愛德華生命科學 (EW) 2003 Q3 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Edwards Lifesciences third-quarter 2003 results conference call. (OPERATOR INSTRUCTIONS). It is now my pleasure to introduce your host, Mr. David Erickson.

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

Our presenters on today call are Mike Mussallem, Chairman and CEO, and Corinne Lyle, CFO. Before I turn the call to Mike, I would like to remind you that during the today's call we will be making forward-looking statements that are based on estimates, assumptions and projections. Although we believe them 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, 2004 financial targets, expected performance of specific product lines, clinical results, product launches and/or expected sales for recent and upcoming new products, 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 our SEC filings.

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

Thank you, David. We're pleased to share with you our third-quarter results, and we have a lot of information to cover in today's call. Before I get into the details, there are three important messages that I would like to emphasize. First, we are clearly disappointed with our U.S. heart valve sales growth rate, and we are confident that market fundamentals remain sound, and we have an action plan to get us back on track to double-digit growth. Second, our lineup of recently introduced new products and our robust product pipeline gives us a high degree of confidence that we can accelerate our overall sales growth rate in the fourth-quarter and beyond. And third, we remain on track to achieve our other financial goals for 2003.

Now I'll review our total sales results. Overall sales growth was driven by our cardiac surgery and critical care product lines, partially offset by our vascular perfusion and distributed product lines. Compared to the year ago period, sales grew 24 percent which includes the impact of the Japan consolidation, our recent perfusion divestiture and foreign exchange. Adjusting for the Japan consolidation and the perfusion transaction, our sales growth was 7.5 percent.

Foreign exchange contributed 3.7 percent, and the total underlying sales for the quarter grew $7 million or 3.7 percent compared to last year. Year-to-date total sales increased 27 percent. Excluding the Japan consolidation and the perfusion divestiture, the growth rate was over 10 percent. FX contributed half of that growth, which resulted in a year-to-date underlying sales growth of 5 percent. The declines in our less strategic product lines were large enough to reduce our sales growth rate substantially but will have a diminishing impact as sales of our new initiatives begin to accelerate.

October 1st marked the one-year anniversary of the very smooth and successful consolidation of our Japan operation. Beginning in the fourth quarter, we will no longer need to adjust our growth rates to account for this transaction. Edwards total full year sales will now be more than $850 million.

Now I will provide more detail by product line. Third-quarter cardiac surgery sales grew 16 percent compared to last year. Excluding the Japan consolidation, growth was 11 percent in the quarter and 14.5 percent year-to-date. On an underlying basis, cardiac surgery sales grew $7 million or 7.5 percent in the quarter and $27 million or 9.5 percent year-to-date. This quarter's growth was driven primarily by sales of PERIMOUNT heart valve and our repair products, partially offset by a 15 percent decline in (inaudible) wholesales.

Growth in Japan continues to be a very strong 20 plus percent, which is significant since in June we passed the one-year anniversary as the sole supplier of tissue heart valves in this market. Partially offsetting strong Japan results was the lower-than-expected 5.4 percent cardiac surgery growth rate in the U.S. where we have recently been facing some aggressive competition.

In Japan, we are continuing to drive the market's rapid conversion away from mechanical valves. Our competitor's continued absence in the market gives us an opportunity to further cement strong customer relationships which are so important in this market. Additionally, we are continuing to pursue regulatory approval of a new valve in Japan which we believe will help us further secure our position.

As you know, the U.S. is the largest heart valve market globally. This quarter we fell short of our U.S. growth goals because of greater than expected porcine declines and slower growth of our pericardial valves. Porcine valves to date account for less than 10 percent of Edwards total valves sales. Recent aggressive tactics by our competition have not only resulted in greater porcine declines than we expected, but their tactics have caused a certain amount of confusion in the U.S. market about the superiority of our PERIMOUNT valve data. This caused PERIMOUNT sales to grow below the double-digit growth rate that these market leading valves normally generate. However, year-to-date worldwide PERIMOUNT sales are up 10 percent.

We are confident that the heart valve market fundamentals remain the same, although we observed a sharply lower number of procedures in August that rebounded in September. This resulted in a somewhat more pronounced seasonal impact than we normally experience in the third-quarter. We expect the overall annual growth of heart valves to be approximately 5 percent. Mechanical valves are continuing to lose share to tissue valves due to the negative side effects and complications resulting from blood thinning medication. This shift is driving an overall annual growth rate in tissue valves that is double the market growth rate.

Edwards' PERIMOUNT valves are the best tissue valves on the market due to their superior durability and hemodynamic performance, and our clinical data to support these claims are unparalleled. PERIMOUNT valves are the most frequently used valves around the world, and we enjoy very strong relationships with key opinion leaders who recognize the superiority of our products. We are intensifying our efforts to ensure that the PERIMOUNT message is heard and understood by all cardiac surgeons so that they are making fully informed decisions based on factual clinically proven comparisons.

Our research shows that surgeons who are focused primarily on coronary bypass surgeries are now performing greater numbers of valve procedures because of declining cabbage cases. Our PERIMOUNT message will now be directed to include this broader audience, and the many advanced new heart valve products Edwards has to offer gives us an opportunity to reinforce our dedication to our existing customer base and to expand our visibility with the broader audience, clearly demonstrating our commitment to continued leadership in heart valve therapy.

Recently we completed a 16 year follow-up on our Mitral PERIMOUNT valve which shows continued excellence, safety, effectiveness and durability. This data demonstrated that patients 60 years and older who received the PERIMOUNT valve had a 90 percent chance of not needing a new valve due to structural deterioration for 16 years. Long-term durability like this is one of the most important product attributes to surgeons while selecting the best valve for their patients.

Ease of implant is also an important feature, and late in the third quarter, we launched Tricentrics in the U.S., a proprietary holder system for our PERIMOUNT Mitral tissue valve. Clinician enthusiasm for Tricentrics is rapidly growing due to its ultra low-profile which creates better visualization and operating space making this valve much easier to implant. Even though PERIMOUNT is already the market-leading Mitral tissue valve, we believe Tricentrics will help us take further advantage of this significant opportunity for penetration in the Mitral position where mechanical and porcine valves still have significant share.

Sales of our PERIMOUNT Magna valve in Europe and Canada are progressing well, and we continue to receive very positive clinician feedback on this state-of-the-art pericardial valve. We are very enthusiastic about Magna's potential in the U.S. and continue to anticipate FDA approval later this year. Given this valve's unsurpassed hemodynamics and durability, we believe Magna will become the leading tissue valve in the U.S. in the next few years.

Regulatory approval for Thermafix, our new calcification reduction treatment, is also expected before year-end. Studies of Thermafix have demonstrated an approximate 40 percent reduction in calcification over current anti- calcification process, Zenologics (ph), which is already the best technology of its kind in the market today. Thermafix will enhance the durability of our market-leading valves, and we plan to apply it to our premium valves shortly after we receive regulatory clearance.

Overall valve repair sales remained very healthy and will continue to grow as we introduce new repair technologies. Earlier this month we announced the introduction of our new ischemic ring, and several surgeons have already successfully used the system to repair patients mitral valves. This product designed for the unique requirements of valve repair resulting from ischemic disease is another example of how Edwards is collaborating with key opinion leaders to provide innovative solutions to address specific patient needs.

Now I would like to briefly discuss an area that we are very excited about, endovascular valve therapy. Edwards is working to advance the treatment of heart valve disease with three innovative catheter-based technologies that have the potential to offer significant benefits to clinicians and their patients. We believe these minimally invasive technologies will dramatically expand the market by providing additional clinical options for many patients who do not receive surgery. Our endovascular repair program for the mitral valve, which includes both the edge to edge and the coronary sinus approaches, is making good preclinical progress, and we are on track to begin clinical trials in 2004.

We are also making progress with our endovascular aortic valve replacement initiative and expect to commence human trials in this program next year as well. As the number one heart valve company with the most extensive knowledge of the disease, we think we are in the best position to be successful in the endovascular heart valve therapy race and are intent on leading this market expansion. At our investor conference in December, we plan to share more details on these programs.

In the quarter, we launched our EMBOL-X embolic management system, the first and only product of its kind for use during cardiac surgery. EMBOL-X provides an effective method for capturing dangerous emboli and mitigating potential compilations. This new product is easy-to-use, addresses an unmet clinical niche, and sales of this device are continuing to grow. Our Co2 TMR initiative reported another strong quarter of sales growth. In early September, our clinical milestone was reached with the announcement of the 10,000 patient to have been treated using this technology. Expanding the adoption of this therapy through physician education and awareness, like the training program recently hosted by the Emory Heart Center in Atlanta, is a key part of our growth strategy for this product. The high-level of interest in this program by leading cardiac surgeons reinforces our belief that the demand for effective therapy is substantial and growing.

This quarter as anticipated we shipped our first units of our Optimase (ph) surgical (inaudible) system. The initial clinical results of Optimase (ph) with its unique photon laser energy source are favorable but limited. Clinician interest in the surgical treatment of atrofibrilation (ph) continues to build, and we estimate that the market for adjunctive surgical ablasion will grow to more than $100 million over the next few years. We expect to continue our limited introduction through the fourth quarter and will update you on our strategy at the investor conference in December.

In conclusion, despite some near-term challenges we face in our U.S. heart valve business, the breadth and support and superiority of our product offering and the solid fundamentals of the business combined with our robust pipeline of new products gives us a high degree of confidence that we can achieve 10 percent cardiac surgery sales growth in 2004. We have every expectation that we will be able to make progress in the fourth quarter toward achieving that goal.

Now turning to clinical care. Sales in this product line grew 24 percent compared to last year. Excluding the Japan consolidation, growth was 8.5 percent, and half of that that was driven by foreign currency. And an underlying basis, clinical care sales grew $3 million or 4.3 percent in the quarter, consistent with its low to mid single digit growth rate. This increase was primarily due to solid sales growth in most product categories and markets, with particular strength in developing countries.

Partially offsetting the growth was an ongoing decline in base catheter products as we continue to shift customers to higher technology alternatives. Sales of PreSep (ph), our newest advanced technology catheter, are continuing to build. We have seen strong clinician interest in this product and are continuing to provide the use of PreSep (ph) as a way to significantly reduce sepsis-related costs and the mortality in emergency rooms and during high-risk surgeries. Products like PreSep (ph) provide us with an opportunity to move a step closer to less invasive monitoring, a field we are currently examining. The global strength of this franchise provides a stable base to generate reliable results and strong cash flow. We continue to expect critical care to generate low to mid single digit sales growth rate both this year and next.

Third quarter vascular sales grew 2.3 percent on a reported basis but declined $1 million or 7.3 percent on an underlying basis, which excludes the Japan consolidation and foreign exchange. Strong growth rates in both our international markets and LifePath AAA in Europe were offset by declines in base vascular products and a residual U.S. distributor issue. After further research, we determined determined that a U.S. distributor was acquiring products from an alternate source. We have reached an agreement with this distributor to discontinue this practice.

LifePath AAA sales in Europe are steadily ramping up as we continue to build our presence in this market. In the U.S., like last quarter, LifePath implants were lower than the levels recorded last year since we only had approval for a limited number of clinical centers for our Phase III trial. Our clinical results are encouraging, and we remain optimistic about this product's potential. We expect the latest follow-up data on LifePath to be presented at the Vit (ph) Symposium in New York next month. We are planning to file our PMA in the first quarter of 2004 and continue to expect U.S. approval late next year.

During the quarter, we filed patent infringement lawsuits against Medtronic, Cook and Gore related to our patent for endovascular graph technology. These lawsuits are part of an active and ongoing effort to enforce our patent assets, and we remain committed to protecting our valuable intellectual property as well as the interest of our clinicians and vendors.

As planned, we began introducing our life stent products in the U.S. and Europe in the third quarter, which represents Edwards entry into the rapidly growing $650 million peripheral stent market. The first series of stents that were released were pre-mounted balloon expandable products in select sizes. Several patient procedures using our stents have already been performed, and the early feedback from clinicians has been very favorable. Throughout the remainder of 2003 and into early 2004, we anticipate introducing additional balloon and self-expanding stents to complete our product line. We are also developing enhancements to our stent products, including additional sizes and features and expect to pursue additional indication specific regulatory clearances in 2004. We believe that we are building a very experienced peripheral stent sales team in the U.S., and we plan to continue adding resources as our product portfolio grows. To date we have trained our first U.S. sales reps, all of whom have extensive experience in the stent business, and have valuable clinical relationships. In Europe, we will leverage our existing vascular sales channel.

Last quarter's transfer of self-expanding stent manufacturing to Edwards has gone very smoothly, and we expect to be fully functioning in the fourth quarter. Additionally, our plans to move balloon expandable stent manufacturing over to Edwards next year remains on schedule.

For our vascular franchise as a whole, we expect sales in the fourth quarter to be a little less than $15 million. As European LifePath AAA sales continue to grow, peripheral stents will be a meaning contributor to expected double-digit vascular sales growth in 2004.

Third quarter perfusion sales grew 39 percent on a reported basis, but when adjusted for the Japan consolidation, the recent divestiture and foreign exchange, sales declined by about 5.5 percent or less than $1 million. This decline resulted primarily from the ongoing reduction and now discontinued sales of low margin distributor products in North America. We expect our perfusion product line to generate sales of approximately $13 million in the fourth quarter and approximately $50 million for all of 2004.

End customers sales of other distributor products were less than $1 million lower compared to the same quarter last year. Within this product line, we have been deemphasizing certain lower margin products. We continued to expect other distributor products sales to be approximately $11 to $12 million on a quarterly basis for the fourth quarter and for all of next year.

For the fourth quarter, we expect total sales to be above the current FirstCall consensus revenue estimate based on the current foreign exchange rates, which are also expected to contribute about 5 to 6 percentage points to our growth rate. For 2004, we are expecting underlying sales to grow between 6 and 9 percent, and we will provide greater detail at our investor conference in December.

And now I will turn the call over to Corinne.

Thank you, Mike. In general, we were satisfied with our operational performance below the sales line this quarter. We managed our operating expenses, which mitigated the lower-than-expected U.S. sales. From an infrastructure position, we believe we are well-positioned for growth as we add new products, and we will continue to increase investments in R&D and sales and marketing in the fourth quarter and next year.

Now we will get into more details about the quarter. Our gross profit margin this quarter was unchanged compared to the third quarter last year as a benefit of the Japan consolidation and favorable product mix offset an unfavorable FX impact. On a year-to-date basis, the gross profit margin was higher by almost a full percentage point. As FX remains at current levels, we expect our gross profit margin to be at least 58 percent for the fourth quarter. For this and other lines in our P&L, we will provide 2004 guidance at our December investor conference.

SG&A expenses were $70.5 million for the quarter or 34.2 percent of sales. While we expected SG&A to be higher than the year ago period due largely to the impact of the Japan consolidation, the stronger Euro also increased expenses by $2.2 million.

Partially offsetting this increase was a savings from the August reduction of our global headcount by approximately 2.5 percent. This headcount reduction was not an easy decision for us as we value all of our employees. However, it was important for us to reallocate resources and reduce costs. I would also like to point out that this action had very little impact on our sales teams. As a result of this headcount reduction, we reported a pretax charge of $13 million in the quarter, consisting primarily of severance costs.

For the fourth quarter, we expect SG&A as a percentage of sales to be approximately 33 percent, which provides for additional investment in U.S. sales and marketing. This quarter we increased R&D investment by $1.3 million over last year to nearly $17 million. This increase is primarily attributed to investments in our peripheral stent and endovascular heart valve programs, and we continue to expect R&D investments for the fourth quarter to be approximately $19 million. Interest expense was $3.5 million this quarter, an increase over the year ago quarter primarily due to the higher average interest rate on our outstanding debt balance. In the fourth quarter, we expect interest expense to decline slightly from current levels.

During the quarter, we commenced a reorganization of our Brazil subsidiary. Since being acquired a number of years ago, this subsidiary has incurred net operating losses primarily due to the devaluation of the local currency and interest expense incurred on intercompany debt. While reorganizing the subsidiary, we were able to recognize the accumulated losses and intercompany debt write-offs under U.S. tax laws. This resulted in a tax benefit of $13.7 million this quarter. Looking forward, we continue to use an effective tax rate assumption of 26 percent. This quarter changes in foreign exchange rates compared to the same quarter last year lifted sales by approximately 3.7 percent or about $7 million. As Mike mentioned, if foreign currencies remain at recent levels, we would expect to see approximately 6 percentage points of additional reported growth for the fourth quarter. The combination of our hedge program and increased international expenses had a negative impact of about 2 cents on our EPS this quarter, and next quarter we expect a minimal bottom-line impact from FX.

During the quarter, we repurchased a total of approximately 470,000 shares of common stock for approximately $13 million and completed our initial 2 million share repurchase authorization. To date we have repurchased approximately 3.1 million shares of the total 4 million shares authorized for a total of $81 million. During the quarter, we repaid $18 million of debt; however, due to the impact of the stronger yen, our total debt balance at the end of the third quarter decreased to only $293 million from the $307 million we reported at the end of the second quarter. Our debt to cap ratio at quarter-end was 34 percent.

At the end of the quarter, Accounts Receivable declined from $124 million to $116 million, and inventories remain steady at $125 million. Including receivables that are part of our asset-backed securitization program, day sales outstanding were 79 and inventory turns were 2.8. We continue to focus on managing working capital by reducing DSO and increasing inventory turns.

Finally, year-to-date free cash flow, which we define as cash flows from operating activities minus CapEx, was $27 million. Excluding the impact of (technical difficulty) in process R&D and the severance associated with our headcount reduction, free cash flow was $42 million.

With that, I will turn it back to Mike.

Thanks. Even though we expect our reported sales growth rate for the full year to exceed 20 percent, we will fall short of our 7 to 9 percent underlying sales growth goal for 2003. While we are disappointed by this outcome, we remain very enthusiastic about our ability to generate stronger growth beginning in the fourth quarter this year and continuing next year. We remain solidly 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 investments above the underlying sales growth rate. Additionally, we remain comfortable with a full year earnings estimate of $1.56 to $1.58 per share. We aspire to sustainably grow net income in the midteens in 2004 and beyond, and we will provide more detail on next year's financial goals at our upcoming investor conference.

Since the beginning of the third quarter, we have introduced five new products and are expecting regulatory approval for two more before the end of the year. This represents the most new product activity since our spinoff three and half years ago and is a direct result of our deliberate efforts to increase investments in R&D and provide new opportunities for growth. Though still early, we expect these new products will help fuel the momentum toward achieving our long-term aspirations of double-digit sales growth while reliably delivering above-average bottom-line results.

Before we open it up to questions, I would like to remind you about our 2003 investor conference which will be held at our corporate headquarters here in Irvine on December 8th and 9th. We are looking forward to showcasing our product pipeline including our endovascular heart valve repair and replacement programs and detailing our plans for continued growth. For more information about this event, please visit our Website or contact our Investor Relations team.

With that, we would be happy to answer your questions.

(OPERATOR INSTRUCTIONS). Glenn Novarro, Bank of America Securities.

Mike, I guess in July you talked about the cardiac surgery and the tissue business getting back to 10 percent growth starting in the third quarter. Obviously now we have not seen that. I guess what we need to hear from you is why should we have confidence that Edwards can get this back to 10 percent growth in the fourth quarter and then into 2004? Is it the launch of the Magna valve? I am hoping it is something more than just easier comps. Thanks.

Thanks, Glenn, for the question. No, I don't think it's primarily about easier comps. There is a good point. There are several things to think about. First of all, the fundamentals of this valve business are very sound. The tissue is continuing to grow at a 10 percent growth rate, so the market itself we feel is very solid.

Although there is a little bit of seasonality in the third quarter, I don't think that overall will have a lot to do with that. I think the biggest thing that we have going for us are two things. One, that our core product pipeline or our core products themselves are the best performing products in the marketplace. We think we have an opportunity to deliver that message more aggressively than we have delivered in the past. That is really point number one.

Secondly, we do have a lineup of new products that is very impressive. Even without Magna, we have an impressive lineup of new products like Tricentrics, like the new ischemic ring, like what also is coming with the Thermafix. So we have sort of the ability here to drive this, and I can tell you that we have an intensity of efforts to really drive results. I expect that to result in 10 percent growth in 2004.

Now I am not sure that we will exactly get there in the fourth quarter, but we are certainly striving to do that and I expect to make progress in the fourth quarter. But I do expect to be there for full full year '04.

You mentioned on the call that August was soft and then there was a rebound in September. Was there anything in September that was maybe better than expected that gives you enhanced confidence? I guess in September or end of August you were supposed to hear about Magna. Can you talk to us and tell us why this is taking so long to get approved?

Yes. August was just unusually slow all the way around the globe. We always see August as sort of our slowest month. It seemed like it was even slower than usual. We are not sure what was around that. September bounced back very strong, and one of the things that we saw strong in September was Tricentrics. You know we only had the Tricentrics holder for the mitral valve for about 11 days of the year, and it certainly caused sales of mitral pericardial valves, the PERIMOUNT valves, to increase substantially after that introduction.

In particular related to Magna, we are in ongoing discussions with the FDA. We feel like that is going positively. We continue to expect that to be approved before year-end.

One last question and then I will get back in queue. In Q2, you loss share by our calculation to Medtronic. My guess is you probably lost share again to Medtronic this quarter. Are you getting hurt by Medtronic's ability to bundle more products, not just in surgery but maybe with respect to interventional cardiology and CRM?

Yes. I think when you talk about share, I think it's a good point. Here is the way to think about it, depending on whether you want to think about it globally or in the U.S.. When our sales grew like it did in the last quarter of 7 percent or this quarter 7.5 percent, I think you want to keep it in context. You have got an overall valve market that is growing around 5, so overall heart valve share actually Edwards is gaining. But when you think about the fact that tissue valves are growing at 10 percent, then when we are not growing 10, we are losing share. In fact, we did lose share again in the third quarter.

Now in terms of why, we actually think that bundling really does not have much to do with it. There are a couple of primary effects. One is the loss of porcine business is pretty substantial, even more substantial than we expected. Secondly, we think that their sales and marketing tactics have been pretty effective here at muddying up the message around the superior pericardial data, PERIMOUNT data, especially with some of the new surgeons coming into the market.

Thanks, Mike. I will get back in queue.

Mike Weinstein.

Good afternoon guys. Could you just before we switch back to valves I want to follow-up Glenn's question. Could you spend a minute on the peripheral stent launches and a couple of specifics on the timing or some of the rollouts and the ramp up in the spending in order to get to some of these products out the door?

In particular, what we have launched thus far has been one of the balloon expandable stents or one sort of size grouping. Actually we have more size groupings of balloon expandables to launch and then many sizes of self-expanding to launch. We expect to have the first self-expanding launch before the end of the year, and we expect those launches to take place throughout the fourth quarter and throughout the first quarter of next year. So at this point, all we have is the clinical experience that is available on the stents we have today. I think we prepared more than 50 clinical cases, and we have been hearing very positive clinical results. But we are still going to learn a lot as we introduce these, Mike.

Okay. Can you give me a little bit of sense on spend levels as we look at the first half of next year? As you are building out this product line and the salesforce, what is the burn rate on this business?

Yes. I would say you will see spending ramp up to some extent starting in the first quarter, probably not see a lot of impact in the fourth quarter. More in the first quarter of next year. But we would also expect to start seeing the front end of a sales ramp at that time. So I don't know. I cannot think of really a specific number to share with you, Mike. It might have an impact of increased expense load in the first quarter, but my guess is it would be in the neighborhood of $1 million or less.

Your third quarter SG&A number and the fourth quarter guidance on SG&A, does not really suggest a lot of spending around this launch. Is that an accurate statement?

Well, we are actually going to be spending around the launch, although we are going to time this. It's going to be more or less ramped with the introduction of products. So it's not going to be a step function, Mike, if you will. There is going to be substantial spending in the fourth quarter compared to the third quarter. You have to remember that even if we hold the percentage relatively constant from quarter to quarter, you see a substantial difference in terms of the amount of sales in the fourth quarter. So spending would be substantially higher. Remember we did save a lot of money around our restructuring that we did in the third quarter.

, Sure. Have you altered any of the launch plans for the vascular business in light of the weaker than expected performance in valves?

Not at all. As a matter-of-fact, part of the reasons here that we give ourselves a little bit of room through our restructuring is so we can make sure that we are spending all we need to both in valves and in the exciting peripheral stent launch.

The median where we will get the data on LifePath? If not, maybe David can follow-up.

I know it's the middle of next month. I will look for it during the call. I have got dates here, but it looks like November 20.

Okay. And then in the valves, I am sure you saw St. Jude's results. Their valves sales were lower then they anticipated as well. That was both international and the U.S.. Do you put the two together and have any thoughts overall in the marketplace, other than the market has not really look that great in the last couple of quarter? Obviously Medtronic's numbers look a little bit better. Is there anything that is going on an a bigger picture, not just share shifts, but maybe the market is now playing out as well as we hoped?

You know, I don't think there is anything very preannounced. Like we said before, there can be some swings from quarter to quarter, but overall we do think the heart valve market has grown around 5 percent and the switch from mechanical to tissue is causing tissues to grow at twice that pace. Now it did seem like a more pronounced softnesses in August than we normally see, but other than that, Mike, we don't see any really fundamental changes in the market.

Mark Landy.

Good afternoon guys. Mike, you mentioned the cabbage (inaudible), you traditionally implant the valve or are beginning to implant valves. So if I maybe read between the lines, it looks like the market growth really should be increasing given that we would expect the traditional (inaudible) to grow 10 percent, and we are getting these new implants at the periphery. Same (inaudible) sales are flat as you pointed out. You guys obviously did not participate given that you grew space in the market. Should we really rethink our market share assumptions here, or are we just really fighting our product battles?

As I said, I don't think that the market's fundamental growth rates are changing, and even with the greater number of positions, we don't think they are basically driving more valves procedures themselves. We think they are carving up the existing procedures that are out there. But as some of the surgeons that we are focused more solely on, only bypass surgeries are now seeing that decline. We are seeing more folks learn valve procedures, so there are a greater number of surgeons for us to serve. I think that becomes one of the challenges for us to address, and we are certainly up to that challenge.

On that new implant phase, what percentage share is your goal to get?

Well, we believe we have the best products in the marketplace. We are very focused at being the market leader in this. So from our prospective, it is our goal to grow our market share from where it is. We already sell places many as the next competitor, and it is our intention to even build on that.

As we move into the new product rollout, I think from your last investor meeting some of the assumptions that probably were made relative to new products, the growth in the revenue (inaudible) had been pushed out a little bit. As we look to '04, are we just redating those expectations, or have you modified some of your expectations for the new products that you're rolling out?

No. I think it's very fair that some of the new product introductions that we expected to happen earlier in '03 have been pushed back. So, for example, here, peripheral stents were not going end up having much '03 impact and really have impact in '04. But by the same token, we did have an awful lot of new products that have been introduced in the last quarter and this quarter, and we really do expect those to have real impact. We have not lost our enthusiasm for those product introductions at all.

So really we are pushing out the base just a little bit?

I think so.

Tim Nelson.

Not to beat a dead topic, but can we drill down into the valve business a little bit more and maybe talk about the differences in international versus U.S. growth? Do you see a slowdown at all in the conversion to tissue in the U.S.? Since we talked about the huge growth in the repair business, I an wondering whether or not that is not somehow impacting your tissue business?

No, we really don't see that. As we mentioned, our U.S. cardiac surgery growth rate was 5.4 percent. We think our heart valves probably grew a little bit slower than that because we got a little lift out of TMR this quarter. But it is not that we have seen some sort of tremendous repair growth. As a matter-of-fact, our repair growth this quarter was lower than the repair growth we have seen in most quarters, and we attribute that to some extent by just a little bit of the seasonality that I talked about before that was a little more dramatic than typical. But, no, we definitely think that the movement of mechanical to tissue continues to be robust.

In both U.S. and international markets?

That is correct, in both.

You have not seen any change in the rate of conversion in either market?

If anything, when you get into markets like Japan and the rate of conversion is even faster than is going on, for example, in the U.S. or in Europe. So clearly that is going on at a pretty rapid pace, and we talked about the fact that our sales grew 20 percent. That is almost pure mechanical to tissue conversion.

You mentioned TMR. Can you give us the actual numbers for TMR and the other little things in the surgery business?

We actually wanted to start moving away from giving actual details, but I think TMR probably had our strongest quarter ever. It was around $4 million worth of sales. Really nothing to speak of on Optimase (ph).

You have been gaining share in research medical recently. Has that been been stable, increasing?

You know what? We probably don't have as good a handle on what cabbage growth is. Actually research medical grew at a slower rate in the quarter. I think it was low single digits.

Great. The last question I was confused about your comment on 15 million in peripheral sales. Was that '04 expectation guidance, or was that Q4?

I am confused, too.

You mentioned $15 million, something about peripheral sales.

You know what I think what I was sharing -- sorry for the confusion -- I think I said that our vascular sales in the fourth quarter was expected to be just less than $15 million.

I have got you. Right. Sure. Thanks.

Katherine Martinelli.

Can you hear me? Just a couple of questions. One, going back to your comments about Medtronic putting out this information or muddying the waters I think was the phrase you used with respect to the PERIMOUNT, can you just maybe give us a little bit more detail in terms of what exactly are the initiatives to combat that? Does that translate into higher SG&A spending? Does it mean you have to have more people out there detailing the benefits of the PERIMOUNT?

Yes. I am happy to talk about it to some extent. First of all, we continue to believe, and all the research that we have done confirms that durability is the number one attribute that surgeons look for in a tissue valve. So that is really where they go first. Even though we have all this incredible body of data on PERIMOUNT valves, I think what the competition has done is taken valves with far less data. For example, I think the Mosiac (ph) valve was not even implanted for the first time until 1994, and making comparisons about it that caused people to be confused about the superior data that exists on PERIMOUNT valves. So we've got a job in front of us to make sure we get that message out there.

In terms of sales and marketing spending, we do plan to spend more money in our promotional efforts, more market focus spending in the fourth quarter and beyond. In terms of specific actions, I would just as soon not get into the specifics for competitive reasons as you might imagine. So does that answer your question?

That is very helpful. Secondly, could you just give us a sense for what the dollar impact of the distributor issue you were having was ?

Yes. It was about $600,000 in the quarter. Not material on an overall basis, but for the vascular business, it was meaningful.

Just lastly, and you may defer this question until December, but since you did bring up the goal of the 79 percent underlying growth on track for '04, can you give us some sense maybe and some broad ranges of what the new products -- the peripheral stents, the Optimase (ph), etc. -- are expected to be in terms of driving that growth so that we can get a sense for what you guys have dialed in for the contribution on those product launches?

Yes. You know I would rather, as you suggested, put it off until the December meeting. When I suggested that we are going to operate in a range of 6 to 9 percent in '04, I really had hoped to lay out in a little bit more detail, rather than off the cup, what our new initiatives would do for us.

Glenn Novarro.

A question on the fourth quarter. I believe consensus is 41 cents, and I think to get to your a range of $1.56 cents to $1.58, that would imply 42 cents for Q4. If that is the case, that would represent your strongest growth I guess since the first quarter. Can you walk us through how we get to that strong growth? Is the currency or the contract, is that going to be where we really get the meaningful benefit, and is this all going to be below the operating income line?

Why don't I take a shot at it here. If I don't answer the question, just come back at me. Your math is correct. We do expect to be in excess of 41 cents in the fourth quarter. Remember what we suggested that the sales are going to be in excess of the consensus, so I think the consensus is out there at something like 2.19 and change. So we think that gross profit rate will probably be a little higher than it is this quarter. We already gave you a good sense for where the operating expense is going to be. That is going to basically drive sufficient drop through. So we don't expect this to come below the line or around the sundry line; we expect it to be real operating results. I don't know if that answers it directly.

Remember we got penalized a little bit because of foreign currency this quarter by a couple of cents. We don't expect that to happen next quarter.

This is all due to the hedging contracts in place because it seems like the currency benefit is bigger this quarter in Q4 than the last quarter?

Actually it only impacted the top line by 3.7 percent or 7 million this quarter. That was offset by the hedging in the cost of goods line as well as the expenses internationally. Those combined expenses led to the shortfall.

A follow-up question, I guess, is on the Japan market for tissue next year. You mentioned that this quarter you anniversaried the consolidation of the Japan business, and the market is growing about 20 percent. What happens when Medtronic comes into the market? How should we think about your growth in Japan in 2004? Can you give us an update on when you expect Medtronic to come back into that market?

Yes. Let me try and give you a few high-level things to help you think about that. Remember we characterized the Japan heart valve market as around $100 million market where Edwards run-rate was in the neighborhood of $40 million. Although we do not say that the overall market is growing at 20 percent, Edwards is growing in excess of 20 percent. That is largely because of the conversion that is continuing to take place in Japan from mechanical to tissue valves. Again, this is after -- this is in the quarter after the anniversary of the exit of our competitor.

So we are not sure when our competitor is going to come back. I think they suggested they are going to come back by the end of the first quarter, but your guess is as good as ours on that one. And then I think when they come back, the view was they had around $10 million worth of sales in Japan before they exited. The question is going to be, how much of that are they going to get back, and how much is Edwards going to hold onto? And you can imagine from our prospective, we're going to try to hold on to all of it, and from their prospective, they hope for the opposite.

What is dialed into that 6 to 9 percent underlying guidance for next year? Is it maintaining share; is it losing share and maybe growing the business only 10 to 15 percent? I don't know if you want to share that.

We have some that they will pickup some modest business as they come back. We certainly don't think they will pick up all of it, and we don't think we will keep all of that.

One last question. Just getting back to peripheral, you talked about ramping up the salesforce. Can you share with us how many salespeople are now trained and selling for Edwards, and where those numbers go in the fourth quarter and maybe next year?

Yes. Right now what we have in place is not much different I think from the last time we gave you an update. We have a national sales manager, a couple of regional directors in place and then five or six salespeople. That is the way we will probably operate for most of the fourth quarter, and we really look to be making the next round of additions in the first quarter.

We are still measuring how many we would add at that time. We have said overall by the end of '04 we expect to get to the mid-40s range, but we are still measuring how many we would add in the first quarter. As we mentioned, in Europe, we have an existing selling organization that is already in place that does things like the AAA product.

Larry Keusch.

A couple of quick questions. Mike, you talked about the seasonality being more pronounced this quarter. I am just wondering if you have any insights as to why that is that we are seeing reduced hospital emissions, and could that not be an issue in the fourth quarter? It just feels like we are seeing across the industry more visibility of seasonality than we have seen in the past.

Yes. That is a good question, Larry. I just want to put in prospective. I am not trying to, for example, blame all our results on seasonality in the third quarter. We think there was some impact there. What did it do to our growth rate, I am not sure, but it might have taken out a percent or so.

We saw most of it in August, and it just seemed more pronounced. Because our sort of valve procedures, our discretionary procedures, they are really driven by the schedules of surgeons. It seemed as though more than ever before they went away in August even more pronounced than we might have seen in the past. We always saw it before, so I am not sure we can tie it too much more than that. We have heard about things like power outages and heatwaves in Europe, and the hurricane in the U.S. probably cost a day or two. All those things probably have a minor effect. But then again, I also mentioned we had a pretty good bounce back in December. So I don't want to lead some sort of speculation about national trends.

Okay. Great. Two other questions for you. The first one is you talk about the sales ramp here in the new product peripheral stents, etc.. But will those actually be contributing any real profitability in '04? When should we expect to see that really become profitable for you guys, question one?

Secondly, just coming back to some earlier questions regarding the mixed messages being sent out there by Medtronic, I am wondering -- again, I suspect cardiac surgeons are up to speed enough on the data that is being presented that they understand your longevity data versus the Mosaic. I am just wondering if there is any price entering into the equation here on how Medtronic is competing as well? It just seems bizarre to me that you could spend this information that might move cardiac surgeons in a different direction in a market that I typically regard as pretty stable and people have been using products for a long time and don't switch easily.

Good questions, Larry. Your first question is around peripheral stents. Is that going to go positive or go breakeven in '04? That is not the case. Clearly '04 is still a year of investment for Edwards in peripheral stents. So when you take a look at our R&D spending and the spending that we will have on the launches and in our salesforces, that will be a year of investment, and it will start turning in 05. Depending on where our volume ramp looks like, I am not sure exactly where the crossover will be be, but clearly it will not happen in '04.

In terms of heart valves, actually we don't think that price is having a lot to do with that. We are not sure the pricing is really coming out of the heart valve market. We think it more has to do with just marketshare battles. Again, when you think about people changing their mind or any of those kind of things, you have to keep in mind all sort of numbers overall. When we say we expected to grow 10 percent and we grow 7.5 percent, it is not like you are seeing some sort of a huge market movement. As a matter-of-fact, the folks that feel passionately about the valve data continue to feel exactly the same as they did before. But we are talking about what is happening on the margin.

So it is the surgeons that maybe don't know so much about valves, okay, or the surgeons really have not had a chance to have a lot of experience, that potentially are more easily influenced here, that maybe we have not served as well as we need to serve them in the future.

Okay. Great. Thank you very much for your help.

Jason Mills, First Albany.

Sorry about that. If I missed it, but I was wondering if you had broken down the underlying growth rate for your heart valve business worldwide in the quarter?

Heart valves worldwide in the quarter actually were pretty comparable to our cardiac surgery growth rate. I think just slightly higher.

So in the 8 percent range?

Right.

Just a couple of follow-up questions on that. You mentioned that August -- and not to go back to seasonality again, but just one more time -- but August was a little lighter than you expected in a bounce back in September. Given that you are giving guidance in the fourth quarter that is obviously higher than the consensus and essentially telling us to raise our top line a little bit, are you seeing even more strength in October, or am I reading too much into that?

Yes. I think you are reading a bit much into it. One of the things I am not sure that is in the consensus estimate is how much currency helps, and remember we said that currency is going to be quite helpful in the fourth quarter, as much as 6 percentage points. So some of that alone just helps lift it up.

Okay. So, therefore, could you give me an expectation for underlying growth rate in the fourth quarter worldwide?

Well, in cardiac surgery in particular?

Yes and heart valves as well.

What we said is that we feel confident that we are going to be able to log 10 percent growth rates in 2004, and we are going to make progress on where we are today toward that goal. So we're suggesting we are going to be somewhere between where we reported in the third quarter and that 10 percent in the fourth. I am not sure we could really nail it much more precise than that, Jason. Is that clear? Did I lose you? I think I did.

Ben Andrew, William Blair.

A couple of quick questions. Mike, talk about how you are going to monetize Centrex and Thermafix. Is that something that you use as a defensive tool, or can you gain incremental revenues from this and start to drive overall growth a little higher, i.e. ISPs going higher per case?

Yes. There is a couple of things. One is when we talk about Tricentrics, we really think that in the mitral position that we have an opportunity to gain more share with our PERIMOUNT valves. It is still a position that is heavily porcine and mechanical, and so we ought to be able to drive share, and by making those long-lasting valves easier to implant, it's incidentally to make a difference.

When we talk about Thermafix, we see that going onto our premium product. So you could picture Thermafix going on products like Magna or going on a pericardial mitral valve with a tri-centric holder and that is being valued more highly surgeons and demanding a higher price.

Okay. On the salesforce side on vascular, Mike touched on this a little bit. But as you ramp people for peripherals, you're going to do that all internally it sounds like? How many people do you see in that group, and do you roll that up as you go through the year? Do you need 10 to start into a 20 sort of thing, or is there an opportunity to move more aggressively with that product?

Thanks, Ben. It is our hopes that the product performs the way we expect it to. So far, so good. Although we really don't have the self-expanding out there yet, and we are really looking forward to that. Right now as we mentioned, we have got all the infrastructure of the marketing folks of sales management in place and five or six sales folks, and we would like to ramp that to 40-plus person selling organization by the end of '04. Exactly the pace that we do that is going to be somewhat variable depending on how well things go for us and to make sure that we really have a solid, stable and competitive product line. If we were to have the greenlight all the way, we would add more aggressively than if not. We would anticipate adding the next group of people starting in the first quarter of '04.

And it is going out quite aways, but if you look at AAA for '04, and you're hoping for approval by the end of '04 in the U.S., how big of a product would you view that as given that the market should be expanding it with more players even though guidance is coming out? Is that potentially a $25 million product in '05?

I think it has the potential to be quite a strong product in '05. You have a U.S. market that is already probably at a couple of hundred million dollars, and it has the opportunity to certainly grow from there. If our product turns out to be as competitive as we think, we would like to think we would be able to take more than 10 percent share on it, so you are number does not get out of line. Probably as you suggested, if we get a tour at the end of '04, it probably doesn't do a lot in '04.

On distribution, are you focused on the vascular surgeon? Do you focus on the radiologist? I know there are a number of different constituencies there. Do you need a separate salesforce, or can you run that through your cardiac surgery group, or do you run it through vascular?

We already have a vascular selling organization that serves vascular surgeons. So that group is already partially well-prepared to be able to take that on. As a matter-of-fact, they are very anxious to be able to take that on.

Beyond that, we would really have to assess whether we want to or just exactly what sort of additions we would make. We have several options in that regard considering that we are building up an organization in peripheral stents, and some of that, again, will be measured by just how good this opportunity looks to us as we get a little closer.

Sheetal Mehta, Bear Stearns.

Actually most of my questions have been answered. Most of my questions have been answered, but just a couple of quick things. With regard to your share buyback, do you expect to finish that program by the end of the year?

We have not set any guidelines in terms of timing of the completion of that program. It will be opportunistic.

Following up on the question on Tricentrics, you have had in the marketplace now for at least over a month now. Can you give us some sense of whether that is really helping with sales? Is that pulling through some of the Magna sales or PERIMOUNT sales like you might be expecting?

You know, I can say a few things about it. The clinical response has been very positive, and clearly our growth accelerated after the introduction of it. We have been getting messages back from the surgeons at this point, things like it has made my operation shorter, it has improved the speed and accessibility of the mitral valve. This is very easy to implant. So we have been reinforced in a number of ways. So we are optimistic that this is really going help us penetrate the mitral position.

Did you mention what the repair growth was for the quarter?

We did not mention what repair growth was in the quarter. It actually on a global basis was low-teens, or actually it was more low double-digits.

Okay. Great. Thank you.

Keay Nakae, Wedbush Morgan.

Questions about the logistic rollout for Magna and Thermafix. With Magna, is it safe to assume you will roll this out in the customary fashion? You will focus on your more familiar accounts given the difference in technique for the implant and then roll it out from there?

Yes, I think that is true. We have got an upcoming meeting at the STS in January which will be an ideal opportunity for us to be able to spread the word in a big way. I think your speculation is correct here. We are going to do this in a very deliberate fashion. This is such an important product, and particularly when you talk about something like implants, we would do this in a very deliberate fashion.

With respect to Thermafix, this was a regulatory pathway there. Are you seeking a PMA supplement for certain product first, and then you will need to get an additional supplement for each product that you want to apply that to as well going forward?

My understanding of the way this works, although I have to admit I am not intimately involved with the regulatory position exactly on this one, is that once we get the approval for this process that we will have the ability to process all of our tissue that way.

Okay. Thank you.

Alex Arrow.

Three questions. First, on the clinical care, (inaudible) this quarter, and it is a pretty big part of your business. And I was wondering if you could tell us the process of replacing the base one (inaudible) with the advanced (inaudible) which over time is expected to improve the growth characteristics of that segment? Can you tell us anything about how far along in the process that is, and are we to the point now where we have the vast majority of that (inaudible) revenue as advanced (inaudible)?

I don't have those base numbers in front of me. I want to suggest that right now -- let me see if I can lay my hand on it quickly -- I want to say that right now advanced catheter is probably almost a 60/40 split of advanced versus base catheters. So we have continued to make progress in terms of moving that product line, but we still have quite aways to go. We are going to continue to focus on doing exactly that.

That is by dollars, not by units?

That is correct. A difference in units.

On the AAA infringement case, I know you can't say anything about the case, but perhaps you can tell us when we might expect to hear when the next step is towards a hearing date or a markman hearing or whatever the next step forward is when that might be? I know you can tell us about the timeline on the AAA case.

I am not aware that any dates have been set at this point. You know naturally these sort of cases could settle quickly or they could take to quite a bit of time. We just filed these things, so it is just too early to tell.

Okay. And then lastly, you have already commented on the misinformation from Medtronic vis-a-vis the PERIMOUNT superiority. I guess following it up, one thing that is still not clear to me since the Mosaic (ph) did not get implanted until '94 and, therefore, they don't have anywhere near as many years worth of data, how can they make the claim that they have more longevity? Is it that they are claiming they have sped up the testing of the Mosaic (ph)?

Cardiac surgeons are smart enough to realize that they have less years worth of data, and given a claim of longevity and not of some other pitch that they are making, what is it that they are saying that is resonating? Whatever it is per your comments is having some impact.

Actually you make a lot of great observations there. You are right. I think surgeons are definitely smart enough to figure this out, and it is our job to make sure that they have all the data to be able to sell it. I think actually on the Mosaic valve they actually reside on the Hancock 2 (ph) data. They will argue that Mosaic is going to be like Hancock 2. So I think they use that argument, but frankly on the Mosaic valve, we have only seen seven years of follow-up data, and we have not exactly seen pristine short-term performance.

Isn't the Hancock 2 data much shorter than 20 years? Isn't the Hancock 2 a valve with less than 20 years worth of longevity?

Yes, it is.

How can they use the Hancock 2 data to support the Mosaic?

That's a very good question. I think people say look at how it is performing in the early years and then somehow make an extrapolation. (inaudible) concept, and I think they do it very effectively.

John Graves, Rockefeller & Co.

First, Mike, on the earning side for the year, does that includes the 6 cents per share gain you took on the tax benefit this quarter?

No.

Okay. That was easy. The second question is on your buyback if I am reading this correctly in your press release.

You've got some friends with you.

On your buyback, are we ever going to see the diluted share count start to come down as a result of that buyback, or is it really structured to just offset dilution?

The buyback was originally put in place to be able to offset some of the dilution, for example, that accompanied our stock option programs, and we think it has been pretty effective in doing just that.

You don't have any plans to actually reduce share count?

No. None in particular.

Derek Windsor, Jefferies & Co.

Thank you. Just three financial details. The gross interest expense for the quarter, not the net? And then the depreciation and amortization again for the quarter, and finally, capital expenditures for the quarter and the outlook for the year?

I am sorry. I did not hear your question.

The gross interest expense for the quarter, the depreciation and amortization expense for the quarter, and the capital expenditures for the quarter and for the year.

Okay. The gross interest expense for the quarter was 3.7 million. CapEx for the quarter was 8.1 million. Depreciation for the quarter, 11.9 million.

No amortization?

Depreciation and amortization, excuse me.

Capital expenses for the year estimate. ore.

To date, 26.1 million.

What about for the balance?

Our guidance historically has been in the $40 to $45 million range. We have not changed that.

Thank you very much folks. We appreciate your continued interest in Edwards. Corinne and David and I will welcome any additional questions by telephone, and 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, and to access this, please dial 877-660-6853 or 201-612-7415 and use account number 2995 and pass code 71725. As an alternative to the telephonic message, you can also access an audio replay which will be archived on the Investor Information section of our WebSite at Edwards.com. Thank you very much.

Thank you very much, ladies and gentlemen. That does conclude this evening's teleconference. You may all disconnect your lines at this time and have a wonderful evening.