愛德華生命科學 (EW) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Edwards Lifesciences' second-quarter 2003 earnings conference call. At this time all participants are in a listen-only mode. If you have a question (CALLER INSTRUCTIONS) This conference is being recorded. It is now my pleasure to introduce your host, Mr. David Erickson. Thank you Mr. Erickson, you may begin.

Thank you for joining us. Just after the close of regular trading today we released our second-quarter 2003 financial results. And on our call today we will focus our prepared remarks on information that will complement the material included in the press release and the financial schedules and then allocate the remaining time for Q&A.

Our presenters on today's call are Mike Mussallem, Chairman and CEO and Corinne Lyle, CFO. Before I turn the call over to Mike, I would 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. These statements include sales growth, R&D investment, net income, earnings per share, and free cash flow goals for 2003. Our valve market fundamentals, specific product line performance, clinical results, product launches and/or expected sales for PERIMOUNT Magna, Tricentrics, ThermaFix, eschemic mitral valve repair and vascular valve repair and replacement, Optimaze, Lifepath AAA, and the Life Stent (ph) product line; 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 the day'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 second-quarter results which reflect continued top and bottom line growth and an improved gross profit margin. Additionally, we continue to make investments in R&D which will provide future growth for Edwards Lifesciences. Sales growth in our cardiac surgery and clinical care product lines was partially offset by our vascular and profusion lines. Reported total sales increased over the first quarter by more than $5 million. Compared to the year ago period, sales grew 26 percent which includes the impact of the Japan consolidation and foreign exchange. Adjusting for the Japan consolidation our sales growth was 9.2 percent. FX had a favorable impact of 6.6 percent and total underlying sales for the quarter grew just 2.6 percent compared to last year.

For the sixth month ended June 30th, total sales increased 28.4 percent excluding the Japan consolidation, the growth was 11.9 percent. FX added 6.5 percent to the growth and first-half underlying sales growth grew 5.4 percent compared to last year.

Now I will discuss each other product lines in more detail. Second-quarter cardiac surgery sales grew 16.9 percent compared to last year. Excluding the Japan consolidation, growth was 13.1 percent with FX contributing 6 percent. On an underlying basis, cardiac surgery sales grew 7.1 percent in the quarter and 10.5 percent for the first half of the year. This quarter's growth was driven by our PERIMOUNT heart valves and our repair products partially offset by the continued double-digit decline in porcine valve sales. PERIMOUNT sales grew 8 percent this quarter, below its typical double-digit growth rate, however for the first six months of the year PERIMOUNT sales increased 11 percent.

Continued strong results in Japan were partially offset by weaker valve sales growth in the U.S. where sales in the year ago quarter were particularly strong. Broadly, we believe that overall heart valve procedures continue to grow at approximately 5 percent with tissue valves growing at about twice this rate. Driven by the conversion from mechanical to tissue, which continues to be as strong as ever.

During the quarter, we announced the completion of 20 year follow-up data on our aortic PERIMOUNT valve which shows excellent safety, effectiveness and durability for patients 60 years and older. And we believe these results make our pericardial valve even more attractive to clinicians and their patients who desire an alternative to mechanical valves.

In Japan, where the growth of PERIMOUNT valves is already substantial, we continue to benefit from a competitor's exit from the tissue market in June of last year. Once again, this has resulted in a Japan heart valve sales growth rate that is greater than 40 percent. Beginning next quarter we will return to more normal comparisons and expect our growth rate to be 20 plus percent.

Over the last year, Edwards has been the only company able to provide tissue heart valves in Japan and during this time we worked hard to reinforce our strong customer relationships. We're optimistic that many customers will continue to select Edwards valves, even after our competitor re-enters the market, which we believe will be difficult for them to achieve in 2003. Additionally, we're pursuing the regulatory approval of a new tissue valve in Japan that we believe will help us secure our strengthened position in this market.

Although our PERIMOUNT mitral valve are growing strongly worldwide, there is still a significant opportunity for further PERIMOUNT penetration in the mitral position where mechanical and porcine valves still have large share. In September we will be introducing Tricentrics, an inventive implant aid for durable, best-in-class PERIMOUNT tissue valves which will make this valve much easier to implant.

Sales of our new Magna pericardial valves in Europe and Canada are growing and clinician feedback in this state-of-the-art valve have been very positive. We remain enthusiastic about Magna's potential in the U.S. where we are currently awaiting FDA approval. Regulatory approval for ThermaFix, our new calcification reduction treatment is also anticipated before the end of the year. Animal studies of Thermafix have demonstrated an approximate 40 percent reduction in calcification, which will enhance the durability of our market leading valves. We plan to apply Thermafix to our premium valves shortly after we receive necessary approvals.

Sales of our heart valve repair products continued their strong trends again this quarter. The recent successful launch of our MC3 (ph) tricuspid repair system in Europe and the U.S. has expanded our market leading portfolio of valve repair products, and is driving further adoption of this therapy. Along with our physician partners, we will continue to innovate in this area and in the fourth-quarter expect to launch a new repair system for treating eschemic mitral valve disease. As we discussed last quarter, Edwards is very focused on the pursuit of catheter-based options for heart valve repair and replacement and we continue to believe that they will dramatically expand the heart valve therapy market.

Both our endovascular repair programs are making good preclinical progress and we expect to begin clinical trials in 2004. Our endovascular replacement initiative is also moving ahead and we're targeting our first human trials for 2005.

In May, we announced the acquisition of EMBOL-X's surgically placed anabolic management system. The EMBOL-X system is a proprietary technology designed to capture blood clots, tissue fragments and other emboli preventing them from traveling through a patient's bloodstream during cardiac surgery. Since May, we've successfully transferred the EMBOL-X manufacturing line to Edwards and anticipate a full launch in August.

Our CO2 TMR initiative reported another strong quarter of sales growth and we're continuing to expand the adoption of this therapy through physician education and awareness. Interest in the surgical treatment of atrial fibrillation continues to build and we estimate the market where congestive surgical ablation will grow to $100 million over the next few years. The initial clinical trials of our Optimaze surgical ablation system with its unique photon laser energy source are encouraging. We expect it will ultimately demonstrate superior performance compared to competing devices utilizing different energy sources. Product manufacturing of Optimaze has been fully integrated into Edwards and we expect to begin shipping our first units next month with a full U.S. launch in the fourth-quarter.

In conclusion, the solid fundamentals of our current heart valve therapy portfolio, together with the multiple new product launches slated for the next six months gives as top confidence that cardiac surgery's underlying growth rate will be 10 plus percent for the second half, just as it was in the first half.

Now turning to critical care, sales in this product line grew 24.6 percent compared to last year. Excluding the Japan consolidation, growth was 9.6 percent with FX contributing to 7.2 percent. On an underlying basis, critical care of sales grew 2.4 percent in the quarter. This increase was primarily due to stronger pressure monitoring sales, growth in advanced technology catheters led by C.E.D.B., and partially offset by declines in base catheter products.

Our global strength in this franchise provides a stable base that generates reliable results. For the remaining quarters of the year we expect the underlying critical care growth rate to be in the low to mid single digits.

Second-quarter vascular sales grew 7.7 percent compared to last year. Excluding the Japan consolidation, growth was 2.8 percent. Foreign exchange contributed 7.7 percent to growth and underlying sales declined about $700,000 or 4.9 percent in the quarter. Strong growth in international markets and Lifepath AAA was offset by a onetime adjustment by our largest U.S. distributor to reduce their inventory of surgical vascular products. Lifepath AAA products in Europe are growing and we are steadily building our presence in this market. Lifepath implants in the U.S. this quarter were lower than levels recorded last year, since we only had approval for a limited number of clinical centers in our Phase III trial. Several days ago, we received FDA approval for five additional clinical sites with should result in a greater number of implants in the second half of the year. And we remain on track for U.S. PMA approval in late 2004.

In June, Lifepath clinical study data was presented at the Society of Vascular Surgery's annual meeting. The early data is encouraging and shows that approximately 85 percent of the patients experience significant aneurysm sac reduction. Over the study period, there were no instances of late rapture or aneurysm related death and Lifepath also demonstrated a low postoperative and no leak rate. Though this data is preliminary, we continue to be optimistic about the long-term potential for Lifepath particularly in that your large U.S. market. We expect more Lifepath data to be presented at the (indiscernible) symposium in New York this November.

Another significant growth opportunity for Edwards is peripheral stents, and we began and we expect to begin introducing our Life Stent products in the third quarter. We believe the differentiating features of our Life Stent product line, including a patented helicle design, which offers excellent flexibility in radial strength will set them apart from competing products. In the U.S., we began hiring our first peripheral stent sales reps and continue adding sales personnel as product sales increase. In Europe, we plan to leverage our existing vascular sales channel.

On the regulatory side, we've already received the C.E. mark and FDA clearance for most of our balloon expandable devices and are beginning to receive clearances is for the self-expanding models. We anticipate receiving additional regulatory clearances throughout the year, which will further broaden our peripheral stents product offering. During the quarter, we transferred manufacturing of our self-expanding stents from Cynthian (ph) to Edwards and we plan to move our balloon-expanding stents over from Orbix next year.

While we are moving rapidly toward the launch of our initial Life Stent products, we are also developing enhancements to the platform including more sizes and features. We expect to pursue additional indication- specific regulatory clearances in 2004. For our vascular franchise as a whole, we expect sales in the third and fourth quarters to increase modestly from present levels as European Lifepath III sales continue to grow and peripheral stents are introduced.

Profusion sales increased 36 percent compared to the same quarter last year. Excluding the Japan consolidation, sales declined 9 percent. Foreign exchange contributed 4.3 percent to the growth, and underlying sales declined 13.3 percent. The sales decline resulted primarily from the reduction of low margin distributed products. As announced last week, we recently completed the sale of our German profusion services business to a local buyer. As an independent company, Edwards has focused its priorities on the global delivery of products and technologies to treat advanced cardiovascular disease. Since very few synergies still existed between that local service business and Edwards, we divested the business to a more service and geographically focused company. For the remainder of 2003 we expect to profusion product line to generate sales of approximately $12 million per quarter which includes the impact of the German profusion services divestiture.

Underlying sales of other distributed products were relatively flat this quarter. We continue to expect other distributed products sales to be approximately 11 to $12 million per quarter for the rest of the year. For total sales, we expect the combination of base business growth and our new initiatives to result in a modest improvement in the underlying growth rate for the second half of the year, compared to the 5.4 percent reported in the first half. If foreign currencies remain at recent levels, we would expect to see approximately 3 percentage points of additional reported growth for the remainder of the year.

No I will turn the call over to Corinne.

Thank you, Mike. Our gross profit margin improved year-over-year to 58.9 percent this quarter lifted by sales of high margin products, manufacturing volume and onetime items. Negatively impacting our margin were current FX rates. If FX remains at current levels, we expect our gross profit margins to be approximately 58 percent for the remainder of the year. SG&A expenses were 75.8 million for the quarter, or 34.8 percent of sales. While we expected SG&A to be higher than a year ago period due largely to the impact of the Japan consolidation, we were also affected by the stronger euro, which increased expenses by approximately $4 million compared to last year. For the rest of the year, we expect to manage SG&A as a percentage of sales down from current levels to 32 percent in the fourth quarter.

This quarter, we increased R&D $1.4 million to $18 million, or 8.3 percent of sales. This increase is primarily attributed to investments in our atrial fibrillation and endovascular therapy growth initiatives. We expect R&D investments for the second half of 2003 to be comparable to first half levels. This quarter we recorded a 3.3 million pretax charge related to the sale of our German profusion services business. This low margin business generated sales of approximately $3.5 million during the first half of the year and was only marginally profitable.

In early May, we completed a 150 million convertible debenture offering and used most of the proceeds to exchange some of our floating-rate bank debt with fixed-rate debt. This transaction enabled us to add a layer of long-term fixed-rate capital to our balance sheet and take advantage of the favorable interest rate environment. This convertible debt offering and the concurrent share repurchase temporarily increased our average debt balance resulting in net interest expense of $3.5 million this quarter. An increase over the year ago in sequential quarters. We expect interest expense to decline slightly from current levels for the rest of the year as we continue to reduce total debt.

In the quarter, other income increased slightly from the year ago quarter to $1.4 million resulting primarily from the favorable impact of FX on intercompany flows in the second quarter, partially offset by a charge to reflect the current value of idle real estate. If currencies remain at current levels, we would expect to record a nominal expense on this line for the remainder of the year.

This quarter changes in foreign exchange rates compared to the same quarter last year lifted sales by approximately 6.5 percent or about $13 million. As Mike mentioned, if foreign currencies remain at recent levels, we would expect to see approximately 3 percentage points of additional reported growth for the remainder of the year.

Due to our hedging program, we expect a minimal bottom-line impact for the balance of 2003. During the quarter we bought back 984,000 shares of common stock for approximately $28 million. Of the total, approximately 915,000 shares were repurchased concurrent with our debenture offering under a second 2 million share repurchase authorization. To date, we have repurchased more than 2.6 million shares of the 4 million shares authorized for a total of nearly $68 million. Total debt at the end of the quarter increased to $307 million from the $277 million reported at the end of the first quarter, and cash was $20 million higher than last quarter. This increase in cash balances is temporary, and we expect to utilize excess liquidity to repay floating-rate debt as it matures. Our debt to cap ratio at quarter-end was 35.5 percent.

At the end of the quarter, accounts receivable remained flat at $124 million, and inventories increased to $126 million, which was primarily impacted by FX. Including receivables that are part of our asset-backed securitization program, days sales outstanding were 76 days and inventory turns were 2.9. We continue to be focused on managing working capital by reducing DSO and increasing inventory turns. Finally, free cash flow for the quarter which we define as cash flows from operating activities minus CAPEX was $26 million. With that, I'll turn it back to Mike.

Thanks, Corinne. Given our first-half results, it will be challenging to reach our 7 to 9 percent full-year underlying sales growth goal. However, we remain on track to achieve our other previously stated 2003 goals, growing net income 14 to 16 percent, generating free cash flow of 85 to $90 million, and increasing R&D investment above the underlying sales growth rate. Additionally, we remain comfortable with the full-year consensus estimate with a third-quarter range of 34 to 36 cents per share, reflecting our current interest expense and foreign exchange assumptions.

From a product development standpoint, the second half of 2003 promises to be eventful. The investments we've been making in R&D are beginning to show tangible results. We have a number of exciting new product launches that are expected to have a meaningful impact on the future growth of Edwards Lifesciences beginning in 2004. We remain very committed to transforming Edwards into a higher growth company and are determined to reach our aspiration of double-digit sales growth, while consistently delivering above-average increases in net income.

Before we open it up to questions, I'd like to encourage you to mark your calendars for December 8th and 9th when will be hosting our 2003 investor conference here in Irvine. At this event, we will be showcasing our product pipeline and detailing our plans for continued growth. Watch for more information about this event later in the year. And with that, we would be happy to answer your questions.

Ladies and gentlemen, at this time we will be conducting a question-and-answer session. (CALLER INSTRUCTIONS) Mike Weinstein of J.P. Morgan.

Good afternoon, guys. I just want to follow up on a couple comments in the call and make sure I understand all of the moving parts. The gross margin came in above what we've modeled those. There was a comment that there was a onetime item that might have helped out in the quarter. Did you indicate how significant that was?

It was driven by a number of things. First, the product mix continues to drive our margins up. And we had higher manufacturing volumes, but we also hat foreign exchange which was impacted by onetime items this quarter. They were a number of insignificant items and in aggregate probably just offset the impact of foreign exchange. We don't expect those offsets going forward.

But the onetime items were foreign exchange or the offsets were foreign exchange?

No, they were offsets to foreign exchange, and we would not expect those going forward.

So foreign exchange hurt us in the gross margin, and the one-timers helped us.

I would think with FX, obviously, which weighs on your gross margin line given what's playing out, and the mix where your sales growth came from in the quarter, that when your gross margins came in would not be the normalized rate, so the two wouldn't be a net if you follow what I'm saying. So I would think your gross margins would have been under more pressure than that because of the mix between the U.S. growth versus the overseas growth from (indiscernible).

Yes, that's correct, and that's consistent with our guidance, Mike, that we were being around the 58 percent range for the rest of the year.

So for the back half, 58 percent was the guidance during this half?

Right, exactly.

Maybe just spend a minute, Mike, on the U.S. business, and I guess principally the cardiac surgery business. But I think we kind of walked away from the first-quarter call saying a pretty good quarter, but for some reason the U.S. business had slowed a lot from what we had seen in the back half of last year. And then in this quarter here, the U.S. business actually comes in down slightly from the year ago, relatively flat. Is there something that we should be aware of? Is there anything in the sales structure that's changed or anything at all that's impacted the U.S. operations? Because everything outside the U.S. looks pretty strong.

Thanks, that's a good question. If you were to examine what the U.S. volume looks like, Mike, what you would see is that in Q1 and Q2 of last year were by far our strongest quarters in the U.S, with Q2 being stronger by $1 million than any of the quarters last year, even Q1. So very tough comparisons from that point of view. We don't see any major sort of changes to the dynamics in the heart valve business in particular. We continue to see the strong progression from mechanical valves to tissue valves. We continue to have pressure on our porcine valves, that's for sure, but they're getting smaller at this point in time. Probably most notably, we think procedure growth is pretty normal, although it's difficult for us to know for sure and it does fluctuate a little bit. But bottom line is, no major account losses, Mike, and we're feeling very optimistic going forward when we consider all of the dynamics and particularly the lineup of new product that we've got coming. We feel confident that U.S. growth rates are going to jump in the back half.

Could I just get you to repeat your guidance on both SG&A in the back half of the year, because it sounds like you're saying that the SG&A ratios are going to be coming down?

So we would expect SG&A levels in the third quarter to be comparable to what they were this quarter, slightly down, and then in the fourth quarter to drop down to the 32 percent range.

Is there a particular initiative that would drive that?

Well, it will be driven by higher sales in the fourth quarter and other cost containment initiatives that we will be undertaking.

Final question. Your hedging contracts, do those start to roll off the next couple of quarters and does that start to help, because you said you had a $4 million hit from SG&A from the euro in the SG&A line this quarter. Does that start to help you out at you get to the back end of the year? Is that part of what improves your ratios?

Yes, we would expect less impact from foreign exchange in the third and fourth quarter in the SG&A line.

Thank you.

Glenn Novarro of Banc of America Securities.

Hello, are you there, Glenn? Operator, we must have lost him.

Glenn, your line is live.

We'll take the next question and come back to Glenn.

Tim Nelson of Piper Jaffray.

Could you talk about the -- more specifically about the international? You talked about the U.S., but the international valve trends, you have Japan benefiting you and (indiscernible) in there, but what about the tissue to mechanical -- you know the shift I'm talking about internationally. Has that started to pick up ex Japan?

Yes, as a matter of fact, I think we've continued to see good growth rates in our tissue valve business ex Japan. They've been I think pretty normal to what we would normally expect in Europe. I'm not remembering the number exactly, although I'll try and get it. I think it was around the 10 percent range. In intercontinental, which is our reference to Asia and Latin America, our growth rates tend to be even higher than that, more like over 15 percent. So tissue valves continue to gain ground in international markets, and Japan, even ex the unusual circumstances that are going on there, continue to have a strong conversion from mechanical to tissue.

Can you quantify the unusual impact again like you did last quarter for us in Japan?

Yes, I think so. What I tried to relate in the comments is that we grew around 40 percent in the quarter. Just to give you an overall sense of that market, Japan heart valve market in total is around $100 million, Edwards annualized rate is somewhere around $40 million in terms of what our sales rate is. What we picked up from a competitor is probably in the 8 to $10 million range on an annualized basis. Does that give you a sense for what the dynamics --

And that started about three or quarters ago?

It started in June of last year. So really that is annualized out at this point.

Great. And just a couple other details. Can you give TMR sales and Lifepath sales specifically?

Yes, TMR was a little more than $3 million, so that continues a good strong growth rate, more than 20 percent. And you said Lifepath? Lifepath we did somewhere around a little more than a 100 implants which was about $1 million worth of sales I would say in the quarter.

Final question. Given the decline in the profusion business, do we assume similar declines in RMI sales?

Research medical didn't decline actually but didn't grow much either. I think we just had slow growth in the quarter.

Thanks.

Glenn Novarro of Banc of America Securities.

Can you hear me okay now? I do want to ask questions on the tissue market particularly did you lose in the U.S. any market share, what was pricing like, was pricing stable or did that contribute to the softer quarter for you? And then, I think you mentioned that you didn't think Medtronic had come to the market in a second half at this year in Japan, I was wondering why you say that?

Let me take them in order. First of all, in pricing, Glen, we don't think there is a big impact on it one way or the other in pricing. I think uprising overall has been pretty stable, as always there is always a little bit of pricing on our lower end products and we get a premium price for high-end and pretty much it's all netted out to be a non-factor. From a share perspective, we haven't really felt any major account losses, Glenn, there is a few small stories here and there. But this one we just don't have great data to be able to quantify just yet. As we get a better feel for what procedures did in the quarter, maybe we can more thoroughly calculate any share impact. But there is nothing that is obvious or clearly identifiable. We think there's sort of fluctuations in the procedures that make it tough to really nail down.

And then finally, Medtronic in Japan, this information is basically coming from our guys in Japan. They are pretty close to the overall process and they know from our own experience how onerous that bureaucracy is and they just feel like it's going to be difficult for Medtronic to be able to be back in 2003.

Just on a follow up, you said that cardiac surgery would be growing 10 percent in the second half at this year. Is that going to be a stronger 4Q than the 3Q or will it be 10 percent both quarters, and how important is Magna to that growth? In other words, if Magna comes end of September, does that impact kind of what you are projecting today?

Yes. Good question, Glenn. You know, naturally Q4 sales are much stronger than Q3 sales for seasonality, but when you actually look at it from a growth rate perspective, we thing both quarters should be in that 10 percent, 10 percent plus range. So it's not like it's all back end loaded. In terms of Magna, because it's tough to predict when that's going to be improved, we really haven't put much impact into our plans. We have some modest increases coming in the fourth quarter, but really nothing that would have a big impact on our performance in the back half.

What is it that gets you back to that 10 percent sales growth in the second half. Is it just that comps get easier?

Well, clearly comps are one thing that make quite a difference. We talked about our lineup of new products, and there are some products like the new ring and the new EMBOL-X product and so forth that are smaller that will all contribute, and we have the launch of the atrial fibrillation that were looking to be an upside. But if you were to ask our sales force what they are really looking forward to, they would talk about this new system called TriCentrix which is an implant aid for our mitral pericardial valve. We have a mitral pericardial valve with extraordinary durability. Really it's the best-in-class valve, but it hasn't been nearly as broadly adopted as it might be, because it is more difficult to implant. You still have a lot of the mitral position that using mechanical valves and porcine valves. And our engineers have come up with a very novel holder that looks like it's going to be very well received by clinicians. We've had a chance to share it with a lot of surgeons. It pretty much makes the implementation of this valve a lot easier, almost foolproof. They are looking forward to that being a real driver of sales growth that they haven't had in the first half. That's due to they're going to start seeing the first of those I think in August with a rollout in the September timeframe.

Thanks, Mike.

Kathrine Martinelli of Merrill Lynch.

Good evening, thanks. A couple of clarifications to start, I just want to make sure, the EPS guidance you cited for the third quarter, that was the 34 to 36 cents, it looks like its about penny below the 37 cents for consensus right now. Is any of that related to increased spending with some of the product launches like the peripheral stents or are you guys just trying to give yourself a little bit more wiggle room assuming some of those new products really kick in more in the fourth quarter?

It's a good question and I think it all depends on where you are on whether its a penny or two pennies, and so forth. I think it depends on how you decide to read that range. We have the benefit of getting all of your models, Katherine, and adding them all up and so we get almost a consensus P&L, and not just the consensus EPS, and when we analyze it for the third quarter, we find that sales where most people are sort of the average of sales is pretty close to where we are. The same thing on GP and even expenses coming down. So operating income actually looks pretty close to what we had. But where we see differences is interest expense, just based on what's happened most recently with our higher debt balances higher. And also people have somehow figured in a gain in sundry or on the other income line which we think inappropriately bumps up the quarter.

That's helpful. Just to follow up on one of the comments. Right now your revenues estimates don't assume any sales from Medtronic or is that part of the swing factor of the earnings line? Valve sales in Japan from Medtronic in '03?

Oh you are saying do our assumptions assume that Medtronic is back in --

I know you said you didn't expect them to (indiscernible) they were talking about being back on the market this summer. So I'm just trying to see if there is any swing factor in your estimates that you have assumed there's no --

I supposes there is a little bit of that in there, Katherine. But the other thing is the competitive dynamic that is going to take place when Medtronic comes back. And you can imagine how our folks are treating that and they are going to put all of their energy not to give sales back to Medtronic. So they are optimistic that even if they do come back, in 2003 or whenever, that we're going to be able to keep the majority of those customers.

Lastly, just in terms of the mitral valve, have there been any increased incidents of (indiscernible) due to regurgitation with your products?

Yes, I've heard that question before, and I think --

Just specifically related to the FDA website, it seems to be listing quite a few --

You know what, Katherine, that is very old news. Way back in the beginning when we first began implanting the mitral valves, what we found is that some people struggled and looped sutures where you are able to get a suture that loops around one of the commissures of the valve. That happened in very few cases, all of those are reported to FDA diligently, as we should. And really, hasn't turned out to have any increase whatsoever in the past, that has to be 18-month old news, if not more.

But you have not seen any increased incidents of it of late?

No we're not. I'll tell you what we are very excited about his new TriCentrex mitral valve implant (indiscernible) addresses that exact issue to be able to take that and make it a much easier implant for surgeons.

Thank you.

The other thing I'll add, Katherine, is that mitral valve growth has been somewhere in the 15 percent plus growth rate for this past six months. So it's not exactly like that's been problematic for us.

Thank you.

Ben Andrew of William Blair.

Good afternoon. A couple of questions, most of the good stuff on valves has been covered. On the peripheral side, I know that is a new area for you guys, how do you see that rolling out with just the biliary indication? I know you are going to start up on some of the vessel specific step, but that's going to take some time, so how big do you see peripheral becoming in the near-term?

First in terms of the biliary indication, we don't think that that is going to really handicap our launch. All of the surveying that we have done said by far the majority stents that are used in the peripheral position are approved for biliary application. So this is going to be more about how completed of a line that we're able to have there, how, what sort of performance features it has in terms and it's deliverability, and we're hoping that our superior flexibility and radial strength that we have really can differentiate us. So we're going to start rolling this out, we already had our first patients and gotten some feedback from that and are able to incorporate that into our launch. We have our first sizes that will start rolling out this quarter, but frankly I don't think that you are really going to see much that shows up in the numbers in Q3, and even in Q4, although the some uptake it will still be modest by comparison. I think, really 2004 is where there is an opportunity for a substantial increase in the numbers.

What I was really getting at is where we've seen the competitors in that space have been there for two or three years now, and peripheral is pretty hard, and it really has a nice little uptake in the beginning but then it sort of flattens out for a while. The emphasis is really has been on some of these vessel specific indications to get some stronger clinical data. So, I mean, it won't be the negating factor.

Well, we clearly have our sights set on that. Then again, we're thinking that our mainline of stents are going to be quite competitive.

Just one other little tidbit. Is there any update on any litigation that you guys have? There was some stuff on the repair side, and any other topics like that?

We really don't have any update at this point. We are continuing to await -- I think there's a trial date that's out in 2004 for our St. Jude litigation.

Thanks.

Sheetal Mehta of Bear Stearns.

Good afternoon. Most of the questions have been asked. Just a couple quick things. You mentioned the new tissue heart valve in the Japanese market. Could you give a time table on that, when you expect that?

Thanks, that's a good question. The Japan regulatory approval is very difficult to predict, and part of the issue here is that it's a stentless valve for us; it's a porcine valve. And because there aren't any porcine valves approved in the Japanese market, it complicates it. So we would think that we would get approval probably somewhere in the same sort of timeframe that we might see Medtronic come back into the market with porcine valves. So a little tough to predict. We would say certainly within the next 12 months, although it's tough to tell whether it's going to be an '03 or first-half '04 event.

Second of all, just going back to the income statement, you talked about R&D growing above the sales rate. Can you give a magnitude of that in any way, shape or form? I know it's kind of tough, and last year you had talked about 20 percent R&D growth came in at about 17 percent, 16 or 17 percent. Can you give a magnitude in terms of what you think your incremental growth could be on the R&D line?

I think in the first half, we grew about 15 percent. And what we're projecting is that the second half will have spending levels that are about the same as the first half of this year. So, hopefully, that gives you a sense for where that one's going to land. We're very committed to continue to invest in R&D, and that's how we think it will play out.

My last question is regarding the peripheral sales force. I think you mentioned you're just planning on increasing your sales force as revenues come in. Do you have a target in mind in terms of the total number of people? And can you give us a sense of how many people you've actually hired so far?

I think we've hired four or five people at this point. We would target by the time we complete this, and I don't know how long it will take us to complete it, sometime maybe toward the end of '04, maybe sooner, would be in the mid-40s for the U.S. selling organization.

Thanks so much.

Mark Landy of Leerink Swann.

Good evening, guys. I don't know if you're prepared to address this, but maybe I'll take a stab. As we look out to 2004 and we think about valve sales, and given when guidance was or where the thought process was before this quarter, do we still look at kind of the average growth rate, or should we start seeing some bumpiness to make up for kind of the lower growth this quarter so it smooths out?

I'm not following exactly the question, Mark. Are you asking me what you think our valve growth rate is going to be in '04?

If we're looking at say a growth rate (indiscernible) through the quarters, given that this quarter was a little bit lower than expected, would you expect to see a higher growth rate than average in the second quarter next year, or would you expect to see it kind of trading to the average?

That's a good question, Mark. We really haven't done our detailed planning on '04 yet, although you can be sure that when we have that, we will roll it out in detail. I can tell you just with the product lineup that we have that overall, I feel real confident that we're going to have 10 plus percent growth rate in 2004. I'm just not able to give you really good quarterly growth rates. And also once we get a little better feel for what procedures might have done in the first half, the second half and how they might have fluctuated, it will give us a better feel for exactly what growth rates will look like.

Mike, as we look to repair, I don't know if you broke out the number. We got on the call a little bit late, but have you seen growth there or is that becoming an increasing part of the focus for doctors? How would we look at repair versus replacement?

Well, repair just continues to chug along at really strong rates. It's been growing in the mid teens. It grew again in the mid teens this quarter, and that is taking place on a global basis. If anything, it's gaining popularity as more and more people see it. And we're happy about that, obviously, as the pioneer and the leader in this space and you know that we've got even more indication specific repair products coming. So that one, there doesn't seem to be really any change in the dynamics.

Thanks guys.

Alex Arrow of Lazard Asset Management.

This is just regular Lazard, not the Asset Management. On the PERIMOUNT , the conversion to Magna, can you give us any thoughts on how much of your European aortic business has converted from regular PERIMOUNT to regular PERIMOUNT Magna, and can we draw any extrapolations as to how much of the U.S. business once you do launch Magna would switch over from PERIMOUNT to Magna?

I'm not sure that I can do it on a percentage basis. Magna in the second quarter was in the 1 to $2 million range, that we did already. Considering the tough environment in Europe, that's actually a real nice uptake. We've had very favorable response, and we continued to have premium pricing on the Magna valve. What we have done so far is to really focus our Magna valve from the strategic point of view on competitive business and not on cannibalizing our own business. That's one that we could do at a later date, but we've really reserved that to sort of a second stage of the strategy and what we've done so far is work on competitive business.

Can you say how much that premium is?

I would say in general we are running around a 20 percent premium.

Great, and on your porcine valves you mentioned double-digit declines in the porcine valves. I was somewhat surprised to hear that, the mechanical valves are not even in double-digit rates and St. Jude and Medtronic, the little tissue valve business that they do compared to you is porcine valve business and those are not declining at double-digit rates. What is it about your porcine valves that is going on?

That's a good question. Frankly, our porcine valves are excellent valves and they would compare favorably with competitive house. I think some of this is probably result of the fact that we have most of our emphasis on the pericardial valve which is the leading valve in the world, and when you've got that in your bag, I think, in general our folks feel like those are the valves that they really talk about with the customers. By the same token, it's also coming off a much lower base. Those are getting to be smaller numbers, I don't know how many porcine valves we still sell in the U.S., maybe $5 million worth, so when you get some losses, they sound pretty big from a percentage basis.

The last question if I could. The divestiture that you made in your profusion business, you seemed to make periodic divestitures of the profusion business. You mentioned before that you are de-emphasizing it. Can you tell us what is your future plans for profusion, are you eventually going to exit that business altogether and do you have any other service geographies that you might decide to divest at any point?

Thanks. As a matter-of-fact, service business, when we got out of that, we still had about 10 million left, so what's left today are two very small service businesses, a very small one about $1 million business in Belgium and a couple million, 2 to $3 million dollars in Italy. Those are not strategic for us but I can tell you certainly the Italian business, for example, is profitable and growing so we will take that sort of treat it as any of our non-strategic business and do whatever we think makes sense. But there's not necessarily synergies there. And more broadly, we decided to stay in Japan when we exited profusion because it was quite a profitable business in there and continues to be very profitable in Japan today, and we decided to stay in the intercontinental markets like Latin America and Asia because the market was still growing there. That continues to be the case, we continue to do well with our Brazil produced auctioneers, and we don't have any plans at this point to exit that business.

Thanks.

Boris Lusek of Penning Capital Management.

What was the EPS impact of foreign exchange in the quarter?

The EPS impact --

What impact did foreign exchange have on EPS?

We don't break it out that way. All I can say is that on the -- we had impacts in our gross margin, in our SG&A line and in our other income.

Okay. The inventory level seems a little bit higher than historically -- what is the normalized inventory level that we should kind of expect or any other comments on why it seems to be slightly elevated?

About half of the increase was driven by the impact of foreign exchange and the other increase was driven by increased inventory in our critical care business which we expect to manage downward in the quarters going forward.

Thank you very much.

(CALLER INSTRUCTIONS) Matthew Buten of Argus Partners.

Why don't you dig a little more into the U.S. growth rates and maybe you can help me out with some of the segment growth levels since that was down year-over-year, I just wanted to get a little more color on that. I'm particularly interested in cardiac surgery. And I've got a few other questions.

I'm not sure, Matt, are you talking about detailing specific products in the U.S.?

Yes, and overall, the cardiac surgery what U.S. growth rate was?

Overall, the cardiac surgery growth rate was in the low single digits. As was the heart valve business which is the dominant portion of that. And so, that sort of gives you a sense for the fact that we also saw those sort of lower levels in our tissue valve product line, higher in repair of course which I mentioned, but negative in porcine valves.

You mentioned that was a tough (indiscernible). What was the growth rate a year ago in the U.S. in cardiac surgery?

I think it was 14 percent, 15 percent something in that range. I'm not sure we gave a growth rate in the U.S., but it would have been in that range.

Vis-a-vis, the inventory reduction that occurred in the vascular business, can you give a little more color on that?

We use one substantial distributor in our vascular business, and that distributor lowered their inventory levels this quarter versus what they were carrying a quarter ago. So what it gave us was a onetime adjustment in our sales. We don't expect that to continue going forward.

How big a onetime adjustment was that?

It was around $1 million. But that kind of thing in a productline that size can really affect the growth rates.

And also I guess maybe if you could touch on the base catheter products, and you had mentioned there's some slowing there as well. What is causing that?

Are you talking about in critical care?

Correct.

There really is nothing unusual going on in that space. We're seeing the same sort of trends that we've seen over the last few years, which is a reduction in our base catheter products as customers in general are moving to higher value advanced tech catheters. So these base products which are lower GP, lower value customers in general are moving up to higher value ones. And that is what has been a primary growth driver of the critical care business over the past few years.

In general, we're hearing about (indiscernible) trends from hospitals in the United States, and I'm just wondering if there's any business or any kind of procedure volume changes that you've noticed that might relate to that?

In particular, there's specific customer groups that we're most interested in specific markets. So if you look at something like heart valves which is a big part of Edwards, that's a growing market. The people that do show up in critical care units in general are much sicker than they've been in the past. We're participating in growing segments and we're moving into growing segments in our peripheral vascular space. So regardless of what is happening sort of on a global basis, what we focus on is participating in areas that have growth.

Any update on the FDA discussions regarding the Magna and kind of where you stand on that? Have you gotten any kind of feedback from them yet?

This is a PMA supplement. We're going to come close to our 180-day point here over the next few weeks, and we expect to get feedback from FDA at that time.

Thank you.

(CALLER INSTRUCTIONS) There are no further questions at this time. Do you have any closing comments?

Thanks so much for your continued interest in Edwards. Corinne and David and I would welcome any additional questions by telephone. And with that, back to you, David.

Thank you for joining us on today's call. If you missed any portion of it, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and you'll need to use account number 2995 and passcode 71725. Alternatively, an audio replay will be archived on the investor information section of our website at www.edwards.com. Thank you very much.

This concludes today's teleconference. Thank you for your participation.

(CONFERENCE CALL CONCLUDED)