a couple of million dollars a quarter as a result of their exit. And so, the question inside your question Mark is when do they come back and we just don't know that. Okay, and then how successful will they be when they do come back and you can imagine we really like having the share and we are going to do everything within our power to hold on to it, but that chapter is yet to play out.

Again then Mike?

Not to beat a dead horse, but in AAA, part of it is obviously doctors getting up to clear with your differentiated technology, but how much is that even the doctors may be switching over due to some of the other failures of the devices that we have seen?

That's a good question I think, one way or another there is a demand out there for an effective Endovascular AAA device and people are preferring us more. We had our biggest quarter in Europe certainly by far and I think you can pick up from our comments, we didn't do much in the US this quarter, but that should start picking up. But, overall the big opportunity for Edwards remains in the US and even though we expect momentum to continue in Europe, that's the big one that we look forward to having approval in late '04.

And lastly Mike, I have seen some Edwards for the new stent system, the peripheral stent system. To what extent have you put that in print and is it out there at the dock. Have you started an education programs or may be you can just update on us where you are on that?

Yes. We are clearly preparing at this point. We haven't done very much market focus at this point, we have done an awful lot of marker research to prepare ourselves in terms of how to prepare the market and we are also in the process of educating our own people in that regard. But, in terms of what we are doing for the market, it's mostly name recognition around Edwards. We want to make sure that the folks in the peripheral vascular marketplace that may be don't get exposed to adverse routine like knows about what we do in other markets and has a sense of confidence in what we can do for them.

And Mike just one last question if I can. Is it going to be intellectual property battles around the edge-to-edge repair?

I'm sure that there will be intellectual property around that, I mean obviously we feel good about our position today but you can be sure that when something is exciting as you know catheter based valve repair that intellectual property will be a key issue.

Thanks guys and great quarter again.

Your next question comes from Katherine Martinelli of Merrill Lynch.

Oh great, thank you. I guess I had the question in terms of the guidance for the full year just given the fact that underlying growth came out closer to the upper end of your targeted range and obviously earning surprising on the upside, was there any temptation to raise the guidance since that would seem with the new product offerings particularly in peripheral stent to coming on stream and maybe some momentum in Lifepath that it looks a little bit conservative not to be moving away from the consensus numbers right now?

Katherine thanks for the question. Are you more referring to top line or bottom line?

Both.

Okay. Well, you know I think we continue to feel as confident as ever on the top line and obviously, I mean full year guidance should tell up by the amount that we beat in the first quarter, but we are not sure that there is tremendous difference in terms of market dynamics that should price you to change, while that would cause us to change guidance for the remaining three quarters of the year. So, we continue to feel like the best place to be is where you pretty much have us estimated for the final three quarters. We like our initiatives a lot as you might imagine but and again we don't have a lot of experience out there and we think it's probably wise to actually see how we do before we dial those in. That will be my counsel.

And in terms of any currency benefits that flow to the bottom line this quarter? Or is it all hedged away?

Well, certainly you saw what happened at the very bottom line beneath operating income, maybe I can ask Corinne to address the currency impact. I mean obviously what happened to another income is an issue.

Right Katherine what we had as Mike mentioned a 6.1% impact to the top line, confirming to foreign exchange and then our gross margin was impacted slightly. So, while we had the favorable product mix from the cardiac surgery revenues we had the offset from the currency rates this quarter and then also there was an impact on the SG&A line, which was up slightly from last quarter due to higher expenses outside the US. So some of that did fall to the bottom line but a lot of it was hedged away.

Okay. And then just two quick clarifications and I apologize if I had missed it on the call. Did you say what the Lifepath revenue was in the quarter, something around the million and also what the CO2 did?

I'm not sure we've said what it did but it is around the $1m for Lifepath and in CO2 it was around $3m.

Right, thank you.

Your next question comes from Michael Weinstein of J.P.Morgan.

Thanks. Actually, can I just follow up Katherine's question, just to be clear on the couple of things first. The $3.6m at the other income that's on a translation of the acquisition. Is that what that is?

Right. So, due to Japan acquisition, we ended up having the Japan entity ended up being owned by our European subsidiary, and that created a Euro-Yen obligation. And due to the extreme volatility between those countries last quarter, we did see a one- time gain that we don't expect to see any recurring going forward.

Okay. So, just to give an apples-to-apples on foreign (ph) claim basis. Your assistance, we remove that obviously (ph) ?

Exactly.

Okay. And then, -- I guess your answer to a question just on the hedging. Can you may be quantify, just in terms of how we should think about in terms of how much, how much of the company's currency exposure positive, pretty meaningful, is now being hedged?

Yeah.

You know, -- let me pitch in here and I will ask Corinne to add. Nothing is changed in terms of the way we manage us. How much sales in Europe and Japan. So, all our exposure is to Yen and Euro. And what we do is try and hedge to the maximum extent that we have proper accounting treatment, which essentially comes out to about two-thirds about 70% of the overall exposure. So, although we have some level of exposure that we will see, but the rest of it, we are in a pretty fully hedged position.

Okay. And then, I am just, -- Mike maybe give me just your thoughts of, if I look at and trying to cut through the different layers that are impacting this quarter with obviously Japan consolidation, does the currency benefit? If I look at the US operations, it looks like US revenues were up about 2% to 3% and which suggest that a lot of the fundamental process is all are coming from outside United States part of that average is coming within cardiac surgery in Japan. Is that seem like, as we think about the gross for the balance, your deduction like a low number, as we what we saw in the first quarter?

Yeah, I would say that's clearly low. I mean, I wouldn't expect the US growth rate to probably stay at that sort of level.

And, do you think that, obviously I don't know the different components to that with across the business segment. Was it low, domestically because of anything going on in valves or was it the rest of the company?

Well, the valve business didn't grow as strong in the US as it did outside the US. So, clearly that's a part of it. But, we had other things that impacted us. So, for example there was about $1m of sales to, -- perfusion sales in the US that came out that wasn't in the prior year. There was AAA sales in the prior year and that really got much smaller this year, as we flipped into our Phase [Inaudible] . Couple of things that attracted from it, if that ends up giving a little bit more color.

That's very helpful, Mike. Thank you guys.

Your next question comes from Tim Nelson of Piper Jaffray.

Hi, great quarter. Last quarter you had a more than normal quarter for Research Medical. Did that help performance continue this quarter, I think you attributed to share gain and you will see outlook there given [Inaudible] .

No, Research Medical this quarter was not a big number, was not nearly what the cardiac surgery growth rate was. As a matter of fact, it was clearly a single digit number [Inaudible] mid-single digit number. Are we concerned about that or not?. Not really. As a matter of fact, we feel like we have enough innovations going on in that business that we think it will stay pretty solid, Tim.

Great, and then can you talk a little bit about the repair side of the business and the trends there. Is that accelerating relative to the overall [Inaudible] market and is it [Inaudible] that is driving it?

Yeah, I mean clearly repair continues to be a strong grower, we had repair growth again that was high teens and so that continues to move even faster than the overall market, and to say exactly where that is coming from is tough. We saw a strong performance in a lot of it, it's probably, we tend to think of it as primarily degenerative and not really ischemic treatment. We think ischemic treatment is not really in the numbers, and we also so a little bit of nice performance from MC3 this quarter. MC3 wasn't in the last quarter and I think it probably did close to a million dollar source this year.

Great, and then finally critical care growth continues to surprise, second quarter in a row, it has done better than, [Inaudible] , a little bit of color on why that is going on why you don't think it will continue?

Well, you know, some of that I'll try to [Inaudible] I maybe it gets a little bit confusing Tim, but remember in prior year what we had is the switchover from [Inaudible] distributors and so that by itself probably added between the 1% and 2% to the growth rate of critical care. So that's part of it, I think precept has really not been a meaningful number at this point in time. We've continued to see strong sales in our intercontinental markets and that certainly listed, and we had a particularly strong performance in Japan this quarter, although we don't know that we should believe that's going to repeat on an ongoing basis, you know Japan hospitals have their fiscal year and on March 31st, and so we are always suspicious when the sales kick up there.

My last question is any explanation at all as to what's happening in the international dollar market. Since you had a great quarter internationally as well. So it may not be the [Inaudible] , but what is happening that's caused the strength, I assume it is right across the board sales internationally.

Tim I don't know, if what I guess we could think about, we continue to think that they are all the same trends. We continue to feel like there's a ship from [Inaudible] that's broadly going on in the international markets. We think the repaired growth is very substantial in international markets and those are the primary drivers of change in terms of do we think there is more procedures - you know it's possible that has some impact in intercontinental markets, but that's probably not a big driver of dollars.

It's a makeshift [Inaudible] versus overall higher unit growth rate like a 7% growth rate, we are still over 5%.

I'm sorry Tim I missed that.

Well I was just wondering if what you are saying it is probably a tissue to mechanical [Inaudible] mixture.

Yes I think so.

That the [inaudible] rate in US. Okay.

Exactly I remember you had the biggest portion in that market using those chemicals.

Great and thanks.

The next question comes from O'Brien(ph) Barnredin of RC Capital.

Good evening. My questions are more related to I guess some of the balance sheet items. I wonder if you have got a better stance in terms of the accounts receivable and also inventory. Some of the goals that you're kind of putting of particularly [Inaudible] for this year?

Well as we said our day sales outstanding including our asset backed securitisation program were 76 for this most recent quarter and that was a little higher than in the fourth quarter of last year, but lower than the year-ago quarter. And in terms of our internal goals.

I, may be I can speak on that a little bit. You know this one we are going it have for a couple of years here. Last year, we made nice improvement both in reducing DSO and inventory. At this point, we've set goals for ourselves to be able to increase our sales with, without real increases and inventory and trying to hold our, hold our DSOs where they are considering the phase of our growing business. So we have some pretty nice focus on this. It's actually built in as one of the components of people' [inaudible] .

So if we come and take a look at the, I guess an asses we can get a net no change in working capital for the full year as you come out with your free cash flow numbers?

That's right and we continue to expect our free cash flow to be in the $85m and $90m range. And of course that is seasonal. And in addition our inventory levels, we've already made some good head way there and are pretty happy with the current levels. Would expect turns to be in this range for the year, but probably not a huge amount of improvement going on there, going forward

Then given that I guess a larger portion of the sales can become overseas. Shouldn't that be a little bit more difficult to do?

Yeah, we obviously have a--

Think you can get it done?

Yeah, we have obviously have an opportunity to continue to improve our performance.

Okay. And just finally in terms of just kind of unit volumes versus pricing obviously we have a number of different products here. So if you guys have been implementing any price increases at all? Or have you been looking for any?

You that answering?

Let me answer this, then we probably need to move to another caller. In general I would say our prices are relatively stable and when we introduce new products we look as an opportunity there to introduce those products at a premium price. So for example those products that are recently introduced will be their premium price versus the ones that have been in the market place for several years.

Thanks

Thanks.

Your next question comes from Glenn Novarro of Banc of America.

Guys, I just want to get a better understanding of what's happening in the US valve market. It sounds like your sales were kind of up in the low single digits and that's up against what was supposed to be an easy comp. So, did they shift tissues slow in the current quarter and kind of what are the trends we should expect going forward in the US tissue market?

Yes. That's a misconception Glenn. So, thanks for that question to think that our valve sales were up in the low single digit, that's not true. It was higher than that as a matter of fact it depends on how you want to cut it, so if you go to something like pericardial valves, those were continuing to be up with real strong growth in mitral pericardial, that was low double digits. The aortic pericardial not quite as strong repair was in mid teens sort of range. So, sort of total tissues and repair was more or less sort of mid or mid sort of singles growth [Inaudible] and so the way you get there is more declined in our porcine products in the US.

And what's impacting the porcine sales that just share gains from Medtronic and St. Jude?

Well. I mean certainly I don't think that St. Jude could possibly be in the share gain position and I don't know whether Medtronic could be there either to tell you the truth. I mean, I don't think we had any share loss in the US more or less we probably had a greater impact of conversion in the pericardial than anything else.

Okay. And let me just shift here just on the peripheral sales force. Can you tell us where you are with respect to hiring these folks? Is the sales force in place? Do you still need to add bodies and perhaps is that one of the reasons why you want to continue to remain conservative on the earnings outlook going forward?

What we are trying to do here is sort of time thing, so that we do it in a staged fashion, and so the way we look at it right now is to bring on sort of our first wave of people in the third quarter and really with the idea that we are going to have products available for them to sell starting in the third quarter and that will be wave 1and then our assumption that the things go well, and that we had a second wave in the fourth quarter. So, we will have to just sort of play (ph) that by year, but right now, we have sort of other sales management in place. We have a marketing employee cell. We certainly have all the other parts to get the launch done and obviously we are in our scale of process from a manufacturing point of view and have some pretty aggressive product development going on. But we are not really putting the sales force on the first time until the third quarter.

And what's the reasonable number that you think, you should add to be competitive against J&J and Boston Scientific?

Do you mean in the short run or in the long run?

In the short run and in the long run.

I would see us heading toward a 40 some person selling organization may be adding it in forms (ph) like you might have done first time around and then added in stage (ph) stuff something like that.

Alright. I'll see you guys up in Boston.

Okay. Thanks Glenn.

Your next question comes from Ryan Rauch of Adams, Harkness & Hill.

Hi guys. Congratulations on a good quarter. Just two quick questions. One where do you stand with your international AAA sales force?

Well, what we did is when we initially launched this product, Ryan what we did was to put some specialist in Europe and we added a number of specialist back in the beginning of, I guess that was 2002 to be able to handle that product and so those folks have been in place and we have been sort of building that effort up during the full course of 2002 and that is as stable selling organization at this point of time.

Okay. And then how many total people do you have there?

Well, in Europe what we have chose to do was to combine the base selling organization with the AAA organization. So, overall we must have in the neighborhood of 25 folks or so in the vascular organization in Europe.

Okay. And then I know I have you asked this a couple times, but can you give us your insight on sort of the competitive landscape in the prospect of potentially having a competitive pair of cardial (ph) valve in 2004, a sort of what you know about product were it comes from and just sort of how you feel you stand competitively?

Do you think there is going to be a competitive valves in the marketplace in 2004 made of pericardium. I don't know, I suppose that's always possible, but that would be pretty aggressive and the only one that we know off today that has any data associated with it would be the one that probably was our originated in Brazil, one of our competitors purchased that they are trying to gain some data outside the US, but we really don't see much of that valves competitively for example in Europe or in other international markets. So it's not a big play and we don't have a really good handle on it. It's certainly well less than 5% of the tissue market share.

Okay, thanks a lot.

Your next question comes from Alex Arrow of Lazard.

Actually it is Sony Omni(ph) coming for Alex Arrow. Congratulations on a great quarter. I have got two follow up questions. One may have asked earlier. But on your SG&A expenses increased by 4% quarters-over-quarter. What impact has the hiring of new sales people of peripheral stent on an SG&A expenses?

Thanks for the questions, Sony. Actually the sales force itself is not impacted SG&A at this point in time. You know the kind of things that we might be doing related to initiatives would be market research and we would be doing some education sort of work. But that's, it's a relatively small number in terms of contribution to SG&A.

Okay, great. And what is the best guess of timing for the Percutaneous valve you have in development?

Well, I mean that's a good question. Obviously we are in preclinical and you are talking about the Percutaneous valve or --. Okay. Well, right know we haven't made any firm commitments in terms of when we are going to be out there. Right now, I guess our best guess is that our first clinical implant is in 2005. You know it's one that we are very optimistic about we got to design that, we are proving [Inaudible] . There's still a fair amount of work to do on this product before it is ready for human consumption.

Okay, great thank you.

The next question is from Matt Eaden(ph) of August Partners.

Hi guys and congratulations as well. Can you maybe give us a little more color on the Magna launch in terms of expectations for second half/ What's the dialogue? Sounding like [Inaudible] with the FDA and maybe give us a little more color on your comfort there.

Yeah. What we did is we made a submission in the January time frame. We completed the submission of all of the incremental improvements that make up the Magna belt and we are waiting at this point for their response. We are probably not going to know anything for a little while yet. We may learn something as we pass the 100-day mark in May of this year. But we may not. So, really what we are waiting for is for them to fire the starting gun and then the remainder of the dynamics is going to be a question of cannibalization of our own pericardial valves versus gaining completive market share. And we think certainly it can do both. For this year, we would sort of do that in the measure rate depending on just when it was approved. And probably on our own plans we would think that we have the opportunity to gain $1m to $2m worth of incremental business this year, if we get an approval, say early on maybe in the third quarter. But, frankly, we just don't know till the FBA lets us know.

Yes, thank you.

There are no further questions at this time.

Okay. Well thanks very much folks for your continued interest in Edwards. Corinne, David, and I will walk from any additional questions by telephone. And with that back to you David.

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