愛德華生命科學 (EW) 2004 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Edwards Lifesciences Third Quarter 2004 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If you would like to ask a question, please press *1 at any time, to place your line in queue. If anyone should require operator assistance during the conference, please press *zero on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. [David Erikson]. Thank you, Mr. [Erikson]. You may begin.

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2004 financial results. And during our call today, we'll focus our prepared remarks on information that complements the material included in the press release and the financial schedules, and then allocate the remaining time for q-and-a.

Our presenters on today's call are Michael Mussallem , Chairman and CEO, and Corinne Lyle, CFO. Also joining us today are Stu Foster, Corporate VP Technology and Discovery, and Stan Rowe, President of Percutaneous Valve Interventions.

Before I turn the call over to Mike, I'd like to remind you that during 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 2004 financial goals for sales, R&D investment, net income, earnings-per-share and free cash flow, expected growth of Paramount Magna, and heart valve therapy products -- the market-expanding opportunity of MICO, the contribution to 2005 sales growth of LifeStent products, the market opportunity to 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'll turn the call over to Mussallem. Mike?

Thank you, David. We're very pleased to share this quarter's results with you, which again were highlighted by strong sales growth in our heart valve therapy product line. Also of note this quarter was our very strong cash flow, a higher gross profit margin, and a significant increase in R&D investment. I'll begin by discussing our sales results, and then turn it over to Corinne, who'll cover the rest of this quarter's financials.

On a reported basis, total sales for the third quarter increased 9.1 percent, to $224.8 million, driven by strong heart valve therapy sales. This quarter's growth was aided by $7.5 million in foreign exchange, and partially offset by discontinued businesses. Sales growth was strong in the US, Europe and emerging global markets.

Now, I'll discuss each of our product lines in more detail. On a reported basis, sales of heart valve therapy products grew 14.4 percent this quarter, with foreign exchange contributing $2.9 million of the growth. I'm pleased to report that sales of heart valve products continue to gain share and grow in double digits in every region except for Japan. Underlying global tissue valve growth once gain exceeded 10 percent this quarter, even though porcine valve sales declined by nearly 20 percent. Global growth in repair products was approximately 9 percent.

Global sales of Paramount Magna grew to nearly $20 million this quarter, and about $50 million year-to-date. Magna's unsurpassed hemodynamics and durability are continuing to drive strong market adoption, and we are successfully maintaining a 20 percent price premium over our leading aortic Paramount valve. We expect Magna to soon become the leading tissue valve in the US.

In the US, total Paramount sales grew in excess of 20 percent -- led by Magna aortic valves and our Tricentrix Mitral Valve System. Strong Paramount sales also led the growth in Europe. In Japan, where sales were about $1 million lower than last year, we continue to await regulatory approval of our Prima Plus Stentless Valve, which will help strengthen our leading market position in this region.

We're continuing to offer our new Thermofix anticalcification process on the Magna Valve, and will broaden the US rollout over the next year. We believe Thermofix offers a significant improvement in calcium reduction beyond our current market-leading tissue treatment, and is another example of our commitment to technological innovation in heart valve therapy.

As planned, during the quarter, we began our first human implants of our BioPhysio valve in Europe, and we're very pleased with the outcomes. This marks the beginning of multi-center clinical trial that will be conducted in Europe, Canada and the US. We continue to expect IDE approval before the end of this year, which will enable us to begin the US portion of that clinical trial.

BioPhysio, which combines more than 20 years of Paramount tissue technology with best-in-class hemodynamics, is the only replacement heart valve designed to mimic the physiologic motion of the natural heart valve. We expect this novel valve to be commercially available as early as 2008 in Europe and Canada, and later in the US.

Now, turning to Critical Care. Reported sales growth grew 5.7 percent in the quarter, with FX contributing $2.6 million to the growth. This quarter's underlying growth was due primarily to robust pressure-monitoring sales, resulting from market share gains and overall strong performance in emerging global markets. Growth was partially offset by recent reimbursement changes in Japan, and the ongoing decline in base catheter products.

Looking forward, Minimally Invasive Cardiac Output, or MICO, is an exciting and market-expanding opportunity that could double the addressable patient population, as well as the growth rate of our critical care franchise in the next few years. We're continuing to evaluate MICO pilot systems in hospitals in the US and Europe, and these clinical studies are generating very positive clinician feedback.

We remain on track to conclude the process by the end of the year, in support of a 510K submission, pending successful completion of the studies and receipt of regulatory approval. We continue to anticipate product introduction in the first half of 2005.

Sales in our cardiac surgery systems product line grew 3.8 percent, to $27.5 million, compared to the same period a year ago, with foreign exchange contributing nearly $1 million to the growth. Strong global growth in cannula and US TMR sales were partially offset by the recent divestiture of our [Profusion Services] business.

TMR sales were sequentially stronger this quarter, compared to the last quarter. In the second quarter, TMR laser revenue was lower than expected, as we temporarily deferred sales, allowing customers to fully understand the reimbursement implications of the CMS panel discussions that occurred in July. There were no changes made to reimbursement as a result of the meeting. Also, in September, the AHA and ACC issued joint guidelines relating to the treatment of angina, using laser revascularization -- further building awareness of TMR.

During the quarter, we successfully completed market evaluation of our newly renamed Optiwave laser system. And the Endocardial product is now available for sale in the US on a limited basis. The Epicardial version of this product, which was recently approved by the FDA, is currently undergoing marketing trials, and is expected to launch early next year. Our unique laser energy system provides clinicians with an easy-to-use device that we believe will offer superior clinical performance.

On a reported basis, vascular sales for the quarter grew 9.2 percent, led by sales of interventional products and FX gains. Sales of base vascular products were slightly higher, compared to last year.

The introduction of our LifeStent products continued this quarter in both the US and Europe, and third quarter sales were about $0.5 million. Although we continue to produce additional sizes of our self-expanding stents, we were severely supply-constrained throughout the quarter. Specifically, the supply of a critical component for the delivery system has been the key issue in restraining sales and delaying our sales ramp.

We've worked aggressively with this component supplier to increase their output and quality levels to meet our rigorous specifications, and just recently, we've ramped up production, and expect a substantial increase in inventory over the next several weeks. As such, we estimate Peripheral Stent sales to be about $1-2 million in the fourth quarter. A full-production ramp up is anticipated as we move into 2005.

While we worked more closely with our suppliers, we continue to build our own in-house manufacturing capabilities -- many of which are also strategic to our Percutaneous valve programs. these include laser cutting of stents, nitinol processing, delivery catheter technology and competitive product characterization.

We're also continuing to build and experienced US sales force, and expect the hiring of additional sales reps to continue into 2005. Both our balloon and self-expanding stents continue to generate very positive customer feedback regarding the conformability and flexibility offered by our differentiated helical stent design.

We believe that these design characteristics make LifeStent particularly well-suited for the continual bending and flexing experienced in the superficial femoral artery. And we hope to demonstrate in our resilient clinical trial that commenced in July.

Phase I, or the feasibility stage of this pioneering trial has already been completed, and we expect to begin the pivotal trial within the next 30 days. Resilient has created considerable awareness of Edwards amongst interventionalists because it is designed to demonstrate the superiority of LifeStent over balloon angioplasty procedures in the legs. Additionally, LifeStent has been featured in live cases at recent medical conferences. We continue to believe that the peripheral stent opportunity is large and growing, and remain confident that this product line will contribute significantly to our growth in 2005.

To update you on our angiogenesis initiative -- in August, we commenced an NIH-sponsored clinical trial using Sangamo ZFP or Zinc Finger Protein technology, which is designed to stimulate the growth of normal blood vessels, for the treatment of peripheral artery disease. Thirty-six patients will be involved in this double-blind study, which will take approximately 12 to 18 months to screen and enroll, with an additional 6 months of safety follow-up.

Other distributed product sales for the quarter were $10 million. The slight decline compared to last year was driven by our de-emphasis of certain distributed cardiology products in Japan. Looking forward, we expect fourth quarter sales to be between $235 and $240 million. This assumption includes an expectation that foreign exchange has a minimal impact on reported fourth quarter sales.

For heart valve therapy, based on the continued strength of our market-leading Paramount valves, we expect to exceed 10 percent underlying sales growth again in the fourth quarter. We're also confident we'll achieve annual sales at the high end of our previous goal of $415-420 million.

For the fourth quarter, we expect critical care sales to be $75-80 million. For cardiac surgery systems, we expect sales of between $26 and 27 million. We project sales of vascular products to be between $16 and 17 million. And other distributed products to be between $10 and 11 million.

Now, I'll discuss our Percutaneous valve initiatives. At the recent TCT meeting in Washington, DC, which attracted several thousand interventionalists, our 3 Percutaneous heart valve programs were showcased in more than a dozen well-attended sessions. Among the meeting's highlights was Dr. Cribier's introduction of one of his patients who traveled from France to celebrate her 1-year anniversary of having received our Percutaneous aortic valve.

This significant milestone is impressive not only because the procedure extended and dramatically improved this 84-year old's quality of life -- it also demonstrates the potential impact of our Percutaneous valve technology on the many patients who are at high risk for surgery.

Also at TCT, a life aortic-replacement procedure used in a compassionate case was simulcast to attendees. The patient was in extremely poor health, and his specific condition later contributed to his death. While we were all extremely saddened by the outcome of this case, the cardiology community continues to show tremendous support and encouragement. We all believe in the potential of this technology to help patients with very limited treatment options. And our commitment to the development of this important technology remains unchanged.

These compassionate-use cases that have been performed to date have largely demonstrated the fundamental characteristics necessary for the success of this therapy. Near-term results include accurate delivery, consistent retention and excellent performance. Moving forward, we will focus our attention on including patients whose condition is less severe, in order to demonstrate the technology's longer-term safety and effectiveness.

At TCT, we reported that we are continuing to make significant progress on all 3 of our Percutaneous heart valve programs. And I'm pleased to report today that they still remain on track, and our assumptions are unchanged.

In our coronary sinus mitral-repair program, our continuing pre-clinical development has demonstrated consistent and dramatic reductions in mitral regurgitation. Presentations at TCT highlighted the unique design and function of our device, and the procedures was reported as being relatively simple to perform. We still expect to conduct our first patient implant by the end of the year at a leading international center, and commence US clinical trials in 2005.

Last month we acquired EB3's Percutaneous mitral valve repair technology for approximately $15 million. Between this program and last year's purchase of the [Ilmed] program, we have assembled both the earliest and most comprehensive intellectual property using the coronary sinus to remodel the mitral valve. As a result of this acquisition, we've recorded a special charge that Corinne will discuss later in this call.

Our edge-to-edge mitral repair program, which was discussed at TCT in a presentation by Dr. Maurice Bookbinder is also proceeding very well in preclinical testing. We've made significant progress in refining the delivery system and shortening the procedure time. And like the coronary sinus program, we're currently focused on demonstrating safety in a preclinical setting on a path to first human studies. We are still hopeful that we will complete our first patient procedure by the end of this year.

Our Percutaneous aortic replacement program is also proceeding well, as we continue to make delivery-system improvements, refine procedural and training methods, and add a larger valve size to accommodate more anatomies. These enhancements are relatively straightforward, and importantly, we do not expect them to impact our regulatory timelines.

Our compassionate-use cases in Europe are continuing, and we anticipate receipt of a CE market for compassionate use at the end of 2005. Additionally, we remain confident that patient enrollment will begin this year in our European multi-center, non-randomized revive trial. We look forward to providing trial design information once it's approved. This additional patient data will support a CE mark for broader indications later in 2006.

Discussions with the FDA on our humanitarian use device submission are ongoing, and we continue to anticipate receiving an HDE by the end of 2005. We are also in active discussions with the FDA about our IDE filing, and we're making considerable progress. We still expect to begin our feasibility study and commence patient enrollment by the end of this year. This would be followed by a pivotal trial and lead to a PMA approval as early as the end of 2007.

I'll remind you that since this is such a fluid and complex process, we're not going to speculate on the regulatory requirements and specifics of clinical trials before they're approved. Of course, we'll continue to keep you informed, and we look forward to providing you with a comprehensive update on all three Percutaneous valve programs during our Investor Conference in December.

Before I turn the call over to Corinne, I'd like to conclude by saying that our confidence in the future of Percutaneous valve therapies is further strengthened not only by our progress, but by the growing clinical interest in the opportunity to treat a large patient population with innovative technologies. Edwards is ideally positioned to capitalize on this opportunity, and we believe that we have a commanding lead on a number of fronts -- including breadth of technology, R&D capabilities and intellectual property.

With that, I'll turn the call over to Corinne.

Thank you, Mike. Highlights of this quarter's strong operating performance were a higher gross profit margin and a 31 percent debt-to-cap ratio. Additionally, I'm pleased to report that through the third quarter, we've already exceeded our annual goal of $100 million in free cash flow.

For the quarter, our gross profit margin of 60.9 percent was again significantly higher than the comparable quarter last year. This was primarily due to the expiration of currency-hedging contracts earlier this year, and the elimination of certain low-margin businesses. The benefit from sales of higher-margin heart valve products in the US was offset by lower reimbursement for critical care products in Japan. For the fourth quarter, our gross margin should exceed 61 percent of sales.

Third quarter SG&A expenses of $79.7 million were 35.5 percent of sales. Primary contributors to the increase compared to the prior year were higher sales and marketing expenses in our US peripheral stent and heart valve therapy product lines, and higher international expenses due to foreign exchange rates. We expect SG&A for the fourth quarter to be about 34 percent of sales.

In the third quarter, we increased R&D investment by 30 percent over last year, to $21.9 million. This increase was attributed mainly to additional investment in our Percutaneous valve program, and additional amortization related to the PVT acquisition. We expect R&D investments to be between 9.5 and 10 percent of sales for the fourth quarter.

Interest expense of $3.4 million for the quarter decreased slightly, compared to last year. For the fourth quarter, we expect interest expense to remain around this level. In conjunction with the acquisition of the [EB3] technology, we recorded a $12.3 million pretax special charge related to the in-process R&D. This estimate was the result of an independent third-party review, which will be finalized prior to the filing of our third quarter 10Q. This quarter, changes in foreign exchange rates compared to the same quarter last year, lifted reported sales by 3.7 percent. If rates remain the same, we expect FX to have a minimal impact in the fourth quarter.

During the quarter, we repurchased approximately 204,000 shares of common stock for about $7 million, and also completed our second share repurchase authorization. Through the first three quarters of this year, we've repurchased a total of just over 1 million shares, for approximately $33 million.

Strong operating cash flows were used to reduce long-term debt by approximately $40 million in the quarter, and our debt-to-cap ratio at quarter end was 31 percent. Total accounts receivable increased $3.1 million from last quarter. Including receivables in our asset-backed securitization program, DSO for the quarter declined slightly to 71.5 days. Inventories increased slightly to $120.5 million from last quarter.

Finally, free cash flow, which we define as cash flow from operating activities minus CapEx was $57 million for the quarter, and $107 million year-to-date, reflecting strong operating results and consistent management of our working capital. We now anticipate that our free cash flow for the year will exceed $125 million.

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

Thanks, Corinne. In conclusion, based on our year-to-date results and our outlook for the fourth quarter, we remain solidly on track to achieve another year of strong performance, and meet or exceed all of our 2004 financial goals. Specifically, we expect to exceed total sales of $930 million, and fund investments in R&D well above the underlying sales growth rate.

We also expect to deliver net income growth of 13-15 percent, excluding the impact of acquisition and special charges, and substantially exceed our free cash flow goal. Additionally, we are comfortable with the fourth quarter 2004 first call mean EPS estimate.

Based on our strong 2004 results, we remain enthusiastic about our prospects for 2005. The strong performance of our base businesses -- particularly our robust heart valve product line, combined with a number of exciting new product introductions, gives us confidence that we can continue to transform Edwards into a faster-growing company. We'll provide more detail on next year's financial goals at our upcoming Investor Conference.

Before we open it up for questions, let me remind you that our Investor Conference will be held at the St. Regis Hotel in New York on December 3rd. At this event, in addition to our 2005 financial outlook, we'll provide an update on our plans for continued growth and our exciting interventional technologies -- including Percutaneous heart valve replacement and repair. For more information, or to register, please visit our website or contact our investor relations team.

With that, Corinne, Stu, Stan and I are ready to answer your questions.

Thank you, sir. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session.

Timothy Nelson, Piper Jaffray.

You did it again! Nice quarter. Could you comment some more on your thoughts about market share in the heart valve market? We have everybody claiming good growth here, and so -- give us a little color on what's going on. And then also comment, if you can, on the repair segment. It seems to be -- continues to be slower than it has been in the past.

Yes. I'd be happy to, Tim. I think as we indicated, our overall heart valve underlying growth rate is in excess of 10 percent. And in the US, we indicated that total pericardial was growing in excess of 20 percent. If you looked at that -- it all depends on whether you're talking about total valve growth or total tissue growth. And it also depends on whether you're talking about it on a global basis.

You know, as we indicated, we had a competitor who returned in Japan. So that obviously hurt market share from that perspective. But if you were to isolate on the US, that I know a lot of people are very focused on, what you see is that our total tissue growth was very strong. It was in the high teens. And so clearly, the market is growing at probably half that rate. So I think we feel very confident that we're gaining market share.

The market's growing half of the high teens? So that's accelerating to 7 percent you said?

No -- I -- well -- I -- let's say, it depends on how you want to cut this. You would say the overall market is probably growing at -- I don't have any reason to believe that it's not still at a 5 percent level and that tissue is probably in that 10 percent level.

And repair?

Just -- you asked about repair, a bit. Yes. We said that repair was growing on a global basis around 9 percent. You know, one of the things that's going on here is that we really haven't focused quite as much on repair in the US. You know, we still have a very strong market share position -- I think in excess of 70 percent. And we continue to innovate in that space that we pioneered.

But we've been focusing a great deal on both our Magna Valve and our own mitral valve offerings. So this tricentrix mitral valve is growing very fast, as a matter of fact. Well in excess of 20 percent -- closer to 30 percent in the US. That's maybe a little bit of why you haven't seen quite as much growth in the repair side.

And then finally on ThermaFix. What are the latest plans to install that on -- I think it's the pericardial and Magna lines? And what will the price upside be for that?

Well, it's available now on Magna. But it's more available on a more-limited basis. It's our intention to roll it out in a big way on Magna early next year, so that we're going to probably quickly get to a point where all Magna valves probably will be with ThermaFix -- or a good portion of it.

A lot of this -- there is a price premium to some extent that goes with that. For some customers that are already buying at prices that are appropriate, they might not see much of a difference. Other customers might see more of a difference. So we'll have an incremental impact -- a slight price increase -- compared to Magna. But you won't see anything as substantial as you saw when we stopped to put Paramount to the 20 percent premium we're getting on Magna.

Given that premium on Magna, this is my last question -- I promise. Can you give us a ballpark of what US ASPs are in the tissue segment? Or for pericardial? Overall, given the blend of Magna and...

You know what? I'm not sure that I can do that easily, or that I even want to go that way, Tim. I mean in general, you can anticipate that the premium price is around $1,000.

Katherine Martinelli, Merrill Lynch.

Couple questions. First on the peripheral stent side. Just trying to understand how we should think about the increase, going forward. By the start of Q1 or exit Q4, are you going to be in a full inventory position that we would expect to see a stent-function increase as you address the backorder? Or would you anticipate it's going to be more measured as '05 unfolds?

Hi, Katherine. This is Stu. I'm going to try to answer that one for you. We're building inventory, now. The way the peripheral stent market works, in order to open an account, you have to provide a substantial amount of inventory to cover all the sizes and shapes of the different self-expanding and balloon-expandable stents. So as we build inventory, we'll be opening accounts.

Our hope is that by first quarter of next year -- early first quarter of next year -- we will have enough inventory so that we're not constrained so much by having product to fill the shelves with, but by just the sales effort required to open the account. So, yes, we expect to see a definite ramp up, as we attain that inventory position in the first, in fact, quarters of next year. And it will ramp during the year next year, as well.

So if we look at Q4, is it safe to assume kind of consistent with what we saw in Q2 - Q3 levels, and then a measured step up heading into Q1 of next year?

Well, I think we said that in Q4, we expect to see about $1-2 million.

Oh, I'm sorry. That's right. You did say that. I apologize.

Stu Foster. Then obviously we expect to see a significant ramp up next year.

And then on the PVT side of the equation. Maybe you could just help us get some comfort with the nature or the color of the conversations you've had with the FDA over the recent months. I'm just trying to reconcile -- not having a whole lot of specifics on the structure of the trial or the clinical trials you'll need to do.

Recognizing there's clearly, as we saw at TCT, a negative patient-selection bias here -- given how sick this patient population is. And yet you guys are fairly specific in terms of your timeframe for when you think you'll get on the market. So if you could just give us some sense of maybe just how those conversations with the regulatory bodies have proceeded, to help us get that same level of comfort on the timeframes.

Katherine, this is Mike. I will toss it over to Stan, for him to provide some color. But in general, we are going to refrain from commenting much about what's going on with FDA, right now. Just because we don't think it's appropriate, while they're going through some of this deliberation, which is somewhat groundbreaking. But Stan, why don't you jump in and try to provide any color you can for Katherine?

I guess the one thing I would say is obviously, what we want to do as we've stated before, is to really move away from the compassionate cases we've been focused on, due to kind of our interface with the regulatory bodies in Europe, and move into kind of the less-critically ill patients.

And as we said, we're encouraged by our discussions with FDA. And so we're confident that we're going to be able to do our first case before the end of the year. So we're focused on those efforts.

Well maybe if I could just -- if I could just follow up with one question on that. As you try and shift to the less-critically ill patients, is it going to be more challenging with that patient population, since there are very good outcomes right now with traditional open surgery, with the ambiguity of this procedure? Which is -- I think it's very at least more technically challenging. So maybe just in terms of -- are these less-critically ill patients that are still not considered or would be turned down for traditional open surgery?

Good question. Katherine, I think that our objective here is not to again participate in the core of the surgical heart valve market. I think our focus remains on treating non-surgical patients and those that would otherwise be very high-risk for surgery. And I think there are subsets of those that are in reasonably good health, but still non-surgical candidates.

And there are those that are very challenging to treat, as well. And so we're trying to move out of that extremely challenging group and into the group that are non-surgical but have a good chance for survival, and are likely to be much more stable during the procedure. So hopefully, that'll help you a little bit.

Mark Landy, Susquehanna Financial Group.

Wow, guys. That's some introduction. Good afternoon. Mike, could you just maybe speak to a little bit about the regaining share? You put out a pretty aggressive marketing message. You added sales people and a new product in Magna. Could you maybe just highlight where you think kind of the share gains are coming from with maybe detailing those three?

Well, you know Mark, that's a good question. Sometimes when you're enjoying this kind of success, it's a little difficult to discern exactly what the most-important factor is. We're convinced that they were all meaningful. We have no regrets about adding the sales force. We certainly felt like we needed to respond to some of the messages that our competitors have been putting out there.

And also, you know, I probably can't say enough about the popularity of the Magna valve. The Magna valve has turned out to be very popular with our customers. You can see by virtue of the fact that we sold 20 million in the quarter. That certainly has been very helpful in terms of our quest of gaining market share. So not only have we been cannibalizing our own product, but we've been taking some competitive share with that product.

You know Mark, I think before at the Analyst Meeting, you had commented that given the competitive marketing measures, you felt that you were losing share with the younger surgeons. And maybe less with the established surgeon. You know? Are you regaining that shelf space with the younger surgeon? Or is this really more of a continued growth within the established surgeon community?

No. I think it's pretty broad, Mark. You know, one of the things that the additional people gave us the advantage of is that we had the ability then to call on people that we just didn't have the time to call on and support fully in the past. And so that's made a difference. So we are seeing people that we haven't seen, before. And clearly, we are gaining with the younger folks. And this has been I think an important element. And we're also keeping the chiefs onboard. So it's been part of the success.

And then lastly, Mike. Could you maybe just comment on volume growth? You had some good success in the market. A portion of it obviously was pricing from Magna. What do you see with volumes in the quarter?

I would say it depends on how you look at this. Whether you go on a global basis or you look at it more on a US basis. You know? On a global basis, the unit growth would've been impacted by the return of a competitor in Japan. Whereas in the US, it's a little bit more of a share battle. So our guess is that the units in the US probably grew around the 9-10 percent range.

Great. Thanks guys. Great quarter.

Thank you.

Glenn Novarro, Bank of America Securities.

Two things. One, Mike, you mentioned the Prima Plus in Japan. Can you give us a little bit more color as to when this will get approved? Are we talking year-end? First half of next year? And maybe what that can do for your Japanese valve business.

Then second -- also -- on Optimaze. I don't know if you mentioned that on your remarks. Maybe the status of that program, too. Thanks.

I'd be happy to. Yes. The approval of Prima Plus has been a real disappointment for us. We would've expected that it would be approved at this point, in Japan. We really have not faced serious objections from the regulators. And t just seems to be an overall very difficult environment to get new products approved, right now. I don't know how familiar you are with what's going on in Japan. They've had a hand-off to a new agency. And in the process of that, we think something's been lost in the translation.

Now, we've been assured that it's got top priority and they're evaluating it at this point. But the fact of the matter is, we feel like it could happen at any time. But it could also, just based on what our disappointment's been so far -- it could go into next year before we see it. So we're uncertain.

It is important to us, though, because stentless valves are important in Japan. We don't have a stentless offering in Japan. We think our competitors probably have half their volume or so that's in stentless valves. So it's an important offering for Edwards.

Let me flip into what we used to call Optimaze. We now have a new name for that. It's called Optiwave. W A V E . I spoke about it a little bit in the prepared remarks. We have an Endocardial product that's now available for sale in the US on a limited basis, and our plan would be start scaling that up after the first of the year.

Then the Epicardial product, which is one that's very flexible and easy-to-use, and potentially could be used in a minimally invasive fashion. It's one that was just recently approved by the FDA. We're going through market trials right now, so we're awaiting clinician feedback. If that's all positive, we would expect a launch early next year.

What could be the market opportunity? For I guess both the Endocardial and the Epicardial? And do you sell them both? Or at a later date? Do you just ride one of the products?

We sell them both. I think what you would assume, Glenn, is that they would compete in the surgical marketplace, for those products that would be ablating tissue in the treatment of atrial fibrillation.

The Epicardial product -- I mean the Endocardial product -- is more of a wand. And so it's one that would be used to create a rather specific lesion. Whereas the Epicardial product is actually a long, flexible probe that can be used to encircle the pulmonary vein. So you would probably use both during a procedure -- would be my anticipation. We think this market in 2005 is -- I don't know -- in the $25-40 million range.

Any guess as to what share of the market you may be able to get, next year?

It's tough for me to say at this point. We're going to work through our operating plan process, Glenn, over the next several weeks. And by the time we get to our Investor Conference in December, we'll be in a better position to estimate that.

Michael Weinstein, JP Morgan.

It's actually [Argent Christian] on behalf of Mike. The first question that I had was back during the second quarter and in this conference call, you talked about submitting the -- making information for the pre - IDE study. I believe it was about 30 patients. Could you maybe comment on what the FDA has said to you on that, and if you've actually started enrolling patients in that trial?

You know Argent, I'm not sure that I'm tracking exactly. Would you mind saying it -- is this related to Percutaneous valve?

Yes. Yes. The aortic valve replacement program.

I don't know. Stan -- do you follow the question, or do we need more clarification?

Yes. So Argent, you were asking about -- about kind of the roll-in trial? The feasibility trial?

Right. Exactly.

Yes. I mean typically, these kinds of new technologies, as they enter into the United States will go through a feasibility study in the US. That can range between 20 and 50 patients. We expect that we're going to also have some kind of feasibility trial that will be a prelude to our pivotal trial.

Again, that's as we're in the process of discussing all of these specifics with the FDA. And as soon as we have everything kind of ironed out, we'll be informing you guys about what the conclusions are and what the agreements look like.

But -- but can you say if you've actually started enrolling patients in that trial?

We're not actively enrolling patients, yet. We expect to do our first case before the end of the year in the US.

How about the other trial for the HDE? I believe that's about 50 patients. Again, on a roll-on basis. Have you enrolled any patients there, as yet?

Yes. The HDE is not necessarily a trial, itself. An HDE is a filing. It's a filing for a limited approval to address a limited patient population of 4,000 or fewer patients.

We will, at an appropriate time, gather up this patient data and submit it. And we again anticipate that we would have an approval in the United States before the end of 2005 for an HDE, but we don't have a specific trial that we're conducting under the HDE.

Just for clarification, is it fair to say, Stan, that even the experience we're gaining with the humanitarian patients -- with the patients that are submitted to through an HDE?

Yes. So for example, the European patients that we're doing today and that are compassionate use.

And you can use them for an HDE in the United States? That's totally okay with the FDA?

If we do the trials properly -- yes.

It's Mike, here. I just want to follow up on a couple other items. First, I just want to clarify maybe with Corinne. Could you try and quantify potentially what the benefit from currency was in the third quarter on the earnings line? I know that it's always tough thing to do, but is the commentary made on the gross margin line relative to seeing the benefit from those contracts roll off? Do you have a sense of what that benefit would've been on the bottom line?

Because the SG&A expenses were higher in the quarter due to FX, the net bottom line impact was negligible. On the top line, it contributed to about $7.5 million or 3.4 percent of revenue. But bottom line -- virtually no impact.

You might've lost me there. So you're not hedged on the -- I'm just trying to understand how your manufacturing is. You're not hedged on the gross margin line, but you are hedged on the SG&A line?

No, we are hedged on the gross margin line. We just had some very unfavorable hedging contracts that expired earlier this year that we no longer have in place, and those were masking the true performance on the gross profit line.

That's what you were talking about if we went back to the first quarter and looked at it. The growth would be flat and you'd [inaudible] your gross margins. That was because of the hedging contract.

Exactly.

And we're not seeing it anywhere. Okay. I know what you're saying. A couple other questions. The peripheral stent initiative you're talking about -- pertaining to build that out. But you're having obviously manufacturing issues with your supplier. How many reps do you have, right now?

Right now, we're in the mid-20s, in our people in the field on our peripheral vascular initiatives. Now, our plan is by sometime next year to get to the mid-40s. But right now, we're in the mid-20s, and they're rarin' to go.

What are they doing? It would seem like they'd have a lot of time on their hands.

Actually, you know, we have our balloon-expandable stents. So they're selling some of those. Right? Now we've just recently filled out that line. And of course in order to get accounts switched over to the Edwards line, we need both the self-expanding and balloon-expandable. But at least on an opportunistic basis, they are out there with balloon-expandables.

They're also out there in terms of a couple of things. Making sure that we enroll in our resilient trial. And also, doing some marketing trials. It's not like we've had no self-expanding stents. We've done probably about 100 cases at this point in time. They've been out there not only getting those cases done, but also getting us some very detailed customer feedback on each one of those cases, so that we understand exactly what we have. And on the basis of that feedback, we still feel very, very optimistic that this is going to be a great stent and be very well accepted in the market.

So we've certainly been aggressive in hiring the people, and felt like we would have enough stents for them before now. But it hasn't happened, yet. And that's coming, shortly. But in the meantime, we've been able to get some good market intelligence, in terms of marketing the products, as well.

When do they bring the manufacturing in-house?

Well, we have in large part, already. There are still some components for both balloon-expandable and self-expanding that are produced outside, but over the next year, we hope to vertically integrate on those, as well.

And so right now, if you had to best-guess, when are you over the hump there on this issue?

Well, we expect to be over it in the fourth quarter, here, and run into the first of the year with enough inventory to cover their needs.

Mike, you said that you thought that in valves, the US unit growth was 9-10 percent. I must have missed it -- did you say what the revenue growth was?

The US revenue growth -- let me see -- I don't know if I did say what US revenue growth was. It was high teens.

So US -- just to make sure I'm comparing apples-to-apples. You're saying the US heart valve revenue growth is high teens, and that unit growth was 9-10 percent?

That's correct.

So Magna's given that much of an impact?

Right.

That's very helpful. Okay. Thank you.

Jason Mills, First Albany Capital.

Just one question, and maybe I missed it. Will the feasibly trial for the aortic valve -- the Percutaneous valve -- be in low-risk patients? Or non-surgical patients? Sorry if I missed it.

Okay, Jason. You know what? Let me kick it over to Stan. I don't know if you're going to get your answer.

Of course, we haven't concluded discussion with FDA. Our target is to move out of compassionate-use cases and move in -- these will still be patients who are non-surgical. So you know by nature these are the higher-risk surgical patients. But they should still be considerably lower risk, if you will, than the compassionate cases that are kind of at death's door. There's still a difference between these two kinds of patients.

So presumably, you're moving down the line with the FDA from compassionate to non-compassionate but high-risk. And then will that be enough -- the feasibility, then -- to move you into a pivotal trial? Will there be another maybe Phase 2 trial or something that would be somewhere between the high risk and the surgical candidates? Could you help me understand the progression there?

I think all I could really say here at this point, Jason, is that we expect to do a feasibility study, and that sometime after that feasibility study, we'll move into pivotal trials. What that progression actually looks like, I don't know, yet.

Mike, sorry -- I have one other question for Corinne. On the gross margin line, following up on Michael's question. Do we have any additional hedging contracts that are still weighting you down? Or are we sort of looking at a gross margin that reflects the mix in your product line fairly well at this point? And therefore, I know you didn't give 2005 guidance. But maybe help us with regards to just the gross margin line in 2005, and what sort of expansion? Or should it be flat? Or how should we think about that?

Yes. We expect our gross margin in Q4 to be about 61 percent. And historically, we've tried to grow our gross margin 50 to 100 basis points on an annual basis. And I suspect we'll continue to strive for that kind of improvement.

Okay. Remind me. The Magna was launched sort of full-force. What month was that, Mike?

It was about a year ago that it was approved in the US. And so it was for sale for the first time in the fourth quarter.

Okay. So we've sort of almost annualized that.

[Bill Dohrmann], Atlas Capital.

Thank you. My question's been answered.

Alex Arrow, Lazard Freres

First on the Magna transition. My understanding is that the regular Paramount valve did not have any advantages over the Magna. Is that correct? In other words, anyone who's using the Magna gets everything -- every advantage, every hemodynamic advantage that you would get with the regular Paramount. So the only people that are still using the regular Paramount are just the ones that haven't yet gotten over the price, or for whatever reason haven't gotten around to switching. Is that a fair statement?

I'm not sure that I'm following you, Alex. What are you suggesting? That there's not an advantage? A hemodynamic advantage for Magna, compared to Paramount?

Oh, no, no, no. It's just the opposite. I mean certainly Magna has much better data. My question is -- I'm just surprised that the transition hasn't happened faster to Magna, given Magna's advantages. My question is, is there any reason other than price for a surgeon to still be using the regular Paramount?

Well, you know what? I think this is just one of those things that -- it's moving very fast. In our view, it's actually moving faster than we expected it to go. The surgical community tends to be a pretty conservative group that really likes to see the data and have some personal experience. So we feel like that's going at a pretty nice pace. I do think that it is going to ultimately -- it is ultimately going to continue to be the most important valve, and our number-one valve.

Just to give you an example. I want to say our original guidance for the year was around $30 million worth of Magna for full-year '04, and we've done 40 here in the first 3 quarters. So we're pretty pleased with the way that it's going.

Do you think ultimately, it will completely replace the regular Paramount?

I don't know about that. You know, the fact is that some people are still using porcine valves, if you can believe it. And so that's still out there. So no, I think there's still going to be in play.

Speaking of porcine valves, we're also somewhat perplexed as to why the Mosaic is doing as well as it is. And I know you've regained some of that share that they took last year. But we still sort of scratch our heads as to why the Mosaic is essentially keeping pace with you guys. Any other thoughts you could give us on that?

Well, I don't know. I guess we feel very confident that we're gaining market share in the US, and we just feel good about that. I can't explain why people would buy that valve. So I'm sure that you have your own research.

On to one question on Percutaneous. I know that you cannot speculate on what the FDA will decide. Can you say when you anticipate the FDA might give some indication that you could then pass on to us as to the trial event?

I think before the end of the year, we'll clearly -- we'll hear back from them. And our anticipation is that we'll have enough time to also do our first case before the end of the year.

And then my last question. Just on the supply constraint for the peripheral self-expanding. I didn't quite understand what it was that was the supply-constraint component. Could you... And I apologize if this is a...

Well Alex, it's one of the main components of our delivery system. It's not actually the stent, itself. But you know, one of the challenges we have is we have a great stent. It's a really different kind of a stent, being a [hulable] stent, and it requires a unique type of a delivery system to deliver it accurately. Unlike the tubular stents.

So we've had to design some very unique and specific components for that delivery system, and we've had an issue on one of those components.

And that's the components you're going to vertically integrate?

Eventually, yes.

But you said the issue would be solved this quarter.

We believe so.

Michael N. Weinstein, JP Morgan.

Hey, Mike. I just wanted to explore the phenomenon you enjoyed this year with Magna, which I think maybe has told you guys that you have this ability to upgrade your mix and your valve business, and it'd shave a higher price point. Let me ask you for your thoughts, because it does seem like you've kind of broken some new ground, here. In terms of how far can you take this? You're going to introduce... You're going to add ThermaFix to the equation. Then I assume you have some follow-on technologies.

Where do you think pricing on your mix in valves goes over the next couple of years?

Well, I think it has demonstrated that. We have a group of customers that value the implant more than the current price point. And they've clearly demonstrated that. This has been a perfect case study in that. We think that there is still more conversation that's going to take place, so we're not nearly finished with that.

And that's why we are going after continued innovation in the heart valve area. That's why we're pursuing new treatments like ThermaFix. And we think that that one's just going to help solidify our pricing. We've got BioPhysio coming, which we think is very novel. We're looking forward to that. And we also think we have the opportunity to apply some of this Magna sort of technology to the mitral position. So we think this is extendable, and it's one that we're going to continue to pursue.

Let me just follow up so we're a little bit clearer on the whole HDE trial/non-trial. I understand what you're saying relative to the ability to enroll patients in that. I think that your commentary has been -- and I don't know if you said this earlier -- if so, I missed it. That your expectation's that you would have 60 patients enrolled by the early part of '05. Is that still what you're assuming? Is that still the requirement?

Well, Mike, I think to file an HDE, we will need somewhere close to 50 patients with some amount of follow-up. And again, those patients could come from both US and European sources to composite the HDE filing.

Right. Which is what you said earlier. And do you think you'll have that roughly 50 patients in early '05?

In early '05? I think, again, we'll have... Our expectation is we'll have 50 patients with some reasonable follow-up by the end of '05 to complete the filing and gain an approval.

I'm confused. When would you file? You're saying you'll file at the end of '05?

No. When would we file? Yes. The actual approval times for HDEs are fairly short.

So maybe we'll step back here, just to make sure there's no confusion. I'm a little bit confused. I'm sure others are on the call. So when do you think you'd have the enrollment on the roughly 50 patients, and when do you think you'd file?

Mike, maybe it's just helpful if I tell you that I think, if I remember correctly, the mean approval times for HDEs is about 85 days. Okay? So you just back out of that and say you have to file before -- 85 days before the end of the year to get an approval. So I think we're going to be ready to beat that timeline without dissecting all the patient enrollment and follow-up criteria.

That's fair. And even if you previously did because of this patient population and how sick they are, their follow-up's going to be relatively short.

Yes. I think the requirement for follow-up should not be too challenging. Of course, given the patient population. But we obviously are going to want some number of patients with a reasonable amount of follow-up.

And there's no issue on where those patients come from? As you said earlier, US or Europe. And right now, the patients are all coming from Europe? Or you do have some patients that are coming from the US?

No. All from Europe, right now. And there have been HDEs approved with only European data.

Okay. So there's no issue. Is there... What's the get-in factor to actually roll in patients in the US?

FDA approval over IDE.

You have to have the approval? You have to have the IDE approval before you can start enrolling patients under that HDE. Is that right?

No. No, the HDE is not an enrollment. The HDE is a filing.

I think Mike's question is, can you have US patients without an IDE in there?

Correct.

Right. Right. We cannot have... Correct. We cannot enroll patients in the United States at all without an IDE approval.

I think we're going to end up cutting off questions, here. I know there's a lot of interest in Percutaneous valves the timelines, and we look forward to sharing those with you in more detail as we have that. And certainly, when the Investor Conference comes around in December, we hope we have more to share of that.

So thank you very much for your continued interest in Edwards. Corinne, David and I are going to welcome any additional questions by telephone.

Thank you for joining us on today's call. Reconciliations between GAAP to non-GAAP numbers mentioned during this call are included in today's press release, and can also be found on our website in the Investor Relations section. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877.660.6853, or 201.612.7415, and use account number 2995. The pass code is 120898. I'll repeat those numbers. 877.660.6853, or 201.612.7415. The account number is 2995. Pass code is 120898. Alternatively, an audio replay will be archived on the investor information section of our website at Edwards.com. Thank you very much.