愛德華生命科學 (EW) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Edwards Lifesciences third quarter 2003 earnings conference call.

At this time, all participants are in a listen-only mode, and a question-and-answer session will follow the formal presentation. At that time, if you would like to ask a question, please press star one to place your line in queue.

If anyone should require operator assistance during the conference, please press star zero on your telephone key pad. And as a reminder, this conference is being recorded. It is now my pleasure to introduce your host Mr. David Ericsson. Thank you. Mr. Ericsson, you may begin.

Welcome and thank you for joining us today. Just after the close of regular trading, we released our fourth quarter 2003 financial results. On our call today, we will focus our prepared remarks and information that will compliment the material included in the press release and the financial schedules, and then we will 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 we will be making forward-looking statements that are based on estimate, 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 2004, expected sales growth by product line, the market opportunity for percutaneous therapies, 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 to Mike Mussallem. Mike?

Thank you, David. We're pleased to share with you our fourth quarter and full year results, which overall represent another year of steady progress toward our aspiration of becoming a much faster growing and sustainably profitable company. Before I get into the details of the quarter, I would like to share some highlights of the year that we're especially proud of.

First, and most important, we introduced a record number of significant new products in 2003, including our magna heart valve, the Tricentrics system, and our life stent peripheral stents. Because of the timing of the U.S. approvals, these products contributed only slightly to sales in 2003. But they're expected to contribute considerably to our growth this year.

Next, we made several investments and acquisitions in innovative technologies, several of which represent new market expanding opportunities. These acquisitions include med coronary sinus pericardial repair program, the EMBOL-X system, minimally cardiac output technology, and most recently, PVT's's percutaneous valve replacement program.

Finally, we achieved most of our 2003 financial goals. We set a goal to continue investing in our future by growing R&D at or above our underlying sales growth rate, and we recorded nearly 12% growth for the year. We targeted net income growth of 14-16%, and we exceeded this goal with a 16 1/2% growth rate. And our free cash flow of $103 million for the year exceeded our goal of $85-90 million. The one goal we fell short of was underlying sales growth.

Reported sales growth for the year grew 22% over last year, including the effect of the Japan consolidation, which accounted for 12% of the growth. Excluding the Japan effect, growth was 10.4%, with currency contributing 6. For the fourth quarter, reported sales increased 10.3%, adjusting for the Pro Gator perfusion divestiture, our sales growth was 11%, with currency contributing 8%.

Now, I will provide more detail by product line. As a reminder, we will be are recategorizing our product lines beginning this year, and there is a schedule on our web site that presents our historical sales in these new categories.

The results I will be sharing with you today will use the 2003 categories, and at the end of my remarks, I will provide our expectations for 2004 sales using the new format. On a reported basis, cardiac surgery sales grew 11 1/2% in the fourth quarter, and nearly 14% for the year, excluding the Japan consolidation. Foreign exchange contributed approximately 6% of growth to both the quarter and full year.

The quarter's growth was primarily driven by sales of our market-leading PERIMOUNT heart valves and our repair products, reduced by a 20% decline in porcine valve sales. Solid international growth was partially offset by softer U.S. heart valve sales, where we experienced increased competitive pressure.

Global heart valve market fundamentals remain unchanged with the overall market growing at about 5%, and the tissue and repair segment growing nearly 10%. Mechanical valves are continuing to lose share because of the negative side effects and complications from blood-thinning medication, and tissue valves improving durability.

Our PERIMOUNT valves are the best tissue valves on the market, due to their unparalleled durability and hemodynamic performance. PERIMOUNT valves continue to be the most frequently implanted around the world, and we enjoy very strong relationships with key opinion leaders who recognize the superiority of our products.

Despite our clinical advantage, the aggressive competitive marketing tactics in the U.S. caused us to fall a couple of percentage points short of our typical 10% global annual growth rate, resulting in an underlying heart valve growth rate of 8.3%.

As we outlined for you during our investor conference in December, we are responding very decisively to these marketing tactics, we are building momentum and we are confident in our ability to gain market share and to return to a 10% underlying heart valve therapy growth rate in 2004.

Our first response was the initiation of a new clinical education program to ensure the customers are selecting valves based on factual clinical data. Our program includes direct head-to-head product comparisons that clearly and simply demonstrate the superiority of our PERIMOUNT valves, reminding surgeons to not compromise on durability, hemodynamics, and other important clinical attributes. This program was initiated late in the fourth quarter, and is now in full swing.

Second, we are currently adding 10 new heart valve sales people in select U.S. territories, and have made several changes to strengthen our sales and marketing management.

Third, our numerous new heart valve products give us the opportunity to demonstrate our commitment to innovation, and to increase our visibility in the market. Although U.S. magna sales were less than $2 million in the fourth quarter, we have received very favorable surgeon feedback in the two months that this valve has been available. Magna's clinical advantages are generating a 20% price premium over our leading PERIMOUNT valve in the U.S. and Europe. Given its unsurpassed hemodynamics and durability, we believe Magna will become the leader tissue valve in the U.S. within the next few years.

Yesterday, we announced regulatory approval of our proprietary Thermafix calcification reduction process. While we are confident in the excellent performance of the current treatment, the addition of Thermafix has been shown in lab tests to reduce calcification up to 44%. We plan to add Thermafix to Magna first, and think its position will make this superior valve perform even better.

The launch of our Tricentrics mitral system in the U.S. has also been progressing extremely well. The Tricentrics holder's ultra low profile creates better visualization and operating space, making our valve much easier to implant than before. Clinician enthusiasm continues to grow, and related complaints dropped to zero in the quarter.

Even though PERIMOUNT is already the market leading mitral tissue valve, we believe Tricentrics will help us take further advantage of the significant opportunity for penetration in the mitral position, where mechanical and porcine valves still have the leading share.

The most transformational and market expanding opportunity for the treatment of valve disease is certainly percutaneous heart valve therapy. With our recent acquisition of PVT, Edwards now has the strongest and most comprehensive program of catheter-based valve therapies, and we believe we are uniquely positioned to be very successful in this exciting market.

Our mitral repair programs, both edge to edge and coronary sinus, continue to make good preclinical progress, and we still expect our first patient procedure to occur in the second half of the year.

The acquisition of PVT, which was completed last week, greatly enhances our position in catheter-based aortic valve replacement, and accelerates commercialization of this break through technology.

The experience from PVT's 17 patients to date has generated valuable clinical insight. This study will be expanded beyond France to additional sites in Italy and Brazil this quarter.

The combination of PVT and Edwards represents a unique blend of capabilities. PVT provides a very strong and complimentary portfolio of intellectual property and experienced interventional management team, and relationships with leading interventionalists.

Edwards brings its own pioneering work in this field, decades of leadership in tissue and valve technology, catheter delivery systems expertise, and trusted relationships with leading cardiac surgeons. Together our resources represent a physician of unparalleled strength and opportunity.

We are fortunate to have the team from PVT joining Edwards, and the program will continue to be led by Stan ROE, PVT's co-founder. Stan brings to Edwards a wealth of experience in interventional therapies, which will be invaluable as about we work with the cardiology community and our surgeon customers to encourage broad adoption of this novel technology.

The interventional community continues to be extremely enthusiastic about this important new therapy, judging by their eagerness to participate in upcoming clinical studies. We still expect to file for, and receive, an HDE approval in the U.S., and also anticipate receiving a CE mark, both toward the end of next year.

We are presently in discussions with regulatory authorities, as we formulate specific launch plans and identify key regulatory and clinical milestones. We will share more information with you as it becomes available.

Now, I will turn to some of our products that going forward will comprise our cardiac surgery systems product line. The launch of our EMBOL-X embolic protection system is progressing. This unique product addresses an unmet niche, and sales are gaining traction in both the U.S. and Europe.

Although our fourth quarter sales of CO2 TMR were down versus the prior year due to lower laser sales, interest continues to increase, and disposable sales nearly doubled in the second half of 2003. We continue to believe TMR represents a growth opportunity and estimate this therapy could benefit many more patients than those who are treated today. We are expanding our education in order to encourage new therapy adoption.

Early evaluations of our [Optimade] system for treating atrial fibrillation are encouraging. As previously indicated, we've decided to delay the launch of this product until the second half of this year in order to improve the reliability of the hardware, and to add minimally invasive capability.

We believe that the advantages of our proprietary laser energy source, together with the platform that offers the flexibility of both endocardial and epicardial delivery, will enable us to pursue a broad share of this growing surgical [afib] market.

In January, we completed an agreement with World Heart to transfer European and Canadian distribution of [Nova Core] back to them. Sales in these two regions were approximately $5 million in 2003. Going forward, we will distribute [Nova Core] only in Japan.

Now, turning to critical care, reported sales grew 11.6% in the fourth quarter, with FX contributing 8.6%. For the full year, critical-care sales increased 21.1%, with a Japan consolidation accounting for 10% of the growth and FX accounting for 6.9%. This quarter's growth was due primarily to strong global pressure monitoring product sales, resulting from market share gains, and overall strong performance in emerging global markets.

An exciting new area that we're investing in is minimally invasive cardiac output, or MICO, which represents an unmet clinical need in critical care. We estimate that a large number of patients could benefit from the accuracy and dependability of a traditional PA catheter that are not being treated today.

During the fourth we acquired certain technology which we believe will help facilitate the development of a MICO system that would allow clinicians to monitor cardiac output without inserting a catheter all the way into the heart.

We believe this technology has the potential to double the current size of the market over time, which could double the critical-care sales growth rate in just a few years. We anticipate first clinical use of this technology beginning in 2005.

On a reported basis, vascular sales for the fourth quarter grew nearly 9%, comprised almost entirely of foreign exchange gains. For the year, reported sales was also roughly 9%, but down slightly after adjusting for the Japan consolidation, and FX. Strong [Life Path] AAA sales in Europe were offset by continued declines in base vascular products.

Even though we're experiencing favorable clinical results with [Life Path] and gaining momentum in Europe, in December, we announced a decision to focus our resources on other technologies that can have a more meaningful impact on our future growth and profitability. We have initiated a formal process to seek strategic alternatives for the [Life Path] program, and are moving toward a quick resolution.

The introduction of our life stent product is progressing well in both the U.S. and Europe. The rollout of our balloon expandable product line is on schedule and feedback has been better than expected. Additional sizes of the balloon expandable life stent will be released over the next two quarters, and we expect a complete line to be available by June.

The market's response to our self expanding stents has been equally favorable and is meeting our high expectations. However, based upon physician inputs, we are making some adjustments to the delivery system. Although this will delay a broader introduction by about a quarter, the most popular product holds will be available in the third quarter.

This timing suggests that the lower end of our $10-15 million sales projection for 2004 is more probable. Live cases and physician discussions at recent industry conferences reinforce our optimism that the peripheral stent opportunity is as large and attractive as ever, and that Life Stent's features are superior to products presently on the market.

Throughout the year, we plan to continue developing enhancements to the product line, including additional sizes and features, and we expect to start a clinical trial aimed at receiving regulatory clearance for a vascular indication.

Additionally, our peripheral stent program has been a catalyst for building our interventional skills and capabilities. Other distributive products for the quarter were $11.7 million. In this product line, we have been deemphasizing certain lower margin products.

Now, for 2004, we are expecting to generate total sales in the range of $915 to 940 million, with the following assumptions for each of our new product line categories.

For heart valve therapy, we expect annual sales to be between $400 and 415 million, and we are committed to rapidly gaining share and returning to double digit growth.

As I previously mentioned, first quarter comparisons will be challenging. But we expect sequential improvement in our growth rate throughout the year, even with the return of our competitor in Japan. We also expect to exceed 10% growth in the fourth quarter on an underlying basis.

Cardiac surgery systems are expected to be approximately $115 million. Critical care sales are expected to be $290-300 million. Vascular sales are expected to be $60-65 million, and other distributor products should be approximately $45 million. And now, I will turn the call over to Corrine.

Thank you, Mike. Before I get into the results for the quarter, I would like to review a few financial highlights for 2003.

In May, we completed $150 convertible debt offering with attractive terms. This 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.

We also took important steps to strengthen our company, including the exit or deemphasis of several less strategic products, and the reduction of head count in August. This allowed us to sharpen our focus and maintain profitability while increasing investments in our future. And during the year, we repurchased nearly 1.8 million shares of stock for approximately $150 million.

Now turning to the fourth quarter results, which were highlighted by an improved gross profit margin, increased R&D investments, and strong cash flow. Our gross profit margin this quarter was 58.1%, which was higher than the year ago and sequential quarters. This quarter's improvement was primarily a result of improved manufacturing performance partially offset by the impact of FX. If currencies remain at current levels, we expect our gross profit margin to improve by about 100 basis points this year.

Fourth quarter SG&A expenses of $72.2 million, increased compared to the same period a year ago, due primarily to the strengthening of the Euro and Yen. However, as a percentage of sales, SG&A decreased to 32.2% compared to the year-ago quarter. For 2004, we expect SG&A as a percentage of sales to be slightly above 33%, which includes increased spending for a U.S. sales and marketing efforts in heart valve therapy and peripheral stents.

In the fourth quarter, we increased R&D investment by $1.3 million over last year, to $19 million. This increase is attributed to greater initiative investments, particularly our [Life Path] AAA program, which required significant spending associated with U.S. clinical trials. Including an estimated $5 million in PVT-related patent amortization expense, we expect R&D investments for 2004 to be approximately $85 million. [inaudible sentence]

An increase compared to last year, but unchanged sequentially.

The year-over-year increase resulted from higher interest rates associated with our fixed-rate debt, which now comprises a greater percentage of our overall debt balance. For 2004, we expect interest expense to total approximately $16 million, which reflects additional borrowing related to the PVT acquisition.

For 2004, we anticipate increasing our tax rate to approximately 27%, to reflect the impact of nondeductible patent amortization expense resulting from the PVT transaction.

In the quarter, we recorded three pretax special charges totaling $9 million. The largest was a previously announced $5 million charge related to the settlement of an arbitration with Baxter, primarily arising from the evaluation of receivables at the date of spinoff.

We also recorded a $2 million charge related to the curtailment of the company's pension plan in Puerto Rico, and a third charge was for $2 million for in process R&D related to the acquisition of minimally invasive cardiac output technology.

As previously announced, in connection with the PVT transaction, we expect to take an in process R&D charge in the first quarter of between $60-90 million, or $1.00 to $1.50 per share. Also in the first quarter we settled heart valve patent infringement litigation with [Carbomedics] for future royalties and $2.5 million, which will be netted against related legal expenses.

This quarter, changes in foreign exchange rates compared to the same quarter last year, lifted sales by approximately 8%. The foreign currencies remain at current levels, we would expect to see approximately 2-4 percentage points of growth attributable to FX for 2004.

This quarter, we used a portion of our strong cash flow to reduce our debt by approximately $37 million, to $256 million at December 31. Our debt to cap ratio at quarter end was 29%.

Accounts receivable increased slightly at the end of the quarter to $119 million from $116 million, and inventories decreased $5 million to $121 million. Including receivables that are part of our asset-backed securitization program, for the fourth quarter, day sales outstanding declined four days to 75, and inventory turns improved to 3.1 from 2.8 in the third quarter.

We continue to focus on managing working capital by reducing DSO and increasing inventory turns. Finally, free cash flow for the year, which we define as cash flows from operating activities minus cap ex, was $84 million. If we exclude special charges, such as the [yemen] acquisition and the head count reduction, free cash flow was $103 million. And with that, I will turn it back to Mike.

Thanks, Corrine. We're proud of what we've accomplished in 2003, and have set financial goals for 2004 that keep us squarely on the path to becoming a faster-growing, more profitable company.

These goals include driving sales in the range of $915-940 million, growing investments in R&D at or above the underlying sales growth rate, delivering net income growth of 13-15%,excluding the impact of the PVT transaction, and generating $90-95 million of free cash flow. Additionally, we're comfortable with the First Call mean EPS estimates for the first quarter and full year, 2004.

As we look ahead to 2004 and beyond, I truly believe that Edwards is entering the most exciting and transformational period in its history. By virtue of the long-term investments we've made in 2003, we are well positioned for the future. Percutaneous heart valve technologies and minimally invasive cardiac output not only offer the promise of less invasive lifesaving therapies to a previously untapped patient population, they have the potential to provide meaningful growth to Edwards Lifesciences.

Add to that a sharpened focus on strengthening our core heart valve business and the emerging opportunity in peripheral stents, and we believe Edwards is poised for continual growth and profitability . With that, we'd be happy to answer your questions.

Certainly. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator instructions] Thank you. Our first question for the day will come from Mike Winestein of JP Morgan.

Thank you. Good afternoon.

Hi, Mike.

How are you doing? Could you just lay out some expectations around Magna and give us with -- a little bit of time here now, if you asked what the feedback is on the incremental pricing, whether you're finding that to be an issue at all?

Yeah, we feel really good about the introduction of Magna. It's really gone very smoothly. We've gotten tremendous feedback. We've gotten really great excitement generated amongst our sales force.

And we've comfortably been able to deliver this 20%-plus premium as we've launched this product, and we fully expect that when the year ends that we will be able to report that we've delivered that 20%-plus premium, Mike.

So you're basically saying the premium will stick, and the -- are you getting any push back on that given where the pricing is relative to other product lines? And then where do you think that, you know, given what that pricing strategy is, where do you think that puts Magna in your mix 12-24 months from now?

You know, obviously it is somewhat mixed. There are some folks who just feel very positive about it and really want to use it across the board, and other folks think about using it for some of their patients. So it is really very broad. We expect magna to continue to grow, not necessarily on a steep curve, but on a very steady curve all throughout the year.

Where Magna is going to be especially popular is because of its hemodynamics are in the smaller patients. Just to give you a sense for it, what we have modeled in our own analysis, which is tough to know exactly how it is going to shake out, is that we will probably sell maybe in the neighborhood of $30 million worth of Magna in the U.S. this year.

That's very helpful. And then Mike, you were observing and recognizing people would ask questions just about the U.S. business in the quarter and you addressed some of it in your comments. Can you just talk a little bit more in terms of giving us the confidence that the overall U.S. performance, primarily in cardiac surgery, is going to turn in 2004? Because obviously, we saw another tough quarter, as you closed out the year.

Yeah, obviously, you can imagine how anxious we are to really be able to report some great numbers. And we feel like we have clearly identified with what the issues are and the things that I talked about in terms of the direct head-to-head comparisons,

the additions to the sales force, and the impressive lineup of new products, all very much caused this to turn around. If you had a chance to sort of see more detail inside the quarter, you would see that we were weaker on the front half of the first quarter and we finished the fourth quarter much stronger.

And we really believe that we have momentum and that the worst is behind us at this point, and that we will be gaining steady progress throughout 2004.

Do you guys care to give guidance on maybe how the U.S. business might ramp during the year?

How the U.S. will do during the year?

Yeah.

Well, I mean we expect the -- when it is all said and done, that it is going to be a share gain year for the U.S. And so we expect ultimately, even though the U.S. is not growing very much in terms of overall sales growth, this last year, we expect it to just steadily ramp up, and expect it to be a 10% grower when we exit the year.

Okay. Just a final question, maybe this is for Corrine. Since you gave your original guidance back at the beginning of December for 2004, you have to have a little bit of additional movement in the exchange rates. Have you factored that into your guidance? Does that make you want to adjust the guidance at all for 2004 for the revenues, or is that offset by maybe the additional delay on peripheral stents, or maybe some of these other items?

Well, no, we're not changing our guidance based on having only gone through the first month of the year and knowing how the rates can fluctuate so dramatically. And if you look back at the average rates for last year, I think that we are not of the mindset right now to change, at least right this moment, our guidance based on currency, but that could change over the next quarter or so if we continue to see rates stay at these levels.

But we're expecting the overall impact from foreign exchange to add 2-4% to our overall growth this year.

We're not expecting the rates to stay at the current level for the full year, but the dollar will probably strengthen as the year goes on, Mike, and I think that's reflected in our guidance.

Okay. Assuming that the dollar held where it is at, would it be a four-point currency benefit for the year?

Yes, it would be towards the higher end of that range.

Okay. Thank you.

Thank you. Our next question will be coming from [David Lawson].

Good afternoon.

Hey, David.

Mike, can you give us some more information now on the aortic valve project in terms of reconfirm the size of the trial you expect to run, when you think it will start, and where it will be held? What some of the end points might be, and what your conversations with FDA have led to you believe would be required to get a valve approved in the U.S. under an HDE?

Yeah, thanks, David. And I sort of anticipated that we'd be getting a number of questions in this area, and I'm probably going to leave you wanting here for some of the specific answers that you're going for.

We're actually in dialogue right now with FDA and looking forward to getting much deeper. And the dialogue will really be two-fold. One will be in pursuit of the HDE, and the other will be more for broader indications associated with the IDE.

And so you've got an [inaudible] revived trial that is really pointed at HDE, that is going on in Europe. That's the one that I mentioned is going to be expanded beyond France, going into into Italy. And as a matter of fact, we will also be recruiting some patients and adding those in South America. That's our first priority.

And we expect that that group of patients in 2004 will probably be somewhere in the maybe 40-60 patient range.

For an HDE now, what would you have to show the FDA in terms of safety and efficacy? I assume you wouldn't have any long term survival requirements for that population.

We're not expecting that they're going to require long term survival, but if they haven't made it precisely clear, exactly what they're going to look for. We certainly would be surprised, for example, if they were looking for 12-month data. We think it will be less than that.

But we frankly don't know yet, David. And one of the things that I commit to you is once we have clarity on this, we will be active in communicating much more about the clinical and regulatory milestones.

And one final question, will you institute your pericardial valve for the valve PVT was using at some point in the process, or will you continue to develop their product?

Well, it is a good question. I can tell you that the team here has been making good progress with Edwards own percutaneous aortic replacement program, and we just closed this transaction a week ago. So what is going to happen during the month of February is we're going to get the best minds in PVT and Edwards together to really pour over the two programs and decide what the best way to integrate those are.

The good news is that the PVT program is moving out. It's got a design that is really meeting the clinical need and we're not going to want to slow that down. But by the same token, we know we've got some great things in the Edwards program, so we are really going to leave it to that team to sort it out and I expect to have that to communicate with you maybe next time we're together.

Thank you.

Thank you. Our next question will be coming from Glenn Novarro of Banc of America.

Yes, can update us where you are on the [inaudible]sales force hire? And I just want to clarify, I think you said the self expanding stent, the broad launch, would be delayed. Is it going to be delayed until the third quarter or the fourth quarter? Thanks.

Yeah, thanks, Glenn. Right now, we have 10 people in place essentially, or approximately 10 people in place in the U.S. for the peripheral stent selling organization, and Europe is ready to go with the selling organization that they have today. It is our intention to come back and add, for example another ten people in the second quarter, and we would continue with that sort of progression to our full compliment of 40-plus people by the end of the year.

In terms of the launch of the self-expanding stent, the product line that is most popular--meaning those codes that will comprise probably 80% of the volume-- we expect to have launched in the third quarter.

Okay. And where are you on the manufacturing side? I know were you moving the manufacturing in house; is that all complete?

Actually, things have been going very well on the manufacturing side. So we're very pleased with that. There is sort of two pieces there. Part of it is the self-expanding, and we put a second side in place for both of those.

I would say probably the best way to characterize it is we're sort of ramping up on Edwards while we're maintaining our outside suppliers, and I would expect by year end '04, that we would have sort of 100% of the capability in place in Edwards.

Okay. And just quickly, for Corrine, the other income line was positive this quarter. It looks like by our calculation, gave you another penny or two, the bottom line. Was that all currency-related?

Yeah, that was primarily from intercompany flows.

Okay. There were no one-time positives other than currency?

No.

Okay. Great. Thank you.

Thanks, Glenn.

Thank you. Our next question will come from Tim Nelson of US Bancorp Piper Jaffray.

Hi, guys. You gave us the contribution of Magna during the quarter. Could you give us some of the other new product contributions in the quarter, like the IMR ring or the Thermafix product?

Yeah, the for example, the Thermafix wasn't even approved in the quarter, so there was nothing there. IMR actually it was --

I meant the Tricentrics, excuse me.

Yeah, the IMR ring really came so late in the quarter that there really was no contribution from the IMR ring. The Tricentrics, conversely, actually that was introduced I want to say in the September time frame, and that really did make a difference in the quarter.

We saw some pretty terrific growth in the U.S. I want to say that it was more than 20%, close to 25% growth of our aortic mitrals as a result of Tricentrics.

Did it shift your aortic mitral mix at all?

Excuse me, I meant to say the pericardial mitrals.

Okay.

Go ahead.

And did it shift your aortic mitral mix, increase your mitral valve sales of Magna?

Yeah, it did increase our mitral valve sales. You know, we did see declines in porcine in both aortic and mitral, but we saw stronger growth on the mitral side with the tail wind we got from the Tricentrics holder.

Okay. Can you comment on the Thermafix pricing plans? You had mentioned before you were going to charge an additional premium on the Thermafix treated magna valves.

Is that still the plan? And is that incorporated in the $30 million expectation for magna?

I'm not sure exactly where that came from in the past, it may have been a confusing message that came from me. I didn't mean to do that. But the people that are already buying magna valves will not have to pay a premium price for the valves that they're paying for today.

There is an incremental premium that will be associated with Thermafix, but people that are already buying Magna today won't experience that. People that buy it in the future may have a little higher premium.

On the order of what, 5%, something like that?

Something like that. I would say around 5, maybe 5-10.

And a final question. It seems to me that you got all of these products here from the get-go, and ones like Thermafix have come early. And is there an inventory issue?

It seems to me it is a little slow to ramp on some of these new products. They're exciting, there is good acceptance, but your guidance would suggest they're really not going to hit their stride until the latter part of the year.

We think that heart valve products, in general, don't necessarily have steep curves that are associated with their uptake. People are quite deliberate about implants, but the good news about it is generally when they convert, it is quite sticky and so it really stays there. So we expect there to be a nice ramp.

We feel like magna is ramping very nicely, Tricentrics is as well. We expect Thermafix to make a difference. But when you put it all together, as I mentioned, we've got tough first quarter comparisons.

I think we grew something like 13, 14% in the first quarter of last year, and so that's the only reason that I'm signaling that you don't end up seeing that overnight.

Okay. Great. Thanks a lot.

Yup.

Thank you. Our next question will come from Mark Landy of Leerink Swann.

Good afternoon, guys.

Hey, how are you Mark?

Good. A couple of questions before we get into the meaty ones. Were there any peripheral stent sales during the quarter?

Yes, there were but it wasn't substantial. I want to say it was less than a half million dollars.

And Mike, you provided the [Nova Core] numbers for U.S. and Canada. What were they for Japan?

For what do we expect? Why don't I give it to you this way. I think our expectation for 2004 is that it in the $2 million range.

Okay. And then kind of following along with that, where Lawson was going, any indication whether there should be a randomized trial, what a control group is, is it nonrandomized? How should one look at this trial specifically for IDE?

Yeah, it is not clear. There are several notions out there in terms of how one might conduct this trial, but it is not clear exactly how this is going to shake out, Mark. Again I'm not trying to be evasive we just don't know yet.

And just as we kind of head through the year, Mike, there are going to be data points that we are looking at. What should we look at through the year? And I suppose, you know, maybe product demonstrations or various posters, you know, PCR, TCT, could you maybe just outline some of those for us?

Well certainly, we expect to have this program and this therapy in general be very popular at upcoming meetings, and I would expect you to see probably live cases at many of these. So I think the PCR, the Paris course will be coming up, probably expect to see live cases there, and the TCT and other locations.

At the same time, you can imagine that we're looking at expanding the number of clinical sites to getting more definition around the regulatory path and initiating U.S. clinicals.

And just in terms of the philosophical kind of battle that you're going to have, Mike, how do you get the cardiac surgeons on board with this product when essentially the business could be shifting to the interventional cardiology counterparts?

I think a couple of things. First of all, we don't expect this therapy to detract from cardiac surgery here, probably during this decade. We really see this as one that is going to expand the marketplace. So cardiac surgery is just a well-developed, robust procedure that has a great track record and now generates 20-year results.

What we're going to do is we're going to try and show the cardiac surgeons here just how positive this therapy is, and encourage their active engagement. Because frankly, nobody knows as much about the anatomy of a heart valve than a surgeon, and we'd love to have their active participation. And we think the deeper that they get into this, the more they will find it attractive.

And then lastly, you mentioned the new heart valve reps. Could you just maybe just detail or walk through the timing of their contribution until they really hit productivity? Is it kind of immediate or should we see them ramp up during the year? Just how do we think of that?

I think we mentioned we're going to have like 10 new faces in the U.S. I want to say already on board are approximately six, so there is still four more to go. Out of those 10, seven are new positions; three are replacements of existing.

And the way we're approaching this, Mark, is to hire very experienced people that would have very short learning curves. People that already know the surgical, if not the valve marketplace, and that their productivity would be pretty quick, hopefully within a quarter.

So where I assume you could be taking these from your competition?

It could be. Broadly, as I say, they're going to be people with industry experience. You know, one of the things that we never do is to take people directly out of one territory--out of a competitor in the same territory.

Thanks guys.

Thanks, Mark.

Thank you. Our next question will come from Alex Arrow of Lazard.

Thanks, and congratulations on a great quarter.

Thanks, Alex.

First, on the ad campaign that you at least rolled out to us on our analyst meeting, the why compromise campaign for the valves, and also specifically, the prioritization of the younger surgeons. That had sounded like that Medtronic had managed to convince over the previous two quarters, can you tell us how that couple of initiatives have gone?

You seemed to emphasize that a lot at the analyst meeting. Anything you can say about how that is going?

Yeah a couple of things. One is we just completed our sales meeting with the U.S. selling organization and certainly had a chance to take them very deep, and allow them to do some role playing and so forth with the why compromise program, and I think it is very straightforward. It is very direct.

We've probably never done as much direct comparison as we are with this program, and I think it has been very well received by the team of people that would use that. And so we expect it to be effective, and that it is going to allow new people to move into this quickly.

In terms of the younger surgeons, or the new surgeons that are moving into this field, I mean part of that, we felt was a coverage issue. We felt like we've always had good coverage of the major centers and the major surgeons, but maybe didn't have enough people in place to pay enough attention to those younger, newer surgeons that are so important to the growth rate of this business. And so with the additional people, we expect that to make a real difference because territory sizes inherently get smaller.

Did you say how many more sales people you had? If I you, did I missed it.

Yeah. What we said was a total of 10 new faces, and it will be an incremental seven.

And the ad campaign, has that hit the surgeons yet or is it still just internal?

It is not precisely an ad campaign. So, in other words, this isn't the kind of thing we run in journals. This is something that is in the possession of our sales professionals and will be shared more individually with surgeons.

Okay. And has that started to be shared with surgeons?

Yes, it has.

Okay. Okay, thanks.

Just really starting to roll out in a bigger way this quarter.

Okay. On the delay in the [Optimaze], can you say what it was that made it -- what about it has become more competitive, the reason for the delay? And also, the part of about being minimally invasive, does that mean through the vessel, or in other words, would it compete directly with the other through the vessel AF devices?

Yeah, on Optimaze, it's not the competition that has really been the issue for us. It has been the reliability of our hardware. We really love the laser.

The platform just hasn't been robust enough to meet our standards. And we're aggressively addressing that now and we expect to have that behind us here in the first half of this year. In terms of the minimally invasive, it is still a surgical product, so this is not a through the vein product.

And I mentioned that we would have both endocardial and epicardial probes, but in addition, we expect to have a device that is possible to use in very small incisions or in ports, to allow a surgeon to do this on a beating heart, in a very less invasive fashion. We call it the encircle device, and it's the kind of thing that we're happy to share. I'm sure we will be showing at AATS.

And you're anticipates a launch in the third quarter of this year?

We expect to at least have market trials started in the third quarter and we will see how that goes.

Okay. And then last question, the charge that you're anticipating between the $60 and 90 million, can you say -- I mean that is a fairly large range. Can you say what it is that would make it 60 versus 90? Are you evaluating the strength of something that you got when you bought PVT to decide how big that is going to be?

That is actually quite complex, and it has to do with the various generations of products that you are working on and how to characterize the IP surrounding those various iterations of products.

So we go through a very formal process here to go through the actual valuation of the intangibles and go through long-term projections to come up with those numbers. And that has to be done by an independent party.

Okay. And now that we've -- you actually completed the acquisition, you can narrow that range at all?

No, because we're still in the process of going through the valuation exercise. But we will certainly have it obviously wrapped up by the first quarter.

Okay. Thanks a lot.

Thanks, Alex.

Thank you. Our next question will come from Sheetal Mehta of Bear Stearns.

Good afternoon. Just a couple of quick questions. First on [Life Path]. You're taking a formal process to figure out what to do with that product line. Do you have a sense of time lines in terms of when you will actually be able to make a decision?

Yeah, Sheetal. As I mentioned, that formal process is one that has already started and it is our intention to move it quickly. We've been pleased with the response that we've gotten so far, and we hope that we have something pretty specific to share when we're sharing our first quarter results, about how that is going to go. I don't expect this to be something that is going to drag out for a long time.

Okay. Great. I don't know if you mentioned it on the call, an update on the Japanese heart valve market, are we still seeing Medtronic to re-enter that market in the springtime of this year?

Yeah. The overall Japan heart market, obviously, is one we find very attractive, and we're fortunate we're the only one there. We didn't have quite the growth rate that we had in the fourth quarter as we experienced in previous quarters. Actually, it was more like mid-teens growth as opposed to what it was growing in excess of 20% in the past. We know we are the market, so that's not competitive issues, we just think that is probably just an anomaly for the quarter.

Broadly, in terms of the return of Medtronic, I don't have anything specific to add, Sheetal. I mean the last thing I heard, I think it was the estimation it was in the April time frame, but I really don't know anything more and probably they're the best ones to estimate that.

Okay. Sounds good. And lastly, can you give a sense of what you're expecting for repair growth in 2004 for your product lines with IMR? Are you expecting that product line will grow faster maybe, than the 12% market rate that we see?

A part of what we always try and do here, by having fresh fresh modern products here, is to be able to [inaudible] any of the competition that is out there. And so what we have dialed in our own projections is that it will probably be in that 10-12% range.

You know, for the most part, we are the market, so even with IMR in there, that will be helpful. And you know, it is one of the reasons why we pursue the patent infringement proceedings that we do, to make sure that we protect the IP in this space, so that this market is one that maintains pricing discipline.

Gotcha. Okay. Thanks so much.

Thank you.

Our next question will come from Ben Andrew of William Blair.

Good afternoon. Mike, just wanted to ask one quick question on the U.S. market. You talk about some of the changes you're going to make this year. Does your plan assume any sort of a competitive response from Medtronic next year or just sort of status quo on their part?

Oh, no, we certainly don't expect that Medtronic is going to cave in and hand over market share. So we certainly expect them to continue to be a strong, aggressive competitors. So that's sort of built into our plan, Ben.

I'm just sort of questioning what kind of changes that you are expecting from them. Because if they know what you're going to do, they at least match you, and you end up with a status quo, which isn't a bad income but isn't that a --

There may be some things that they can match. One of the things that we know that they're going to have a tough time matching is they have a tough time matching the large body of long-term data that we have. And they're going to have a tough time matching the lineup of new products that we have . [Inaudible] that is very impressive. Those kinds of things have a gestation period that is just going to mean it is going to be tough for anybody to respond to.

And just then finally, on price versus volume here. With the significant price difference on Magna, have you thought about what chunk of your growth next year is coming from, just pure price in terms of mixed shift versus volume or market share, you know, actual capture?

Yeah. We're more focused on the actual unit growth than the share growth. Certainly, we will expect that there is going to be a certain amount of our growth that is going to come based on the premium pricing, but that's going to be secondary to what we gained in the units.

Okay. Thanks a lot.

Thanks, Ben.

Thank you. Our next question will from Larry Keusch of Goldman Sachs.

Mike, just a couple of questions. When you think about the revenue guidance for '04, I know you're not thinking about specific timing for Medtronic's entry into Japan, but are you assuming that you do lose share and sales when they do enter? Is that included in the model? Yeah, that's a good question, Larry. Just as a way of helping you think about this one, just for round numbers, estimate that a Medtronic adds something like $10 million worth of sales when they exited the market. So if they came back with the expectation that they'd want to gain it all , and we would have the expectation that we don't want to give any of it back, and you sort of split the difference and said maybe it is in the $5 million that they gained back if you looked at an annualized number, and you can figure one day might come back. That's the kind of thing that on a business our size, a $400 million business, could shave 1% off of the growth rate, okay? If you assumed that sort of they got half.

So depending on how you want to sort of calibrate your assumptions, that's the kind of thing that could impact it. And that's why I don't know that it's appropriate to get fixated, necessarily, on exactly when there is a 10% number. Because in a quarter, it could be an 8 or a 9 instead of a 10, depending on exactly how that rolls out. Right. Okay. But the point is, is that at least you guys are thinking, obviously try to keep as much as you can, but you've got some expectations that they will get some back?

That's right.

Okay. And then separately, just thinking about your peripheral stent business, and not necessarily where it goes this year or perhaps even next year, but how do you think about Boston Scientific and J&J? Certainly, getting more aggressive on pursuing clinical studies, or gearing up to pursue clinical studies with drug alluding peripheral stents. And I recognize the vessels are larger and they have different types of lesions, but certainly, there is a lot of [inaudible] disease that may actually do quite well with drugs on board.

So how do you make sure that your position in this business doesn't wind up like bare metal stents will in the coronary side of this market?

Yeah, I think it is a good point. Drug-alluding stents, by their very nature, are probably not going to be very near term in terms of where they come. But we think their first target, that the coronary platers -- players will target will be the renals. That's a natural target for interventional cardiologists and a natural place for them to be effective.

When you get into some vessels where we think we can excel, so for example if we think we can do quite well in the SFA, the superficial femoral artery, the initial results are somewhat disappointing for drug-alluding stents, and we think it is going to be quite a challenge to get there. And therefore, we think a strategy that focuses in that direction is likely to be more robust. Does that make more --

Yeah, that's helpful. At this stage of the game, again, I understand you're just really under way with this business, but do you have any plans to go after DES? Anything that you can disclose at this point that might be helpful just to understand where you're going?

Yeah, we clearly have internal programs going after drug-alluding stents. And we announced in the past that we did an arrangement with Happy Valley Medical, and there is some others that we're pursuing. And as we have more to share in that regard that's concrete, we will definitely do that, Larry.

Okay. Great. And then just one last question, just so I make sure I understand. If you look at constant currency growth, was there any impact in the fourth quarter from acquisition? In other words, I'm just trying to get to what the exact organic growth rate was in the quarter?

Yeah, no, you know what? We have this table that we provide in the back that really details exactly how much is underlying and how much is acquisition. We give out an awful lot of information. It actually works the other way for us in the fourth quarter, where actually we had a divestiture of our perfusion service business that detracted from our reported growth rate.

So we don't get any lift, only a detraction from what we've done from a business development point of view.

Okay. Super. And then lastly, just timing onThermafix. When does Magna actually get Thermafix?

You know, we're starting to put that on some magna valves right now. And so late in the second quarter, we expect to start ramping this up so that it gets, really, on all the magna valves.

Great. Thank you very much.

Yup.

Thank you. Ladies and gentlemen we have time for one final question today. It will come from Greg Simpson of Stifle Nicolaus.

Mike, good afternoon, how are you?

Fine, Greg, how are you?

Good. I got a couple of general ones for you, if you don't mind. Talking about the competition for Medtronic, can you give us a sense as we now exit -- or as we have exited '03, can you quantify maybe what happened in terms of market share in '03 in your view? How much share did Medtronic pick up, and kind of where are we at going into '04?

Yeah, well, it depends on how you end up looking at it. As I mentioned, our actual global growth for heart valves in 2003 was 8.3%. So on a global basis, if the heart valve market is growing 5%, we actually gained share.

But if you reason that tissue and repair was growing at close to 10, then you would say, okay, there was a little loss on a global basis. Obviously, those losses were more severe in the U.S., and so probably twice or more what was going on in the global basis.

Can you give us some sense then, just U.S. tissue valve market, kind of where we're at right now in your opinion?

Well, I think we're going to be gaining share, going forward. So if that's what you're asking for-- I'm not following exactly. Do you mean what are the share positions?

Yeah, where you view, in your mind, where you exited '03. And how much share in U.S. tissue did you lose in '03?

Yeah, you know what? I don't have those handy and when we carved them up, we normally carve it by position in the aortic and mitral and repair position. So I'm not pulling off a single number here that can help you in that regard, Greg.

Okay. Fair enough. And then, Mike, two questions on PVT, if you could. In mentioning in your prepared comments, I noticed your wording on PVT. Can you give us a better sense of the clinical results to date in the 17 implants?

I'm trying to get an idea, you mentioned you've learned a lot, clinically. I'm trying to get a sense of what has been learned, and then trying to get a sense of what the clinical challenges are ahead so we can kind of make our determination as to time lines as you go forward. And then just one follow-up.

Yeah, thanks for that. Let me try and describe it. Getting clinical experience just is enormous, and you learn so much about delivery, about the various techniques associated with either antegrade or retrograde approaches to the valve. So both the procedure development, the procedure gets well developed, which we have a pretty good handle. You end up with a better feel for the implant and what sort of balloons that might be used.

We also learned enough to understand that we should employ this rapid pacing technique to actually stop the heart from pumping while the balloon is -- while the valve is actually being deployed in position, so that we get an accurate deployment. So, I feel at this point that we have proven an awful lot of feasibility.

The patients that have been treated were very sick patients that were not surgical candidates, and were really at end of life. And so, we don't end up with a very good test in terms of being able to learn anything about durability at this point.

What we really would learn more about is the procedure, and about the deployment techniques.

Right. Okay. And then if I can follow up on the questions asked earlier by both David and Mark. How would you classify--not looking for specifics here--but how would you classify your early discussions with the FDA? I'm trying to get a sense, are they excited about the therapy? Or given the strong results that you already get, the strong clinical results you already get with traditional valve replacement, are they nervous about the idea of cardiologists taking on this procedure?

Yeah. This one is so knew that we very much have their attention, and so this is one that I know that they're going to think about. And I'm not sure that they've even gained consensus within the agency of what they should do.

We know that they are canvassing the marketplace and getting feedback from both cardiologists and surgeons, and trying to help formulate their own minds in terms of what standards should be set.

They are receptive to this idea that there is a group of patients that are not good surgical candidates. And as a matter of fact, it's FDA that has initially encouraged PVT to pursue the humanitarian device exemption in parallel with the path to a PMA.

So we think that the path that we're headed down is one that they're going to be receptive to. Exactly what standards are going to be applied are just not clear at this point, Greg. And we hope to have answers here, in the not too distant future, and that maybe a quarter from now that this will be clear in terms of what the path is.

Okay. All right. Thanks very much, Mike.

Okay.

Gentlemen, there are no further questions at this time. Do you have any closing comments?

Okay. Thanks very much for your continued interest in Edwards. Corrine and David and I will welcome any additional questions by telephone and with that, back to you, David.

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