愛德華生命科學 (EW) 2004 Q4 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Edwards Lifesciences Q4 2004 Earnings Conference call. (Caller Instructions) It is now my pleasure to introduce your host, Mr. David Erickson.

Welcome and thank you for joining us today.

Just after the close of regular trading we released our fourth quarter 2004 financial results and during our call today we’ll focus our prepared remarks on information that compliments the material included in the press release and financial schedules and then allocate the remaining time for Q&A.

Our presenters on today’s call are Mike Mussallem, Chairman and CEO, Corinne Lyle, CFO, 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 reasonable, these statements involve risks and uncertainties and actual results or experiences could differ from the forward-looking statements. These statements include but aren’t limited to, 2005 financial goals for sales, gross margin, net income, earnings per share, and free cash flow, expected growth of PERIMOUNT Magna and heart valve therapy products, the market-expanding opportunity of minimally invasive monitoring, product availability and sales targets for LifeStent, the market-expanding opportunity for percutaneous valve therapies, the timing of clinical trials and regulatory approvals, the impact of foreign exchange and expensing of options and other risk factors that may be found in our SEC filings, which are available on our website.

With that, I’ll turn the call over to Mike Mussallem. Mike?

Thank you, David.

We’re very pleased to share with you our fourth quarter and full year results, which represent an overall outstanding year of performance in a number of areas. Before I get into the details of the quarter, I’d like to share some of the highlights of the year that we’re especially proud of.

First and most importantly, we had a great year in our largest and most profitable franchise, heart valve therapy, where we achieved double-digit growth globally, led by the rapid adoption of PERIMOUNT Magna in the U.S. Strong sales of these high margin products helped lift our gross margin by more than 200 BP.

At the same time we were lifting our profitability, we continued to invest in important near-term growth drivers - peripheral stents and minimally invasive monitoring.

Finally, we met or exceeded all of our 2004 financial goals. With total sales of approximately $932 million, we achieved our $915 to $940 million goal. This accomplishment is all the more significant considering the fact that in Japan a difficult reimbursement environment and the return of a heart valve competitor resulted in essentially flat year-over-year sales.

R&D investment in 2004 was 20% higher than last year’s level, exceeding our sales growth rate. Net income, when adjusted for special items, achieved our 13 to 15% growth target and our free cash flow of $138 million for the year substantially exceeded our goal of $90 to $95 million.

As we announced yesterday, we’re realigning our Japan operations to sharpen our focus and lift the growth rate of this business. This decision was prompted by the changing reimbursement environment and shifts in market trends for some of our lower-margin distributed products.

Most notably, we’re divesting our Japan perfusion products business for $10 to 20 million, based on the achievement of certain milestones over the next year and a half. We will also exit our pacemaker distribution business by the end of the first quarter.

In conjunction with these actions, we are restructuring our Japan operations. This will include the transfer or elimination of approximately 60 full time physicians, resulting in a special charge of $6.0 to $9.0 million in the first quarter of 2005. The net result of the realignment will reduce annual earnings by approximately $3.0 million.

These actions will result in an increased sales growth rate and higher gross profit. Later in the call we’ll provide some additional details on these items, including the expected impact to 2005 sales estimates for cardiac surgery systems and other distributed products.

In addition, I hope you saw the release that went out the same time as the earnings release that announced our receipt of conditional FDA approval to begin clinical trials for our percutaneous aortic valve. You’ll be hearing more about this from Stan Rowe later in the call.

Now, turning to the quarterly results, on a reported basis total sales for the fourth quarter increased 5.8% to $237 million, driven by strong heart valve therapy sales. Highlights of the quarter were 10% sales growth in the U.S. and emerging markets and nearly that in Europe. We also generated a higher gross profit margin and strong cash flow.

Now I’ll discuss the sales results in each of our product lines in more detail.

On a reported basis, sales of heart valve therapy products grew 13.8% this quarter and 14.4% for the year, led by our new PERIMOUNT Magna valve. Foreign exchange contributed $2.8 million of growth for the quarter.

Globally, underlying heart valve therapy growth once again exceeded 10% for the quarter, driven by share gains in the U.S. and Europe. This was despite a nearly 30% decline in porcine valve sales.

For the full year, underlying heart valve therapy growth also exceeded 10% and growth was strong in every region, except for a slight decline in Japan.

Globally, sales of our market-leading PERIMOUNT valves grew 15% for the quarter and full year. Based on their superior performance, our PERIMOUNT valves continue to be preferred over porcine valves and today represent 95% of our total worldwide tissue valve sales.

Strong market adoption of Magna, our newest generation PERIMOUNT valve, is driven sequentially stronger sales growth every quarter this year, resulting in 2004 sales of more than $70 million, exceeding our original estimate.

Magna’s unsurpassed clinical attributes are continuing to drive growth and command a 20% price premium over our leading aortic PERIMOUNT valve. Based on its strong momentum, we now expect Magna to become the leading tissue valve in the United States as early as the end of the year.

In the U.S., total PERIMOUNT sales grew nearly 20% this quarter, led by Magna aortic valves and our Tricentrix mitral valve system.

Strong PERIMOUNT and valve repair sales also led the growth in Europe.

In Japan, quarterly valve sales were down versus the prior year and for the full year down about $1.5 million. In March, we will reach the anniversary of our competitor’s reentry into Japan, at which time we expect our sales growth rate to return to double-digits.

Reinforcing our confidence of a increased growth rate in Japan, our Prima Plus valve received both regulatory clearance and reimbursement approval and physicians there have already begun using it. Prima Plus expands our product offering into the niche stentless valve market and strengthens our market-leading position in this region.

Our ThermaFix anticalcification process, which offers a significant improvement in calcium reduction beyond our current market-leading tissue treatment, was introduced at last week’s Society of Thoracic Surgeons meeting.

Magna with ThermaFix was introduced on a limited basis in 2004 and this year we’ll expand its availability. We expect this proprietary product enhancement will generate a modest price premium and drive further adoption among younger patients.

Global heart valve therapy sales grew approximately 10% for the full year. We’re continuing to strengthen our leadership position in this area with new technology and plan another new product introduction for the second half of 2005 focused on an indication-specific design. We will also drive repair market growth by building awareness and focusing on clinician education.

Now, turning to Critical Care, reported sales grew 5.3% this quarter and 8.4% for the year, led primarily by strong share gains in the U.S. and emerging global markets. Foreign exchange contributed $2.3 million of the growth for the quarter.

Underlying growth for the quarter and full year was due primarily to robust pressure monitoring sales resulting from market share gains and sales of Advanced Technology Catheters. Growth was partially offset by this year’s reimbursement changes in Japan and the ongoing decline in base catheter products.

For more than 30 years Edwards has maintained its leadership position in Critical Care by continually introducing enhancements to our Swan-Ganz product line. The latest advancement in this area, which we unveiled at last week’s Society of Critical Care Medicine conference is our new minimally invasive monitoring system featuring the FloTrac Sensor and Vigileo Monitor.

Preliminary clinical findings presented at the SCCM concluded that FloTrac provides reliably accurate information comparable to the performance of our Gold Standard Swan-Ganz.

The accuracy of FloTrac, combined with its ease of use, represents a market-expanding opportunity that we believe could double the addressable patient population, as well as the growth rate of our Critical Care franchise within a few years.

Additionally, we’re pleased to announce that today we received 510(k) clearance for our new FloTrac system and we continue to plan the launch of this product in the second quarter.

Sales in our Cardiac Surgery Systems product line declined 9.5% for the quarter and 6.7% for the year, offset slightly in both periods by FX.

For the quarter and the full year, strong global growth in Cannula, as well as foreign exchange gains, we’re more than offset by a significant decline in our Japan Perfusion Products business.

As I mentioned, we’re exiting our Japan Perfusion Products business as part of a broader realignment of that country’s operations. The Japan Perfusion Products business generated approximately $6.0 million in sales last quarter.

We expect to complete the transition of this business to the buyer in 2006. Throughout the transition period, we’ll continue to act as a supplier and expect sales at about half the current level.

Recently we initiated marketing trials for the epicardial version of our Optiwave Cardiac Ablation Laser system. During this evaluation period and in collaboration with leading clinicians in the field, we identified opportunities to further enhance this device’s performance.

We’re completing these iterations before resuming marketing trials. We continue to believe that Optiwave’s unique laser energy technology offers superior clinical performance in an easy to use device. For the quarter, we estimate sales in the Cardiac Surgery Systems product line to be approximately $25 million.

Underlying vascular sales grew 10.8% this quarter and 7.5% for the year, led by sales of interventional products and foreign exchange gains. Foreign exchange contributed about $0.50 million of growth for the quarter.

The supply of our LifeStent products continues to be constrained this quarter, resulting in fourth quarter sales of just under $1.0 million. We believe the supply constraints are behind us and expect to achieve target inventory levels by the end of this quarter.

We remain encouraged by the positive customer feedback on the conformability and flexibility of our LifeStent Balloon and Self-Expanding Stent and we continue to project total peripheral stent sales of $10 to $20 million in 2005 ramping steadily upward through the year.

We recently began the pivotal phase of our RESILIENT clinical trial and expect to complete enrollment in the fourth quarter. RESILIENT is a pioneering study intended to demonstrate LifeStent’s superiority over balloon angioplasty in the superficial femoral artery (SFA).

We believe LifeStent’s design characteristics make it particularly well-suited for the continual bending and flexing experienced in the SFA. This positions LifeStent to achieve and SFA indication in the U.S. in 2007.

Positive results of the RESILIENT trial would enable Edwards to clearly differentiate itself in the large and rapidly growing peripheral stent market, particularly in the SFA segment, and could stimulate this segment to grow to $300 million in the next 5 years.

And to quickly update you on the Angiogenesis initiative, our NIH sponsored clinical trial using Sangamo’s ZFP technology, is proceeding and enrollment will continue with patients at higher doses.

For the quarter, we estimate sales in the Vascular product line to be between $15 and 16 million.

Other distributor product sales were $10 million for the quarter and nearly $43 million for the year. The decline, compared to the same period last year, was driven by our deemphasis of certain distributed cardiology products in Japan.

As part of the Japan realignment, we’re also exiting our distributed low margin Pacemaker business by the end of the first quarter. This product line generated sales of approximately $2.5 million this last quarter. For the first quarter, we estimate sales of other distributed products to be approximately $8.0 million.

For 2005, we expect to generate total sales between $980 million and $1 billion 20 million, consistent with our earlier guidance. For the first quarter, we’re projecting total sales of $245 to $250 million. These projections assume current foreign currency levels.

For Heart Valve Therapy, we are raising our projection for total annual sales to a range of $465 to $80 million.

We’re projecting Critical Care sales to be $315 to $325 million. As a result of the Japanese realignment activities, we expect Cardiac Surgery Systems sales of approximately $100 million and other distributed products to be approximately $30 million. And we still project sales of Vascular products to be $70 to $80 million.

Now I’ll turn the call over to Corinne, who will cover the rest of our quarterly results and following that, Stan Rowe will provide an update on our Percutaneous Valve programs. Corinne?

Thank you, Mike.

This quarter’s results were notable for continued improvement in gross profit margins and as Mike mentioned earlier, our strong free cash flow.

For the quarter, our gross profit margin of 61.5% was higher than the previous quarter and significantly higher than the comparable quarter last year. The continued improvement was primarily due to sales of higher margin Heart Valve products and an improvement in Critical Care margins in the U.S.

Compared to the same period last year, gross profits improved primarily due to the expiration earlier this year of currency-hedging contracts.

Additionally, the gross margin benefited from the elimination of certain low margin businesses. For 2005, we expect our gross profits margin to continue to improve, due to the growth of higher margin products and we now expect our gross profits margin to be more than 62% for the year.

Fourth quarter SG&A expenses of $82.7 million were 34.9% of sales. Primary contributors to this increase over the prior year were higher sales and marketing (S&M) expenses in our U.S. Peripheral Stent and Heart Valve Therapy product lines and higher international expenses due to foreign exchange rates.

Assuming current foreign exchange rates, we expect SG&A as a percentage of sales, for all of 2005, to be comparable to the fourth quarter rates.

In the fourth quarter, we increased R&D investment by 23% over last to $23.4 million. This increase was attributed to additional investment in our Percutaneous Valve programs, including amortization related to the PVT acquisition. We expect R&D investments to be approximately 10% of sales for 2005.

Interest expense of $3.5 million for the quarter was comparable to the same quarter last year. For 2005 we expect that interest expense will decline slightly.

Other income for the quarter was $2.7 million, resulting primarily from foreign exchange gains and favorable legal settlements.

As a result of the Japan realignment announced yesterday, which provides some tax benefit, we expect our effective tax rate for 2005 to remain at the 2004 level of 26%.

During the quarter we recorded a net special charge totally $4.9 million pre-tax. This consisted of a $7.3 million charge related to the impaired investments and the establishment of a $5.0 million charitable fund, partially offset by the sale of real estate development rights, which generated a $7.4 million gain.

This quarter changes in foreign exchange rates, compared to the same quarter last year, lifted reported sales by 3.0%. If rates were to remain at their current levels, we expect FX to have a similar effect in 2005.

During the quarter we repurchased approximately 700,000 shares of common stock for $25.7 million. For the full year we repurchased a total of just over 1.7 million shares for $59.2 million.

Long-term debt at December 31st was $267 million, resulting in a debt-to-cap ratio of 29.8%.

Total accounts receivable increased $6.2 million from last quarter. Including receivables and our asset back securitization program, DSO for the quarter stood at 72.9 days, an improvement of 2 days over the same period last year. Inventories increased slightly to $127.7 million from last quarter.

Free cash flow, which we define as cash flow from operating activities minus CapEx, was $38 million for the quarter and $138 million for the year, reflecting strong operating results, increased taxes payable, and improved accounts receivable management.

For 2005 we are still projecting free cash flow of $115 to $125 million, despite a onetime $10 to $12 million reduction in cash flow resulting from the Japan realignment.

We will adopt a revised FAS 123 and begin expensing stock options as required by the accounting standard, which is expected to be in the third quarter. For the last two years, our annual pro forma stock option expense has been around $16 million after tax. For 2005, we expect our annualized expense to be slightly higher.

In 2003, EITF 48 was approved requiring companies with contingent convertible debt to account for the potential dilutive affect of the underlying shares in the diluted EPS calculation. The impact to our EPS translated into approximately $0.01 per share in the quarter and for the year.

The 2.74 million increase in the number of underlying shares is largely offset by a reduction in tax-effective interest expense and amortized fees of about $1.0 million per quarter. This is detailed in the tables included with our press release. For 2005 we estimate the annual EPS impact to be $0.02, which is factored into our guidance.

Under the American Jobs Creation Act, we are currently considering repatriating $150 to $250 million. We are evaluating a number of options and will make a final decision later this year.

And with that, I’ll turn it over to Stan.

Thanks, Corinne.

For the next few minutes, I’ll be providing an update on our percutaneous valve programs. Let me begin by saying that we are continuing to make significant progress in all three of our percutaneous heart valve programs and I’m pleased to report that they remain on track.

In our edge-to-edge mitral repair program, which seeks to treat patients with leaflet disease, we have completed our preclinical feasibility studies and demonstrated repeatable procedural and repair performance. Procedure times have consistently been under one hour and the results mimic the surgical Alfieri repair.

We expect to begin first-in-man studies involving 10 to 20 patients in the March/April timeframe in centers outside the United States and we’ll refine our product timelines following a review of these results.

I’m very pleased to report that we have received regulatory approval in both Canada and Sweden to begin a feasibility study of our coronary sinus mitral repair procedure. We are also excited that we have already performed the procedure in our first patient.

We expect to continue enrollment under the feasibility study and will discuss the results once sufficient data has been accumulated. We’re optimistic that the outcomes will be similar to our preclinical studies, which demonstrated consistent reductions in mitral regurgitation.

The opportunity for treating mitral valve disease using catheter-based technologies is very large. We estimate that millions of patients have mitral regurgitation, only a small percentage of whom are treated with open heart surgical procedures today..

As less invasive alternatives are developed, we believe physicians will elect to treat patients at an earlier stage in the progression of this degenerative disease We estimate that the market opportunity for percutaneous mitral repair could exceed $1.0 billion within 10 years.

Our percutaneous aortic replacement program is also proceeding well and we’re continuing to make progress on a number of fronts. In Europe, where compassionate cases are still being conducted, we now have 3 patients who have celebrated their 12-month anniversaries.

In pursuit of the CE Mark in Europe, we have received approval for the first of multiple centers in our non-randomized, revised study. This study begins the transition from nonoperable to high-risk patients, which is consistent with our goal of treating less severely ill patients. We expect to enroll our first patients by the end of this quarter, which would lead to a CE Mark in 2006.

Just last night we received conditional approval from the FDA for a feasibility study under our U.S. IDE application. This 20-patient study is for a single U.S. center and randomizes our valve against balloon aortic valvuloplasty. We hope to treat our first patients this quarter.

Our plan calls for a second phase of the feasibility study, expanding to additional centers and including 40 additional patients before we commence the pivotal trial. The planned pivotal trial, called REVIVAL, also randomizes against balloon aortic valvuloplasty and is comprised of less than 400 high-risk and nonsurgical patients with one-year follow-up.

The pivotal trial, of course, is conditional based upon the results of the feasibility studies. Importantly, the conditional approval allows us to refine our assumptions regarding the path to PMA approval, which we anticipate occurring in three to four years.

Now that we have a clearer view of our path to PMA approval in the U.S., we’re reviewing the timing of our HDE strategy. Our number one priority will be successful enrollment in the PMA trial and given this, we no longer plan to pursue an HDE approval in 2005.

In addition, we’ve completed two important development milestones in the areas of product and procedural enhancement. We now have available a 26 millimeter (mm) Cribier-Edwards percutaneous aortic heart valve that will enable us to accommodate a wider range of patient anatomies and will soon be available for use in our clinical trials.

Also of note, we’ve performed our first procedure using our custom retrograde delivery system. By leveraging our endovascular experience we were able to rapidly complete the development of this system, which is an important delivery alternative to the antegrade approach and significantly simplifies the delivery of the percutaneous heart valve.

So, to summarize, we’re continuing to make significant progress in all three of these programs and we look forward to sharing our results with you in future months.

Mike, back to you.

Thanks, Stan.

We’re proud of what we’ve accomplished in 2004 and have --

* Set financial goals for 2005 to build our momentum and we’ll drive another year of stronger growth and profitability.

* Even taking into consideration the Japan realignment, we expect to meet our 2005 financial goals.

* We expect to generate total sales between $980 million and $1 billion 20 million.

* The continued high growth rate of our most profitable businesses, coupled with our exit of low margin product lines gives us increased confidence that we’ll grow our gross profit margin by more than 100 BP.

* We also expect to deliver net income growth of 13 to 15%, excluding the impact of special items, and generate free cash flow of $115 to $125 million.

* Additionally, we’re comfortable with the first quarter, first call mean EPS estimate of $0.45 and expect full year EPS to be $1.85 to $1.95, excluding the expensing of stock options.

In conclusion, the investments that we’ve made over our first years as an independent public company are now paying off. Edwards is fortunate to have strong base businesses, namely our Heart Valve and Critical Care franchises on which we’re build a number of exciting and market-expanding growth opportunities.

In 2003 we laid the groundwork for our peripheral stent and minimally invasive monitoring platforms to become significant contributors and we expect to see tangible results from these efforts in 2005 and 2006. The progress we’ve also been making in the percutaneous technologies will expand the heart valve market and provide lifesaving options for patients who go untreated today.

In sum, we think our growth prospects in the short-, medium-, and long-term are brighter than ever and we’re very excited about the future.

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

(Caller Instructions.) Tim Nelson, Piper Jaffray.

Hi guys.

Hi.

Very nice quarter, great initiatives. Just a little bit on the heart valve market, as usual. The underlying growth in the overall markets continues to look to be robust. Would you concur with that? Is it stronger than it has been over the last six quarters and do you think that’s going to continue?

You know, I think the market does seem robust, Tim. I think one of the things that certainly helps us is we continue to see the shifts from mechanical to tissue valves continuing and as robust as ever. And obviously the Magna valve has been very popular for us. But overall, we think the market growth has been solid.

And you expect that to continue, obviously. You just increased your guidance for heart valves.

We certainly do. We feel confident, both the growth of the market and how well we’re strategically positioned to take advantage of that.

Yes. I’m picking up some activity in the path of the AHA and ACC on heart valve implant guidelines and a rewrite effort that seems to be underway. Would you anticipate that to be done in 2005 and what would you expect that impact to have on the referral community and their referral rates for valve patients?

Yes. I’m not sure that I’m perfectly current on this. Overall I know that we’ve been encouraging this. I think the last think I heard was that there was an announcement that there was going to be some new guidelines that lowered the age criteria and that was going to be coming.

I don’t know the precise timing. We do think it would have an influence on the marketplace. The market is already beginning to behave this way, Tim, as you know. I think this is just further reinforcement.

Great and a quick question on the coronary sinus product for you or Stan. Are you still hopeful that the clinical evaluation plan for that product will be randomization against medical therapy?

Yes, Tim. On the coronary sinus program we believe that that’s the best control group.

And that would seem to me to be a relatively quick and easy clinical, if that were the case.

I don’t know yet. It’s kind of too early to tell. We have not really structured that trial today.

Okay. Well, congratulations on your first patient.

Well, thank you very much.

I’ll get back in queue. Thanks.

Thanks, Tim.

Katherine Martinelli, Merrill Lynch.

A question first with respect to the gross margin for Corinne. Can you just give us some sense of how we should think about the year unfolding? Because it would seem like you would probably have the most pronounced improvement in Q1, but then you start to lap the Magna launch and I’m just trying to measure that against some of the benefits you’ll get with the premium pricing when you have the anticalcification treatment rolling out.

The fourth quarter was 61.5% and we expect the average for the year in 2005 to be more than 62% and that will ramp throughout the year. So it’ll be slightly better each quarter.

Okay, so we should see sequential improvement throughout the year?

Yes.

Okay and then just with respect to FloTrac, since it was debuted, I think it was, last week and some of the obvious benefits in terms of expanding the patient population. Are you, based on some of the physician reception that you might have seen, more bullish about it having a revenue contribution this year? Or do you still view that as more of a missionary selling effort and we should view the contribution more meaningful in ‘06?

Yes, you know, Katherine, we’re very encouraged by this and we’re very enthusiastic, although we’re cautious about the amount of sales we might get in 2005. We still anticipate this -- although there is enthusiasm, we do know that we need to build consensus across many groups in the hospitals. So we anticipate a slow sell cycle on this one and really start seeing substantial impact in ‘06.

So I guess then, within the broader critical care business, what percent of that is now the AdvanceTech catheters versus the base catheters, since you are seeing good growth in the former but it’s being offset with the continued decline in the base business?

Just for round numbers, if you assume this is a $300 million business, just for the purpose of discussion, pressure monitoring probably represents about a third of that business and two-thirds of it is mostly the Swan-Ganz product line, although access is a portion of that. Out of the Swan-Ganz portion, you probably have about 55% Advance, 45% base, at this point in time.

Great. All right. Thank you.

Rick Wise, Bear Stearns.

Hi. A couple questions on the heart valve trial that you talked about the, percutaneous valve trial. Can you talk about the endpoints of the two feasibility studies, what outcomes are they comparing and the follow-up required and give us a little more color on some of those details, please?

On the feasibility studies, Rick?

Exactly.

I think we’re going to be focused just generally on safety comparison between balloon aortic valvuloplasty in the long run. But in the feasibility studies you’re looking at pretty short-term follow-ups of 30 days.

Just sort of survival rates of 30 days or?

Yes, kind of gross events at 30 days, as a comparison with balloon aortic valvuloplasty.

And just the one [indiscernible] high-risk patient definition, these patients that could undergo surgery as well or will they be as sick as those studied in the compassionate use trial in the EU?

No. No, they’re going to be not quite as bad as those compassionate cases and we’ve agreed with the FDA upon a scoring system that basically ranks these patients as high-risk.

Okay and I mean, certainly the timelines for this trial in general sound like the ones we were anticipating, but I just want to make sure I understood what you were saying in the press release, the wording about defining our assumptions regarding path of premarket approval, anticipating it occurring in 3 or 4 years. What do you think, that you hope or expect to file a PMA for percutaneous in 3 or 4 years or is it receive clearance from FDA in 3 or 4 years?

Exactly. We’re looking for an approval.

Okay and two other quick ones. The currency impact on EPS, if any, Corinne, in the quarter and just maybe if you could discuss it a little bit. Obviously you’ve given us a fairly wide range. Just in the simplest terms the drivers that could get you the upper end or knock you down toward the lower end, what should we be thinking about for the ranges, extremes?

Based on where we are today and taking into consideration the approximately $0.05 or so from the Japan realignment and also the impact of the contingent convertible debenture offer, debenture accounting treatment, as well as the upside from where we are in terms of current FX, we’re comfortable at the midpoint of the range.

In terms of why we’ve evolved to a range is we’ve historically given ranges on our revenue lines as well as on our net income line and we thought it was more appropriate to transition to a range on the EPS line, just to be inline and consistent with the other items in terms of goals.

But just to follow-up on that, but I mean, I didn’t say it, perhaps, very well. To get to the $1.95, is that more sales driven or is it margins and just trying to understand what’s the contingent on getting you to the upper end?

Well, so for example, if we got to the 15% net income growth, which would be based on strong revenues as well as ability to manage other items in the P&L, certainly we would be at the high end of the range, so, if you think of it in those terms. Also, obviously FX helps us on the upside in terms of the sales range, because the weaker dollar leads to higher sales.

Okay. Thank you.

Jason Mills, First Albany Corp.

Hey guys, thanks for taking my question. Mike, you mentioned in the second half of the year, I think, a new product launch in the heart valve repair side, if I heard you right. Could you elaborate a little bit more on that and also talk about the potential of using your Magna technology in the mitral valve position?

Let me first answer the first part of that, Jason, and then come back to it. I did say that we plan to have a new indication-specific repair product in the second half of the year. We would probably unveil this at the AATS meeting in May or certainly later on in the year at the EACTS. We’re not revealing, at this point, exactly what that product is, although you can believe that we have it well-defined and moving along well at this point in time.

Jason, the second part of your question?

Just wanted to ask about potential outside of repair products in the mitral valve position, what you’re working on, maybe for replacement there.

Right. Let me comment briefly on that. As you know, we aggressively invest in our heart valve business more than anybody else and as a matter of fact, we think it’s appropriate to be introducing new products in the mitral position and we have some work going on right now. We’re not ready to share what that is, but you can be sure that we have some more ideas in mind in terms of increasing our market share position in the mitral.

Right. Obviously a very big opportunity. On the critical care side, with respect to MICO or FloTrac, I think Katherine asked a little bit about that business and you’re cautious about saying the contribution this year. Would that contribution be augmented by published data and if so, maybe when might we see that published and talked about in the journals and so forth?

That’s a good question. You can imagine there are going to be a number of studies. Because we already have the 510(k) clearance at this point, we’re able to do studies that both evaluate clinical performance as well as the cost-effectiveness of this. There was some data that was presented at the SCCM meeting that spoke to accuracy, but that’s still relatively light compared to what’s coming.

So I think you’ll see routinely more data presented, as both on the performance of this product and we’re also beginning some cost-effectiveness studies. So, during our sales cycle in 2005, we won’t have the cost-effectiveness studies and mountains of data supporting the performance of the device. And we’ll be accumulating that in a big way during the course of the year. Exactly when that comes out, I would say pretty much watch all the critical care meetings, because you should see a pretty steady stream of reports in the upcoming meetings.

Okay, great and just a couple of other ones on the cardiac surgery side. Just wanted to make sure. In the quarter, was there a negative impact from the Japanese restructuring? That occurred after, correct, so there weren’t any divested --?

Yes, a good question, Jason, yes. No, the restructuring occurred after the quarter, so there was no impact. What we did relate, though was we had quite a decline in our Japanese (inaudible - background noise) product sales, which was a drag on sales in cardiac surgery systems for the quarter. So whereas we had a strong quarter in cannula growth by comparison, this really pulled down our overall growth rate in cardiac surgery systems.

Okay, I’ll sneak one more in and I’ll get back in queue. How’s PMR looking? Obviously a small part of your business, but it’s been sort of really good at times and not so good at times, depending on what the Cap equipment side was doing. Could you update us on that?

Yes. It’s been very consistent for us. I think it grew between 5% and 10% in the quarter, so it’s been pretty solid and not probably remarkable one way of the other.

Okay. Thanks.

Argent Christian (ph), J.P. Morgan.

Good afternoon, guys. It’s actually Argent Christian for Mike. Just a question on the percutaneous valve initiative. You guys have obviously spent a lot of time talking about the humanitarian device exception. Could you spend a moment on what went [indiscernible] behind, aborting that program or just going with the full-fledged IDE and [indiscernible] choice of pivotal trial then? Thanks.

Yes. Let me start and I’ll ask Stan to supplement it. Yes, our original intent was to pursue an HDE in parallel with the IDE and the PMA. On further reflection and also observing what’s going on with some other devices in our space, it’s become very clear that we need to prioritize the PMA approval and that’s clearly what we intend to do. And so we’re really sort of taking a fresh look at our HDE strategy and we slide design an HDE strategy to be more complimentary and not put it in a competitive position with enrolling patients in the PMA. I don’t know, Stan, do you want to add anything?

I think that’s it. I think we’re also very sensitive to the fact that there are many, many patients in the U.S. who really need and want this device and so we need to continue to be able to serve them even after we’ve completed enrollment in the PMA. So we haven’t given up on it, but what we’ve said is don’t expect it in 2005. We’re no longer pursuing this on an aggressive basis but more looking for how to design this to be more complimentary.

I’ve got it and if I could just switch gears for a second and maybe ask Corinne a question on the convertible debt? Corinne, just looking out to 2005, maybe you could spend a minute and just explain to us how we should be thinking about modeling shares outstanding and is this something that we’re going to see for the next few quarters? Is it a --?

The change is a permanent one and EITF 48 requires you now to include the impact of the underlying shares from the convertible debt and so the way to account for that is to add back the impact of the interest expense and amortization on an after tax basis to your net income.

We’ve laid that out in our tables and then you divide that adjusted net income by the shares outstanding that would include the total underlying shares from the convertible debt. So those are the two factors that you need to take into consideration when calculating your EPS and we’ve laid out a table in our earnings summary that shows how you get to those numbers.

Okay and just one last follow-up, Corinne, on the $2.7 million in other income that you guys generated. Was that something you had been anticipating for the quarter? I’m not quite sure. I don’t remember too well there.

Yes. Our sundry line tends to be plus or minus $1.0 million on an annual basis. This year, if you annualized the results in that line it was a little bit -- about $400,000 or so and so we did have the upside this quarter, but overall it nets out to plus or minus $1.0 million.

Okay. Thanks.

David Zimbalist, Natexis Bleichroeder.

Hi, a couple questions. First of all, can you talk a little bit and tell us what the exact foreign exchange benefit was for the cardiac surgery business?

Let’s turn to that. In terms of what the sales impact was, David?

Yes.

Okay. Let me flip to that. It looks like, yes, about $500,000 to $600,000.

Okay. Also, when you talk about conditional approval for the percutaneous valve, what is left for you to do before you could actually implant the first patient? Is it all in the hands of the IRBs getting done and in or are there still some issues to work out with the FDA for that first patient?

Yes, we approved to move ahead with an implant but there are things that we have to do that are minor changes to the protocol. We basically have a green light to start our first study and the conditions are very straightforward to move ahead.

Okay and then can you talk a little bit about the effort you’re going to put in place to roll out FloTrac? Are you going to be needing to build a separate sales force or a significant supplemental support effort for rolling it out or is it going to be a limited launch throughout most of 2005?

Yes, thanks, David. Our intention is to leverage the critical care S&M organization that we have in place. We may indeed put a few specialists - and are doing - that in place that would specialize in supporting some of the trials that we want to run. But, really, you shouldn’t think of it as requiring additional SG&A to be able to drive this.

If we find subsequent to this that there’s some upside potential to investing more heavily, of course we’ll update you, but that’s not our plans at this time.

Okay, thanks.

Mark Landy, Susquehanna Financial Group.

Evening, folks.

Hey Mark.

Hi guys, congratulations on the FDA news.

Thank you.

Sure. Just a couple of quick questions and then I just maybe wanted to walk through a timeline with Stan. Mike, I might have missed it, but did you give us repair growth for the quarter? I know you gave us repair for the year.

I didn’t give you repair growth in the quarter. It’s a little below 10%. It’s in the -- a little more than 8.0%, so that gives you a sense for it.

Okay, great, and then on the peripheral valve sales force side, have you added anybody or how are you doing on this?

The sales force side, you said, for peripheral or percutaneous valves? I’m sorry?

No, no, for - sorry - peripheral stents.

Yes, actually we’ve done some rearrangement within Edwards, but we haven’t added incremental resources recently. We plan to start adding incremental resources again later this quarter and continue that over the next couple of quarters.

What’s your targeted goal there, Mike?

Well, I would imagine, over the next couple quarters, we’ll add another 10 people.

Okay and then for the center that’s going to do the trial, the first part of the feasibility study, have you named that yet or is that going to remain quiet for now?

We haven’t named -- we know who the center is, just we’ve decided that this is one that we should allow the center to be able to share that news. They’re very anxious to do that and so that’s one that you’ll have to stay tuned on.

Okay. Then, just if I walk through maybe a timeline over the next couple of years, I’ll just try to construct something to get within your timeline. So, would it be 2005 would really be the two feasibility studies and the paperwork that’s needed then and to begin enrolling your pivotal study in ‘06, probably about nine months to a year implant time and so 2007 you complete the follow-up and the filing of the PMA. And then basically ‘08 is a waiting game for a panel and approval. Is that a fair timeline?

Mark, you’re doing a great job. Do you want to come over and help me? Hey listen, we just got this, kind of all the information last night, so we need a little more time as a group to pore over it and really get all the timelines put together. Looks like you’re doing a great job, but we’re really not prepared to talk about this timeline.

Then just if I can push you on one thing there. In terms of enrollments of, say, 300-400 patients, what are you thinking? Obviously 20 to 40 patients probably is pretty manageable.

Well, I mean, again, our investigators are very excited about this and they’re going to be moving at utmost speed. I will tell you that I think that we’ll get referrals from multiple sites around the U.S. and we’re just very pleased that this is kind of the structure of our trial. That we’ve really worked hard to structure the trial as a randomized trial versus valvuloplasty and we’re pleased with the outcome with the FDA.

Okay, so stay tuned on the implant time, right?

Right.

Okay. Congratulations. Thanks very much.

Hey, thank you, Mark.

Alex Arrow, Lazard & Co.

Thanks. First, either for Stan or Mike, the alternative to the antegrade approach that Stan mentioned during his initial comments, can you tell us anything about what that alternative is and how it differs from your existing antegrade approach?

Sure. You’re talking about, in our discussion earlier, that we’ve done a retrograde custom delivery system and we’ve done our first patient? Is that your question, Alex?

Well, my understanding is that the compassionate use cases that were happening in France, there were some antegrade and some retrograde and I thought that I heard you say before the Q&A session began, you said that that there was a new approach other than those two. There is an alternative to the antegrade. Is that not quite what you said?

Let me explain that to you, Alex. Sorry for the confusion. What this is, is we’ve developed a custom retrograde delivery system that is a real enhancement of just using the off-the-shelf products that we’ve used to date. And we’ve started some clinical studies in this area and it looks very encouraging.

Okay. Have you planned for the feasibility study that you’re about to begin, whether that would be all one approach versus the other or some of each?

We have approval for both antegrade and retrograde within the plan for this trial and we’ll be supplementing our current data with this new delivery system. I can’t tell you how pleased we are that this was the study design that we’ve been able to work with FDA so closely to develop.

Given that it was the study design that you were going after, why then would it be 3 to 4 years as opposed to the 2 years that it sounded like you’d previously been saying?

I think this timeline is very doable and this is a great outcome for us, in terms of a study design.

Can you say anything about the inclusion criteria or is too early to say? Is it going to be 80-year-old plus and nonsurgical patients or is it going to be more broad than that?

Well, we have a scoring system that we’ve agreed upon with FDA to get started with and I think it’s a very reasonable way to qualify high-risk patients.

But can you -- in other words the scoring system would mean that only the high-risk patients would be the ones that would be eligible for the trial and the lower risk patients would not be in the trial?

That’s correct.

Okay. Can you say anything about the CoreValve patent that was issued that they announced last week?

No, I can’t say much about that except that we have an incredible patent estate at Edwards and we’re very pleased with our ability to practice in a very broad manner, both in the United States and abroad.

Yes, I don’t think that they’re claiming that you’re not able to practice. I think it’s just that it’s somewhat surprising that they would be able to practice, given your Anderson patents. Are you --?

We’re really not concerned about CoreValve. They’re a very early startup company and we’ll see.

Okay. Thanks, Stan, and if I could ask one last question it would be just if you’re able to give us any guidance on what the impact of the new FASB options impact might be starting in your third quarter? Anything you can tell us on that?

Yes. What I mentioned, Alex, was that historically our after tax option expense has been calculated to be about $16 million. We expect, on an annualized basis, that that would be a little bit higher for 2005. So you could take that number, increase it slightly and divide it by 2.

Okay. Thanks, Corinne. Thanks very much.

Thanks, Alex.

Larry Keusch, Goldman Sachs.

Good afternoon. Stan, just a couple more questions on the FDA trial protocols here?

Yes, Larry?

Could you talk a little bit about what the primary endpoint will be in the pivotal trial? I heard you say 30 day, basically, safety in the feasibility, but what about the pivotal study?

Well, with more interventional trials, I’ll just say that we have composite scores and so our plan is to compare balloon aortic valvuloplasty with percutaneous heart valve implantation in these composite scores.

Okay and will the composite include mortality?

Yes.

Okay, so it’s going to be your basic composite score including mortality.

Yes.

Okay and then when would we, as outsiders, have the opportunity to see the data from the first feasibility study? When does that show up at a scientific meeting?

Well, I’m not even sure I have the timeline for when we complete the feasibility study, so I’m not sure when they’ll be presented. But clearly our investigators routinely present the data at all the major meetings. So you can count on getting good updates from them.

Okay and then just lastly on this point, just again, just to make sure I’m clear on this. The up to 400 patients that you talked about, that’s total for the two arms so basically let’s just say it’s 400, 200 in each arm?

Actually, I said less than 400 patients and yes, it’s total.

But its one-to-one randomization?

Yes it is.

Okay, thank you. And then just another couple very quick questions. Mike, you gave U.S. PERIMOUNT sales, I believe, in the U.S. up 20% in dollars. I’m just wondering if you can help us some way think about what units were, total valve units in the U.S. in the quarter, growth, something like that? And then, Corinne, I’m just wondering if you’ve given any thought - I guess if I do the math quickly, it’s $0.25 on the stock options - would you actually think to essentially go ahead and restate 2004?

Yes, I don’t know the exact number of unit growth. In general, you can do some kind of math here to reduce it by 25% or a third and that would be a safe number for what units grew.

Okay.

We haven’t -- I mean, we’ll certainly account for stock options when it’s required by the accounting standard, in terms of pro forma to 2004. I think in order to compare apples to apples we probably will show the numbers both ways.

Okay, great, thank you.

Thanks, Larry.

Okay. Well, thanks for your continued interest in Edwards. Corinne and David and certainly I welcome additional questions by telephone. So, with that, back to you David.

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.

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