愛德華生命科學 (EW) 2005 Q1 法說會逐字稿

Good evening, ladies and gentlemen, and welcome to the Edwards Lifesciences First Quarter 2005 Earnings Conference Call. (Caller Instructions.) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Erickson. Thank you, Mr. Erickson. You may begin.

Welcome and thank you for joining us today. Just after the close of regular trading, we released our first quarter 2005 financial results. During our call today, we'll focus our prepared remarks on information that complements the material included in the press release and financial schedules, and then, we'll 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 be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to 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, overall trends in the heart valve business, the expected growth rate of the Japan heart valve business, PERIMOUNT Magna and repair products, the market expanding opportunity for FloTrac, the launch of and sales targets for LifeStent, the market expanding opportunity for percutaneous valve therapies, the timing of clinical trials and regulatory approvals and the impact of foreign exchange. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements may be found in our SEC filings, which are available on our website at Edwards.com.

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

Thank you, David. We are very pleased to share with you our first quarter results. Highlights of the quarter include solid sales growth, several new product launches and continued progress on our percutaneous valve development programs. I'll begin by discussing our sales results, and then, turn it over to Corinne Lyle who will cover the rest of the quarter's results. And following that, Stan Rowe will provide a percutaneous valve update.

On a reported basis, total sales for the first quarter increased 6 percent to $249 million, driven by heart valve therapy and critical care sales. Our underlying growth rate was 6.4 percent, which Corinne will elaborate on later in the call. Sales growth was strongest in the U.S., Europe, and emerging global markets, and Magna, once again, was a significant contributor to our results.

Now, I'll discuss each of our product lines in more detail. On a reported basis, sales of heart valve therapy products grew 10.1 percent this quarter, with foreign exchange contributing $2.2 million of growth. During the U.S. launch of Magna in Q1 of 2004, we recorded approximately $2 million of stocking orders. Excluding the impact of these orders and foreign exchange, the global growth rate this quarter was 10 percent. Overall, the trends in the heart valve business continue to be very positive and we remain confident that we will achieve 10 percent underlying growth for the full year.

Globally, sales for our market-leading PERIMOUNT heart valves were strong in every region except for Japan. In the U.S., PERIMOUNT sales continued to grow in double-digits, led by the Magna valve, while porcine valves declined by more than 30 percent. And the global growth rate in heart valve repair products was 10 percent this quarter.

First quarter heart valve sales in Japan were slightly less than the same quarter last year. In March, we reached the anniversary of our competitor's re-entry into this market, and we continue to expect Edwards Japan to return to double-digit heart valve sales growth beginning in the second quarter. Our Prima Plus stentless valve, which was launched there in January, has been well received and is generating positive feedback from physicians. Its introduction strengthens our leadership in tissue valves in this region and reinforces our confidence in elevating our growth rate.

Strong market adoption of Magna, our newest generation PERIMOUNT valve, drove sequentially stronger sales again this quarter. Magna's unsurpassed clinical attributes are continuing to command a 20 percent premium price over our leading aorticPERIMOUNT valve. Throughout 2005, we'll be expanding Magna's availability and still expect it to become the leading tissue valve in the U.S. by the end of this year.

During the year, we'll also be expanding the availability of Magna with our new ThermaFix anticalcification process. At last week's American Association for Thoracic Surgeon's meeting, in addition to featuring Magna with ThermaFix, we unveiled two new products. Our first was the PERIMOUNT Theon mitral valve system, which is based on our existing mitral pericardial technology and includes enhancements and additional accessories along with our new ThermaFix tissue treatment. Patients in the U.S. have already been treated with the Theon system, which sells at a modest price premium and will be introduced in Europe next year.

Also at last week's AATS meeting, we announced the controlled introduction in the U.S. and Europe of GeoForm, the newest product in our expanding line of indication specific mitral valve repair systems. In a recent clinical feasibility study, the University of Michigan reported that GeoForm not only effectively reduced mitral regurgitation, it showed signs of improving ventricular function in a challenging group of patients. Along with our other differentiated repair products, GeoForm, with its innovative three-dimensional design, will help drive 10 percent repair growth in 2005.

Now, turning to critical care. Reported sales grew 6.4 percent this quarter, with foreign exchange contributing $1.9 million to the growth. Growth for the quarter was due primarily to robust pressure monitoring sales resulting from market share gains and sales of advanced technology catheters. Growth was partially offset by the ongoing decline of base catheter products.

We're pleased to announce that we achieved important developments in manufacturing milestones for our new minimally invasive monitoring system featuring the FloTrac sensor and the Vigileo monitor. Last month, we obtained the CE mark and launched FloTrac in Europe, and just yesterday we announced our targeted U.S. launch. Clinical findings from an international study presented at the ISICEM meeting in Brussels last month, confirmed that FloTrac provides an easy to use and reliable method for measuring cardiac output with accuracy comparable to our gold standard Swan-Ganz catheter. We continue to believe that FloTrac represents a market expanding opportunity that could significantly increase the number of monitored patients as well as double the growth rate of our critical care franchise within a few years.

Reported sales in our cardiac surgery systems product line declined 6.7 percent in the quarter. Excluding sales of our divested Japan perfusion products business and foreign exchange, underlying sales growth was 3.4 percent, led by market share gains in our cannula business. While we transition the Perfusion business to a buyer during 2005, we'll be acting as a supplier and expect to generate sales of approximately $3 million per quarter.

During the first quarter, we enhanced our epicardial Optiwave cardiac ablation laser system and returned to marketing trials. We continue to believe that Optiwave's unique laser energy technology offers superior clinical performance in an easy to use device. Our clinical experience with the new version will help shape our future launch plans.

Sales of vascular products grew 8.7 percent on a reported basis led by sales of interventional products and modest foreign exchange gains. On an underlying basis, Vascular sales were up 12.9 percent.

During the first quarter, LifeStent sales slightly exceeded $1 million. At the end of March, we reached sufficient inventory levels of our self-expanding stents, enabling us to begin consignment of the entire product line. We'll continue to broaden the availability of LifeStent to additional accounts in the U.S. and Europe throughout the second quarter. Expansion of our U.S. sales organization continues, and in the third quarter we will complete hiring.

As we continue to innovate and build upon our earlier experiences, we plan to introduce several product enhancements, including LifeStent Turbo, a next generation low-profile balloon expandable stent, which is planned for a third quarter introduction.

Additionally, we're developing a new delivery system for our self-expanding stents, also targeted for release later this year.

In 2005, we remain confident that we will achieve total peripheral stent sales of $10 to $20 million.

We continue to make progress in the pivotal phase of our RESILIENT clinical trial and expect to complete enrollment by the end of the year. As previously mentioned, the RESILIENT trial is intended to demonstrate LifeStent superiority over balloon angioplasty in the superficial femoral artery, or SFA. Positive trial results would position us to receive an SFA indication in the U.S. in 2007, and enable Edwards to clearly differentiate itself in the large and rapidly growing peripheral stent market.

And to update you on our angiogenesis initiative, our NIH-sponsored clinical trial using Sangamo's ZFP technology is proceeding and enrollment will continue with patients at higher doses. Additionally, Duke University has funded a new clinical trial for up to 20 patients with severe critical limb ischemia.

Our other distributed product sales for the quarter were $11 million and slightly above our original expectations due to some residual sales resulting from the timing of our exit of the Japan pacemaker business.

In summary, we continue to expect to generate total sales in 2005 between $980 million and $1.02 billion, unchanged from our earlier guidance. For the second quarter, we're estimating total sales to be comparable to this quarter. These projections assume foreign currency remains at current levels.

On a product line basis, our sales assumptions for 2005 remain unchanged except for other distributed products. For heart valve therapy, we expect annual sales of $465 to $480 million, representing an underlying growth rate of at least 10 percent. For critical care, we expect annual sales of $315 to $325 million, for cardiac surgery systems, we expect approximately $100 million, and for vascular products, we project $70 to $80 million. For other distributed products, we now estimate quarterly sales of approximately $8 million for the rest of the year.

Now, I'll turn the call over to Corinne.

Thank you, Mike. Once again, our financial results were solid this quarter and notable for the significant year-over-year improvement in gross profit margin, which helped drive out profitability growth. For the quarter, gross profit margin was 61.4 percent, significantly higher than the comparable quarter last year. The improvement over last year was due to favorable FX, primarily the expiration of last year's currency hedging contracts, as well as sales of higher margin heart valve products. We expect gross margin to continue to improve this year, and still project it to be more than 62 percent for the year.

First quarter SG&A expenses were $85.6 million, or 34.4 percent of sales. The primary contributors to the increase over the prior year were higher sales and marketing expenses in our U.S. peripheral stent and heart valve product line and higher international expenses due to foreign exchange rates. Assuming current FX levels, we expect SG&A as a percentage of sales for all of 2005 to be approximately 34.5 percent.

In the first quarter, we increased R&D investment by 19 percent over last year to $25 million. This increase was attributed primarily to investments in our percutaneous valve program. We expect R&D investments to be approximately 10 percent of sales for 2005.

Interest expense of $2.8 million for the quarter declined slightly compared to the same quarter last year, primarily attributable to a lower average debt balance. We expect a comparable level of interest expense for the second quarter and estimate the total expense for 2005 to be between $10 and $11 million.

Other income for the quarter was $1.1 million, resulting primarily from foreign exchange gains, and generally, we have a small expense in this line. During the quarter, we recorded a $2 million net pre-tax gain from special items consisting of a gain on the sale of our Japan Perfusion Products business of $7.7 million, and a $5.7 million charge relating to that operation's realignment.

This quarter, changes in foreign exchange rates compared to the same quarter last year lifted reported sales by about 2.5 percent. If rates remain at their current levels, we expect FX to have less than a 2 percent impact for the full year.

I'd like to take a moment to provide a little bit more detail on the difference between the reported and underlying sales growth rate. As Mike mentioned, our underlying growth of 6.4 percent is higher than our reported growth this quarter. This is because the reported growth rate includes the impact of discontinued businesses, which more than offsets the contribution from foreign exchange. We expect this trend to continue for the rest of the year. As part of our growth strategy, we have exited businesses that are less promising, and these included divestures in perfusion businesses and other distributed products in Japan, as well as the discontinuation of Lifepath.

During the quarter, we repurchased approximately 290,000 shares of common stock for $12.5 million. Long-term debt at March 31 was $275.8 million, resulting in a debt-to-cap ratio of 29.9 percent. Total accounts receivable increased $8.3 million from last quarter. Including receivables and our asset backed securitization program, days sales outstanding for the quarter stood at 71.3 days, a decline of about 1.5 days over the prior quarter. Inventories decreased slightly to $126.1 million from last quarter. Free cash flow, which we define as cash flow from operating activities minus capex, was about $15 million for the quarter, which was reduced by approximately $8 million of securitized receivables associated with the perfusion business in Japan. For 2005, we are still projecting free cash flow of $115 to $125 million.

As we said last quarter, we will adopt the revised FAS123 and begin expensing stock options as required by the accounting standard which is currently expected in the first quarter of 2006. Last quarter, we mentioned that we were expecting to repatriate $150 to $250 million under the American Jobs Creation Act. We now expect to be at the high end of that range and will make a final decision later this year.

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

Thanks, Corinne. I am pleased to provide you with an update on the status of our percutaneous heart valve initiatives. This quarter we made significant progress in all three programs and each remains on track with our development timelines. In our edge-to-edge mitral repair program, which seeks to treat patients with leaflet disease, as expected, we completed our first patient in late March at a leading European center. In this case, our catheter was used to successfully stitch together two leaflets of the mitral valve in a patient suffering from severe regurgitation. This repair effectively mimicked the surgical Alfieri repair. This case is part of a feasibility study involving several centers in Europe and Canada [indiscernible] our goal is to complete it this year.

In our coronary sinus program, we've completed several more patients as part of our feasibility study being conducted in Europe and Canada. These cases have proven that it is possible to reduce a patient's mitral regurgitation through percutaneous deployment of our proprietary coronary sinus implant. These early cases are very encouraging and have enabled us to identify opportunities to improve the technology, which we are aggressively pursuing. It is also our goal to complete this clinical feasibility study by year-end.

We are also continuing to make progress on a number of fronts in our percutaneous aortic valve program. In pursuit of a CE mark in Europe, this month we expect to complete first implants as part of our non-randomized revised study treating high-risk patients. We have received approval at three study sites, and are currently conducting clinical and procedural training. We are also seeking approval for several additional study sites, which keeps us on track to obtain our CE mark in 2006.

Separately, in the past few months, Professor Cribier has completed approximately 20 additional compassionate cases in France. Results from this patient series will be reported at the Paris course in May.

Last month, our U.S. clinical study began at Beaumont Hospital where to date several patients have been treated and active enrollment continues. We also recently received approval to add a second site. We remain on track to complete both our 20 and 40-patient feasibility trials by the end of the year, which would be followed by the start of the REVIVAL pivotal trial. Although we do not comment on individual cases, in March, Beaumont reported that they successfully treated their first patient using our Cribier-Edwards valve. Remarkably, this patient, who before his procedure struggled to walk even short distances, was discharged after three days and was back to work a day later. This vividly demonstrates the promise of this technology for thousands of patients either too sick or unwilling to undergo traditional valve surgery.

In addition, we've completed important development milestones in the areas of product and procedural enhancement. In Canada, we completed an important series of cases using our custom retrograde delivery system. These cases have demonstrated how significantly our retrograde technology can simplify the delivery of the percutaneous heart valve. Also in Canada, we have successfully completed our first cases using the new larger 26-millimeter Cribier-Edwards valve. Having this larger size available allows us to accommodate a wider range of patient anatomies in our clinical trials.

As we gain clinical experience in all three of our percutaneous programs, our confidence in the potential of these technologies to treat additional patients and expand the heart valve market increases. We and the clinicians involved in our trials will continue to provide updates in future months.

The next of these progress reports will occur at the Paris course in May where a number of presentations on percutaneous technologies are expected. And in September, AATS will present a new program called Valvular Heart Disease 2005, Advanced Surgical and Interventional Therapies, directed by Toby Cosgrove and Marty Leon. This course signifies the growing understanding among cardiovascular surgeons and cardiologists of the need for collaboration in the development of percutaneous therapies.

Mike, back to you.

Thanks, Stan. Before we open it up to questions, I am pleased to say that we are well on our way to achieving our 2005 financial goals. In particular, we expect to generate total sales between $980 million and $1.20 billion, grow our gross profit margin by more than 100 basis points, deliver net income growth of 13 to 15 percent, excluding the impact of special items, and generate free cash flow of $115 to $125 million. Based on our strong first quarter results, we are narrowing our 2005 EPS guidance from $1.90 to $1.95, which is at the higher end of our previously stated range.

Finally, we find the quarterly First Call EPS mean estimates for the rest of the year to be reasonable. Our first quarter results, led by solid Heart Valve Therapy and Critical Care sales, provide a strong base from which to grow and build momentum for the rest of the year. We are particularly excited about the recent launch of our new FloTrac system and the availability of our complete line of peripheral stents and the growth opportunities these represent over the next few years.

And with the insights we've gained and the progress we're making on our innovative percutaneous valve programs, we are very optimistic about the outlook for Edwards. So with that, Corinne, Stan, and I are ready to answer your questions. And in addition, we have Stu Foster here with us to answer any questions that you may have about our peripheral stent program.

Thank you. (Caller Instructions.) Our first question is coming from Katherine Martinelli with Merrill Lynch.

Great. Thank you. I just wanted to ask you a question, Mike, on the heart valve business in terms of the expectations for the year. The Q1 growth [indiscernible] I'm thinking and the underlying gains in the 8 percent vicinity. Anything specific going on in the quarter, noting that you're going to be facing tougher comps given the Magna launch and I know there are some other new products coming that will help offset that, and the potential launch in the fourth quarter of a competitive tissue valve? [Indiscernible] thinking the numbers are closer to the lower end of the 465 to 480 range, or nothing in the quarter that caused you any particular concern?

Thanks, Katherine. I appreciate that. No, we're not guiding toward the low end of the 465 to 480 range. As a matter of fact, we expect the underlying growth rate, so without foreign exchange, to exceed 10 percent for the full year, which says that we expect the growth rate to be higher going forward. What I tried to relate, but it may not have come through, is that if you take--if you consider that in the first quarter of 2004 we had some stocking units in Magna, which was the primary launch quarter for Magna, that equaled about $2 million. Those by themselves pulled down the growth rate in the quarter pretty significantly by a couple of percent. And as a matter of fact, recognize that because we still had not anniversaried the return of a competitor in Japan, Japan's growth rate in heart valves was still negative in the first quarter and we expect that to rebound to double-digits. So we expect our growth rate to step up for the rest of the year.

And then, could you just give us a sense for what peripheral stent sales were in the quarter? I'm assuming it was obviously still capacity constrained and any comments regarding your target--I think you were in the $10 to $20 million range for the full year?

Yes, exactly. Yes, we did get to the target inventory levels that we wanted to get to, but it didn't happen until the very end of the quarter, so it really didn't help us out much. We sold a little more than $1 million of peripheral stents in the quarter, but we have reiterated that we continue to feel confident that we'll achieve between $10 and $20 million of peripheral stent sales this year. So it means we're going to get on a pretty aggressive curve here.

Great, thanks.

Our next question is coming from Tim Nelson with Piper Jaffray.

Just to follow-up on that peripheral stent question, you talked about complete inventory. What are the longest sizes you have and will that be scheduled to be expanded over the course of the year, Mike?

Yes. We have Stu here, Tim, so I'll turn that over to him.

Hey, Tim.

Hey, Stu.

Right now--we had to fill out the inventory and the longer sizes came last. Right now, we have everything between 6--on the self-expanding side, 6 millimeter and 10 millimeter stents up to 90 millimeters in length. And the long stents, the 70s, 80s, and 90s, which are generally used in the long SFA lesions, which is what we're targeting, we didn't get till just recently. So that's what we've got and we've started consignment going just a couple of weeks ago and we think we're on our ramp.

So no plans to go to 120 or 150--?

--Well, yes, we have plans to do longer stents, of course, but those will come later.

Okay. On the percutaneous side, could we talk about the mitral issues you mentioned in terms of redesign? Is there a substantial new effort there and how does that effect the timeline?

Hi, Tim.

Hi.

No, we're very enthusiastic about this. We're the first people to go in and actually prove that in the coronary sinus you can effect mitral regurgitation with a permanent implant and that's terrific. But I can tell you there are some things that we've learned that we think will help us really optimize this product, and we think we can do it quickly and complete our feasibility studies this year.

So, the feasibility study--and then, any further updates on what the FDA might require from a pivotal trial?

No, we've really not gone there. No discussions with FDA.

Okay. And then, finally, on back in the heart valve business, at the AATS there was a lot of talk about mitral regurgitation and the need to do asymptomatic patients following the Serano article that was in the New England Journal. Is that factored into your guidance for the repair business, Mike?

We certainly have seen more interest out there, particularly from patients. For whatever set of reasons, this article in the New England Journal has stimulated patients to carry that article into their physicians and we're getting a lot of reports of that. I don't know what it's done to underlying growth rates. What we've said is we feel confident that we will grow our repair business 10 percent this year.

And that's up--it's up the same as prior growth rates, isn't it?

I think we were a little under 10 last year. I want to say we were in the 8 to 9 range.

Okay, keep it--oh, then finally, on stocking, you had 2 million stocking in the first quarter of Magna. What about the full year stocking impact?

It declines. I want to say it probably is half that in the second quarter and continues to decline. So that was the single biggest quarter of stocking in the year.

Okay, great. Thanks.

Thank you.

Our next question is coming from Mark Landy with Susquehanna Financial Group.

Evening, folks. My--probably a question for Stu. Could you just maybe give us an update on the peripheral stent sales force? Obviously, you've had some good feedback from physicians given your confidence in the sales number in peripheral sales for the year. I mean, could you share some of those feedbacks with us?

Sure, Mark. Right now, we're sitting at about 30 people in that peripheral stent sales group. Our plan is to get up in over 40 and do that by the third quarter. We're pretty selective about who we're trying to hire here. We want people with relevant experience. And right now there is a lot of competition for those kind of people from other folks. In terms of feedback, we're aimed at first and foremost going after the SFA and we're doing it through the clinical trial. But we're also able to show folks just by the flexibility of the stent and the way it looks in their hands and on a table that it's the right stent for that anatomy where there's a lot of motion and there has been a lot of issues regarding durability of the stent itself. And so, I think that's what drives physicians' interest in our product and why we remain optimistic about meeting those sales targets.

Thanks, Stu. And is this commentary that we've heard--probably for Stan. Stan, physicians close to the U.S. feasibility study have voiced some frustration that the trial might be going a little slower than they had thought. Is this something that you're doing deliberately by kind of holding them back or is it something else that's kind of slowing down the process?

Mark, I'm very pleased with our progress. We've opened one site, Beaumont Hospital, and he's been moving up the learning curve nicely. And a lot of folks want to get into this trial. So we're actively preparing for additional sites, so I think we're moving very nicely.

My understanding is that your second stent to the IRB is already up and approved. Is there any holding in that? I know they had mentioned they had more than 10 patients lined up. So, I mean, should that come on line soon or is that going to be a little while?

No, I would expect that we would get started in a second site easily this quarter.

Okay. Thanks, guys.

Thank you, Mark.

Our next question is coming from Glen Novarro with Banc of America Securities.

Thanks. Good afternoon, guys. A couple of questions. First, Mike, can you break out the valve growth in the quarter between unit volume and price? Second, for Stu, you want to go from $1 million in sales to $10 to $20 million this year on peripheral stents. Maybe help us understand how you get there. Does it require more hospitals in terms of new accounts opening? Maybe you can tell us about how many accounts you have to date and how many accounts you think you'll go into. And then, lastly, for Stan, when you read Dr. O'Neil's comments after the first implant, he talked about delivery system still needed to be upgraded and advanced. So can you give us timelines as to when the delivery system can be approved and what kind of regulatory pathway would that require? Thanks.

All right, Glen. We'll try and take these in order. And if we missed any of those let's circle back. In terms of the heart valve, the dollar growth is higher than the unit growth. I'm not sure I have a good number for you on a global basis in terms of what the unit growth was. But for those people that are sensitive to what share is doing in the U.S., the U.S. heart valve rate this quarter was around--was in excess of 9 percent. And when you consider the fact that it was the one that had comparisons with the stocking orders, that growth rate would have been in the 11 to 12 percent range for the U.S. And so, we're not concerned that we're doing anything but gaining share at this point in the heart valve business.

Maybe has price changed in terms of the mix year-over-year or sequentially or is it still pretty strong?

In terms of the premium price for Magna, that continues to be as we reported last year. We continued to get our 20 percent premium. But what happens is Magna is getting larger and larger in terms of the total percentage. So it--as that grows bigger, what you see is ultimately what looks like price growth for Edwards.

Okay.

Hi, Glen. This is Stu. Let me answer your question on the stent business. What's been limiting our ability to ramp up stent sales in large part is the fact that without enough inventory and being able to go into an account and replace an existing competitor with the full range of sizes, we're very reliant on our sales people being at the case at the time it happens. Now, now that we have inventory in place, we're able to do some of that. So we're now able to go in and replace others' inventory with ours and less dependent on having someone there for each case. And that's why the big ramp in--just to give you a sort of a rule of thumb goal here, we are expecting that in the second quarter, for instance, we'd be able to double sales from our existing sales in the first quarter. And if you sort of go through that kind of a ramp, it takes you into the range that we're talking about.

Could you at least give an update on how many hospitals you may be servicing today?

Well, very few in terms of hospitals where we have been able to provide full consignment inventory, and our goal is to ramp that up quickly. And I don't have an exact number for you.

Okay. And Stan?

Yeah, Glen. Thanks for your question. Regarding Dr. O'Neil's comments, I guess first I'd say we only have the antegrade approach in the United States. And this is not--the antegrade approach is not an easy procedure and it takes some training. I think if you ask Dr. Cribier what he thought of this procedure after the first five cases he'd say it was pretty challenging, but his last five cases have been a whole lot easier. So there's a learning curve and with experience I think it gets easier. That being said, I think a lot of the guys are really anticipating and looking forward to the retrograde system coming into these trials and that's looking terrific and we're going to be pushing forward to get that include in the trials just as soon as possible.

Okay. Thank you, guys.

Thanks, Glen.

Our next question is coming from Mike Weinstein with J. P. Morgan.

Thank you. I have a few questions. Maybe first to follow up Glen's. Do you not know the U.S. unit valve growth? You don't know the split between units and price in the U.S. market?

Do I--I probably--in the U.S. we could probably get that number.

Or worldwide--.

--I think in general, Mike, what we have shared--I don't have the worldwide number because remember it gets complicated for a couple of reasons. There's mechanical valves in there and porcine valves are a little broader piece. So I'm not sure that it's a great indicator. In the U.S., we continue to feel that the trend is continuing that about two-thirds of the growth that we're seeing comes from units and the other third tends to come from price. And this trend is by in large the exact continuation of what we saw in 2004.

The other thing that sort of complicates the unit numbers, Mike, is depending on how you end up counting those stocking orders from last year. And so that's why I'm not sure that's an easy equation. You really have to work your way through that one.

I think it was the third quarter is when you were really cranking in the U.S. and I think your U.S. down growth was 20 percent in the quarter, I believe. And I recall about 9 to 10 percent units. Does that sound right?

Yes, but again, if you're dealing with it from a growth number perspective, I think that's accurate. But if you look at the absolute numbers, the sequential growth has been quite substantial. So you'll see, if you take a look at what U.S. valve sales were in fourth quarter versus first quarter, you'd see a substantial step up. So, for example, I think we sold 25 percent more Magna valves in the first quarter than we did in the fourth.

Well, we're just trying to look at it as you anniversary submit Magna comparisons, what that's doing to book your unit growth and that's [indiscernible] last year. And if we can--actually, the first time I heard about the stocking benefit in the first quarter of last year and we went back and check it and I don't think we'd heard about that before. And is that--which sounds in itself unusual to me that you're actually able to stock heart valves and collect revenues on that. Is that true across all heart valve franchise? Is that unusual?

It's not unusual at all, Mike. And if you go back, we're very sensitive to this issue--to making sure that we are consistent in our comments. I'm not sure it was in our strip comments, but I know it was in Q&A comments last year that we talked about $2 million worth of stocking orders in the first quarter.

That you guys said in the first quarter of last year that you had $2 million of stocking?

That's correct.

Maybe just if you could help us a little try to understand, maybe Corinne, what to do to see how you guys got to the underlying sales growth number. We have the press release, but it's a little bit confusing because you show 2005 discontinued business impact and you show cardiac surgery as $2.8 million, and the total being $2.8 million. Is that the impact versus 2004? How do you end up getting to the 6.4 percent?

Sure. I mean, the number--there's a little bit of rounding going on. But if you took the 2004 discontinued business impact of 8.9, subtracted that from--.

--Wait. That's versus 2003, right? Am I looking at that right?

No, that's the impact in the first quarter of 2004. Just the $8.9 million.

That's first quarter of '04 versus first quarter of '03?

No, that's just first quarter--that's just the impact of the discontinued businesses. $8.9 million.

Okay. So you had $8.9 million in revenues in businesses that were counted discontinued?

Yes. So those are no longer there. Just take them out of the '04 number. You take the $2.8 million out of the '05 number of 249--.

--And you're looking at the differential.

And that's the differential from the discontinued business impact. And you also have to take out the FX impact on the 2005 number and that's how you get to the underlying growth.

Okay. So you're not looking at it as--okay, I'm just trying [indiscernible].

What we're trying to do is get to same store growth here, Mike. So what we do is we take the discontinued businesses out of this year and the prior and we take any foreign currency differences between the two years out so that you can see what the underlying growth rate of the business really is.

Okay. It's just that the approach is a little bit different than I guess we were using. But I think I understand what you're trying to do.

We're open to suggestions if you have a better thought.

No, that's all right. We're just trying to make sure we're on the same page. And then, the commentary around the valve franchise. Obviously, you are expecting the Japanese business to reaccelerate because you're using the comparison. And then, in the U.S., how much does ThermaFix play a part of your expectations over the next few quarters, just so we can gauge that?

It helps, but it's not a huge part of that. I just want to reiterate what I've said in the past that the launch of Magna was not really a step function. It's more like a ramp. The way our customers tend to behave with new valve products is adoption tends to happen on a more gradual basis. And so, probably the more dominant effect that we continue to see throughout the course of this year in terms of the addition of growth is what's still coming from Magna.

And then, lastly, maybe help us just try and quantify the currency impact to the bottom line for the quarter?

We had about a 1 cent impact versus last quarter.

And how do you get that?

Essentially, it's a combination of some of the impact on the GP line as well as the other income versus last quarter. So it's about a penny.

So it's in--the other income is--you have $1.1 million and a year ago that was--it's a $1.1 million of other income versus last year being either--?

--Yes, I'm looking at it versus last quarter. In terms of versus the first quarter of last year, the first quarter of last year was unusual because we did have some foreign currency hedges in place that sort of skewed the numbers and makes the comparison very difficult. So rather than do that, just versus the fourth quarter, it's about a penny. And if you look at the currency rates where they are today versus where they are at the end of the year, it drives about a penny on the bottom line.

What if--I'm just trying to say if we want to look at it year-over-year rather than sequentially, do I--how do we think about the impacts first on gross profit and then, do we back out $2.2 million?

You could normalize the GP to what our GP was for the second, third, and fourth quarters of last year if you wanted to. So it was about close to 60 percent for the year on a normalized basis. And you could incrementally add that to your first quarter to get to a normalized first quarter when you look at the difference versus this quarter.

Okay, that's helpful. Thank you.

Our next question is coming from David Zimbalist with Natexis Bleichroeder.

Hi. Thanks for the question. I wonder if you could talk a little bit about Prima Plus in Japan. You mentioned that it's part of your expectations for growth in the Japanese tissue valve market. Could you tell us a little bit about how that's being taken up and what kind of contribution you expect it to make?

Yes. There's been a nice up tick in the first quarter that's associated with it, but I think what happens is that we always have to remember that the Japanese market is much smaller than the U.S. market or Japan by comparison when it comes to heart valves and so it was less than $1 million of impact in the first quarter. And certainly, that's going to grow over time and in terms of percent growth in Japan, it will be substantial and really lead to our strong lead already in tissue valves. But in terms of what it's going to do to Edwards globally, it is a niche marketplace and it's not going to be a substantial driver.

Okay. And can you talk a little bit about the protocol you have or the series of steps you have to go through in order to get the retrograde product--the retrograde delivery system into the U.S. feasibility study?

I think we just have to do pretty standard engineering testing and file that as an amendment to our IDE to gain an approval.

Okay. And what kind of timing are you hoping for on that?

I really don't know how long that's going to take. We've got to work through that. But it's probably within the next--.

--I'm sorry?

Yes. You mean the normal cycle is about 30 days for a review with the IDE, but we probably won't be filing the retrograde delivery system for another couple of months is my guess.

Okay. And does Dr. Cribier use it in his cases in France?

No, he has not yet.

And now, this last question in general. Are you getting any pressure from hospitals that by in large today are purchasing your tissue valves to move to consignment in any way?

Yes, we routinely hear from hospitals that they would like to have us consign tissue valves and by in large our competitors do that and we've resisted that. We have encouraged hospitals to buy their sets of valves from us. We do--we have other approaches that we have to help hospitals be able to afford the introduction of new valves, but we ship valves daily so that when they use a valve we replace it.

Okay. Thank you.

Our next question comes from Alex Arrow with Lazard Asset Management.

Thank you. Actually, it's Lazard Capital Markets. If I could start out on FloTrac, the comment you made was that the success of the FloTrac may result in a doubling of the growth rate of the clinical care business within a few years. And it's at 6.4 percent now. So am I--or is it okay to interpret that that would be a projected 13 percent growth rate within two or three years from now for the entire Critical Care business?

No, I wouldn't say that, Alex, because part of that 6.4 percent is currency driven. So I think if you looked at the underlying growth rate, and this is what I was trying to refer to, so I--pardon me for the confusion here. I was really referring to a doubling of the underlying growth rate. And that critical care business usually runs in the low single-digits. It was running around 4 percent, I think 3.8 percent for this quarter, on an underlying basis. So the thought is to double that rate.

Okay. So 8% within two to three years timeframe?

Correct.

And since you also commented that it was comparable results to the cardiac output measurements you get from the Swan-Ganz, should we model in any kind of a cannibalization of Swan-Ganz or is it a new market expansion?

You can imagine, Alex--that's a good question. You can imagine, Alex, our goal is not to cannibalize our old product line and we're going to be going to areas in the hospital where we think they don't do monitoring where there is an opportunity to use FloTrac. You know, in the long-term, is it possible for there to be some cannibalization? Yes, of course, there is. But we don't expect that to be the dominant impact. We think that there is going to be actually a rather slow movement.

Okay, thanks. Next, maybe for Corinne, just a question on Company-wide gross margins. It looks like you're guiding to about 200 basis points higher in '05 than you were for Company-wide gross margins in '04 and '04 was already up 200 basis points over '03. Is that entirely from magna or is there any other material product shifts that are driving the better gross margins?

What we said at the end of the fourth quarter of '04 was that we expected a 100 basis point improvement over the fourth quarter of '04. And that number was about 61.5 percent. So we're hoping to do more than 62 percent this year, as you suggested. In terms of what drives our gross margin improvement year-over-year, it's driven by the fact that our fastest growing businesses are also our highest margin businesses. And certainly, Magna is part of the heart valve mix. And in addition, as you know, we've been divesting lower growth margins--gross margin businesses and that also helps improve gross margins going forward.

Okay. Have you given any guidance or would you give a comment about whether you'd expect this type of Company-wide gross margin improvement to continue into the year afterward and whether it would be up to say 64 percent?

Yes. Our guidance historically has been that we expect a 50 to 100 basis point margin improvement from year-to-year, and we will continue to expect that going forward.

Okay, great. If I could then shift on to the percutaneous valve. First, just a nomenclature clarification. The new name--I think it's a new name--Cribier-Edwards valve. Is that PVT valve or are these two--am I mixing up names? Is there a PVT valve and then also a Cribier-Edwards valve.

No, same product.

Okay. Are you--so the name PVT valve is a retired name at this point?

I don't think we actually ever called it to the PVT valve. A lot of folks did, but we named it the Cribier-Edwards valve.

Okay. And so you mentioned the 26 French, that's an increase I believe over the valve size at the time the PVT was acquired by Edwards. Is that the new--is the plan for that to be the new standard size in the one that you would go forward when you get approval? Would it be 26 French would be like the main standard size?

Yes, I'm sorry for the confusion, Alex. No, it's not 26 French. It's 26 millimeter. The product that you're familiar with has a diameter of 23 millimeter, which is the most common diameter for surgical heart valves. The 26 millimeter is to treat larger patients. We're talking about diameter.

Okay. So would there then be the two separate sizes you would go to market with?

Yes, these are two separate sizes and they both go through--well, actually, the 23 goes through a 22 French sheath now, and the 26 goes through the 24 that the previous one used to go through.

Okay. So there's two separate sheath sizes and there would be a difference in the size of the vessel that they can fit through in addition to the size of the actual valve they are able to deliver.

Right but we've downsized.

Okay. And then, there's--finally, on percutaneous. Stan, there's been some announcements about CoreValve. Could you comment on the relative level of clinical progress that you've seen CoreValve making and how it compares to the progress that you're making with the Cribier-Edwards valve and whether that's something that would be a real threat or not a real threat?

Well, I think this is such an attractive area that we're going to have competition. And we're very confident in both our technology and in our intellectual property position. And I think we're going to continue to outpace everybody clinically.

Would you say the current progress that CoreValve has been announcing is well behind what you're already doing or--I mean, are you going to outpace them or do you already outpace CoreValve?

I think I'm very comfortable with our leadership in the clinical space and in the technology space.

Okay. And then, if I'm allowed one last question, then maybe just you mentioned TurboStent on the peripheral stent. Can you say how that stent differs from other leading stents that are out there.

Yeah, let me--TurboStent is going to be our new balloon expandable stent. It--what we try to do is take the best properties of our current balloon expandable stent, which are its flexibility and low profile. And we've kept that and to that we've added additional radial strength and additional radial capacity. So we think it's going to be a very, very well accepted stent by the folks who do peripheral vascular.

Okay. It's stronger and it's more radial opaque.

Correct, without giving up on profile or flexibility.

Okay. The name implies that it's faster, but it's just stronger and more radial opaque is the main difference.

Thanks, Alex.

Our next question comes from Jason Mills with First Albany Capital.

Hi, Mike. Thanks for answering the question here. I wonder if you could give an update on your mitral replacement initiative. What's going on in that development pipeline? And I think in the past we've heard rumors or discussions about potentially putting Magna in that position. Could you comment about that, the timing, and what the competition is currently in that area? I don’t think there is much going on, but if you could help me there.

Yes. Thanks, Jason. In the mitral position, we--one of the things that I talked about is the fact that we just introduced a new system at AATS called the Theon mitral valve system, which is really based on our existing mitral pericardial technology, and additionally includes some enhancements and some accessories as well as the ThermaFix treatment process. And so, our goal here was to make our existing mitral pericardial valve, which we think has durability that should be better than other valves, easier to use. And we expect that to be an important introduction this year. Now, longer-term, we are considering more enhancements for mitral valves. We don't have anything to announce at this point, but we think that stay tuned. This is an area of innovation that we're interested in.

So is this a growth dragging area? And if so, would that be more '06, '07? You've anniversaried Magna at this point. ThermaFix may help over the course of 2005 some of these other products. But is this a potential--more than just a generation type growth driving initiative beyond maybe '06, or is that--?

--Yes, I think we've gone on record as saying that we've got a lot of potential in the mitral position. There is still a lot of mechanical valves used there by comparison to the aortic position. There are still a lot of porcine valves used in the mitral position, because they are somewhat easier to use. And so we know that as we make advancements with our pericardial technology and make that easier to use, that we have tremendous potential to gain share. And really what's been in our numbers so far is primarily growth or more growth in the aortic position than in the mitral. So we do look forward to this as being an opportunity for the Company.

If I may just follow-up on that, what are the hurdles here for tissue valves in that position just for someone who just doesn't know?

Do you mean hurdles in terms of the design and performance?

Yes, exactly.

Yes. The key issue that people think about is it's more demanding than what the aortic valve sees. So the durability of a tissue valve has always been questions, which is what has driven some mechanical valve use. And also, the approach is more challenging for a surgeon. It's a more difficult surgery. The anatomy is more challenging. And so it's the combination of ease of use and durability is the combination that's the winning combination. And that's what we're going after.

Okay.

Does that answer your question?

That does help me. Thank you. If I may just ask sort of a long-winded strategic question here. Corinne, I think you said your debt-to-cap is under 30 percent. It's obviously been going down. You reiterated your free cash flow guidance for the year upwards of $125 million. And now, you're going to have a 40-person sales force in vascular and you've been expanding your sales force across the board. It seems somewhat leverageable. I guess my question here is, and I know you won't comment specifically about companies you may acquire or products, but where may we see you make acquisitions to bridge the gap here with your core heart valve business, the launches in critical care, that could help growth, but yet, you are still talking about single-digits in those areas. Where may we think or see you acquire to in '06, '07 generate growth to bridge you to percutaneous valve replacement?

Jason, this is Mike. You mind if I jump in on this one, because it's kind of a broad strategic question? We're very focused as a Company in terms of the areas where we focus. And you know where those are. Heart valve disease, critical care monitoring, and peripheral vascular disease. And those are going to be the areas where we're going to look at building and trying to enhance positions that are already leadership positions and make them stronger than ever. So when you see us look at things externally, those would be the areas where you should expect us to look. We still think there are substantial unmet clinical needs in those spaces and think they are real opportunities.

Would it be fair to say that there are more acquisition or acquisitive potential activities in peripheral vascular given the plethora of smaller companies out there relative to those other two areas, or is that not the case?

It's--traditionally peripheral vascular--it's a pretty active space. And there are a number of things going on there. But I'll add with the advent of percutaneous technologies in heart valves we're seeing a lot of innovation go on in that space as well.

Okay. Thank you very much for the help.

Thanks.

And our last question is coming from Greg Simpson with Fessel, Nichols and Company.

Okay, thanks. Good afternoon, guys. The hazards of being last in queue. I'm down to scraps here. A couple of questions if you don't mind. Corinne, everybody has obviously struggled with the other income and expense line. I realize it's a difficult proposition, but can you give us your best guess at guidance at least for the second quarter if not for the remainder of the year?

As you suggest, it is a hard line to provide guidance on. But generally, this is a line that we have a slight expense in. Normally, we have our asset backed securitization expenses in this line and the other expenses are hard to predict. But we are not expecting any income in this line going forward for the rest of the year.

Okay, great. That's helpful. And last question for Mike or Stan. Stan, you seem to have addressed this issue in your prepared comments. But as you guys know, I mean, there were some rumors floating around at AATF last week or a week and a half ago about PVT and the trial. I'm still going to call it PVT if you don't mind. It sounds like from your prepared remarks that things are going fine there. But just so I'm clear and everybody is clear, how many patients have been done here in the U.S. at this point under the safety trial?

Yes, Greg. Thanks for your question. We're not going to keep tally on the number of patients. It's too hard to do. But I can assure you that the trial is moving ahead and the device is performing as expected. And we're really confident in both the clinical study and how the device is performing today.

Okay. Has there been anything that's gone on in the--I don't want to get into the specific rumors. But has there been anything that's gone on in the safety trial that would be considered a pretty serious issue?

We're always going to have challenges in treating these kinds of patients, Greg. And that's just the nature of this beast. But the trial is proceeding well. We have an independent safety monitoring board that oversees the trial and the active enrollment is continuing.

Okay. All right. Thanks, guys.

Okay. Thank you very much for your continued interest in Edwards. Corinne and David and I would certainly welcome any additional questions by telephone. With that, back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying growth rates and amounts adjusted for special items, are included in today's press release and can 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 and the pass code is 146444. And I'll repeat those numbers, 877-660-6853 or 201-612-7415. The account number is 2995 and the pass code is 146444. Alternatively, an audio replay will be archived on the Investor Relations section of our website at Edwards.com. Thank you very much.

This concludes today's conference. Thank you all for your participation.