愛德華生命科學 (EW) 2005 Q2 法說會逐字稿

Greetings ladies and gentlemen and welcome to the Edwards Lifesciences Second Quarter 2005 Earnings Conference Call. At this time all participants are in a listen-only mode. [OPERATOR INSTRUCTIONS] And 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 Second Quarter 2005 Financial Results. And during our call today, we'll focus our prepared remarks on information that complements the material included in the press released and financial schedules and then allocate the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO; and Corinne Lyle, CFO. Before I turn the call over to Mike I would like to remind you that during today's call we will be making forward looking statements based on estimates, assumptions and projections. Although we believe them to be reasonable, these statements involve risks and uncertainties that's 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, the ability to exceed 10% growth in Heart Valve Therapy sales and double the growth rate of critical care. The timely launch and adoption of FloTrac and LifeStent products, the market expanding opportunity for Percutaneous Valve Therapies, the completion of clinical trials and the timing of regulatory approvals, and the impact of foreign exchange and the effectiveness of FX hedging programs. Additional information concerning factors that's 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're very pleased to share with you our second quarter results which reflect strong top and bottom line growth. Double-digit sales growth was driven by 15%, underlying growth and Heart Valve Therapy sales and strong performance in our Critical Care and Vascular franchises. Total reported sales growth this quarter was 10.1%. On an underlying basis growth was 11.6% reflecting last quarter's divestiture of certain low margin businesses in Japan. Underling sales growth was solid in all regions with particular strength in the U.S. and Europe.

I'll begin with a review of product line sales and update our Percutaneous Valve programs and then Corinne Lyle will discuss the rest of the quarter's results. On a reported basis sales of Heart Valve Therapy products grew 17.3% this quarter with foreign exchange contributing $1.9 million of growth. Sales of premium priced new tissue valve and repair products including Magna, Magna with ThermaFix, Theon, Prima Plus, and IMR were contributors to growth. And these innovative technologies drove clear and encouraging market share gains globally, particularly in the U.S.

I'm pleased to report that sales of our heart valve products grew in double-digits in every region. In the U.S., sales grew by more than 15%, driven by our market leading PERIMOUNT products. New product stocking orders in the U.S. were approximately $1 million similar to last year's level. As we expected, growth in Japan returned to double-digits this quarter as we passed the anniversary of our competitor's re-entry into this market and also successfully launched the PrimaPlus Stentless Valve.

We estimate global market growth during the first half of the year was typical ranging from 4-6% overall and twice that for tissue valves. Market growth in the second quarter appeared to be higher than average but within the normal variability experienced from quarter to quarter. Sales of our premium-priced Magna valve continued to gain momentum this quarter driven by expanded clinical use and the addition of our new ThermaFix advanced tissue treatment. Magna sales continued to grow due to the exceptional features and performance of this valve, and Magna has surpassed our original expectations by becoming the leading tissue valve in the U.S. in just 18 months.

In repair products, double-digit sales growth in every region drove an overall global growth rate of more than 15%. IMR, designed for a ischemic heart valve repair, contributed to results this quarter. GeoForm, our newest indication-specific mitral valve repair system, is now being introduced in the U.S. and will soon be launched in Europe. We expect innovative products such as these that treat new indications to be the key drivers of future repair growth.

Our PERIMOUNT Theon mitral valve system which we launched in the U.S. this quarter is being well received by clinicians. This system includes ease of use features and enhanced durability to better address the demands of the mitral position. Based on the strength of this quarter's sales and the continued momentum of new products we are confident that we will exceed our previously stated goal of 10% underlying Heart Valve Therapy sales growth for the full year.

Turning to critical -- to our Critical Care franchise, reported sales grew 7.9% in the quarter with FX contributing $2 million. Growth was due primarily to strong pressure monitoring sales resulting from market share gains, sales of advanced technology catheters and an expanded Hemofiltration product line in Europe. Partially offsetting the growth was the ongoing decline in base catheter sales. During the quarter we began the targeted launch of our new minimally invasive FloTrac monitoring system. Consistent with our expectations, sales this quarter were about a half a million dollars. We are receiving encouraging feedback on this innovative technology. This quarter we plan to commence a large multi--center European study to measure the clinical and economic benefits of FloTrac. We expect the results of this cost benefit study which should be available in 2006 to encourage broader adoption of this easy to use system. We also continue to believe that FloTrac represents a market expanding opportunity that could double the growth rate of our Critical Care franchise within a few years.

Reported sales in our Cardiac Surgery Systems product grew less than $1 million for the quarter. As a reminder , we divested our Japan Profusion products business in January of this year. Excluding sales of this divested business and foreign exchange, underlying sales growth was 16.9%. Recall that last year approximately $1.5 million in sales of TMR lasers were deferred to the third quarter as we awaited the outcome of a CMS panel review. As a result, TMR sales benefited this year's second quarter growth rate and will detract from the third quarter's growth rate. CSS results were also driven by strong Cannula sales resulting from both market share gains and a shift to specialty products.

During the second quarter we expanded the limited released of our Optiwave Cardiac Ablation System. We continue to believe our product's unique laser energy technology offers superior clinical performance and is ideally suited for minimally invasive procedures. Our clinical experience with this new version will continue throughout 2005 as we collect further input on clinician preferences and system performance.

Sales of our Vascular products grew 10.5% on a reported basis lead by interventional products and modest foreign exchange gains. On an underlying basis, excluding divested products and foreign exchange, Vascular sales increased 12%. Sales of our LifeStent products for the second quarter increased to approximately $2 million. At this pace we project total Peripheral Stent sales for 2005 to be at the lower end of our previously stated 10 to 20 million-dollar range. Throughout the quarter we continued to broaden the availability of LifeStent to additional accounts in the U.S. and Europe. We also continued to expand our in-house development and manufacturing capabilities of components such as stents, delivery systems and balloons which are applicable to all of our interventional programs. In addition, we continued to expand our U.S. sales organization and expect to complete hiring over the next few months.

In the third quarter we will begin introducing the first of several new products starting with the LifeStent Turbo, an improved balloon expandable stent. Additionally, we plan to introduce longer sizes and the LifeStent FlexStar self-expanding stent delivery system in the first half of 2006. The pivotal phase of our RESILIENT clinical trial is progressing well and we still expect to complete enrollment by the end of the year. We expect phase one results to be presented during the upcoming TCT meeting in October. Positive clinical results in the trial would position us to receive an SFA indication in the U.S. in 2007.

And in our Angiogenesis initiative, the -- the NIH-sponsored clinical trial using our proprietary gene regulation technology licensed from Sangamo is continuing to enroll patients at higher doses. In our second clinical trial, Duke University is actively enrolling patients in a 20 patient study for treating severe critical limb ischemia.

Other Distributed Product sales for the quarter were $7.8 million compared to $10.5 million in the same period last year. Excluding foreign exchange and the impact of the discontinued Japan pacemaker business, the underlying growth rate was 11.5%.

In summary, we're very pleased with our first half sales performance. Due to the recent strengthening of the dollar , current foreign exchange rates are estimated to reduce our sales by about $5 to $6 million each quarter compared to the previous guidance. However, strong underlying sales growth should partially offset this effect. At current rates we expect to generate total sales in 2005 between $980 million a billion 20 unchanged from our earlier guidance. For Heart Valve Therapy we continue to expect annual sales of $465 to $480 million representing an underlying growth rate of more than 10%. For Critical Care we expect annual sales at the high end of our $315 to $325 million range. For Cardiac Surgery Systems we continue to expect sales of approximately $100 million. For Vascular Products we now project sales of approximately $70 million. And for Other Distributed Products we estimate quarterly sales of approximately $7 to $8 million for the rest of the year.

Now we would like to provide an update on our Percutaneous Valves Programs. Last month in our Percutaneous Aortic Valve Replacement Program we announced a delay in our U.S. clinical feasibility trial as we await approval by the FDA to incorporate our new retrograde delivery system which has been successfully used in Canada. Our meetings with the FDA are ongoing and have been very productive. We are confident that we will be able to resume the trial by the end of the year with the incorporation of the new retrograde system. Cases in Canada with the retrograde approach and the 26 millimeter valve are continuing and we remain strongly encouraged by these results. And in the REVIVE trial we are continuing to perform cases at sites in Europe with the antegrade approach as we work for approval to the retrograde system.

Also this quarter we completed the restructuring of our development and supply agreements with 3F Therapeutics. This new agreement further supports progress in our Percutaneous Aortic Valve Program. We can now self-manufacture all the components of the Percutaneous Valve and apply our extensive knowledge gained from the manufacturing PERIMOUNT valves. We are actively engaged in transitioning manufacturing to Edwards.

The last time that results in our Percutaneous Aortic Program were reported publicly was at PCR in May. Dr. Alan Cribier reported that the clinical experiences of 40 companionate cases in Rouen. Cribier noted that there has not been a single case of valve failure when the valve has been successfully placed. Dr. John Webb reported at PCR on the first 13 patients to receive a Percutaneous Valve using our new custom retrograde delivery system. In our Canadian experience, 10 of the 13 patients successfully received their valve using this new system and Webb reported that the procedures lasted about an hour. Webb also reported on the first use of the 26 millimeter Cribier-Edwards Valve and observed no perivalvular leak in four patients and trivial leakage in one.

In our Edge-to-Edge Mitral Repair Program, Dr. Maurice Buchbinder reported in May at the Paris course on his first patient experience using Edge-to-Edge Mitral Repair Technology at San Rafael Hospital in Milan, Italy. This was done in collaboration with doctors Alfieri, Maisono and Columbo. In this first in man study Dr. Buchbinder was able to successfully stitch the two mitral leaflets together and reduce the patient's mitral regurgitation. This catheter based procedure replicates the surgical technique pioneered by Professor Alfieri. In the ongoing feasibility study of this device, enrollment will continue through the end of this year at additional sites in Europe and Canada. Additional results will be presented at the upcoming Valve Symposium in September and at the TCT meeting in October. By the end of the year we expect to have sufficient clinical experience to demonstrate feasibility at which point we will finalize plans for the pivotal trial necessary to gain regulatory approval.

We continue to be enthusiastic about our Coronary Sinus Program. We have the earliest chronic implants as well as a comprehensive portfolio of intellectual property and technology. At PCR, Dr. Jan Harnek reported on his positive early patient experiences using our Coronary Sinus Device. Dr. Harnek concluded that in this series of patients it is possible to reduce mitral regurgitation by placing an implant in the coronary sinus and he characterized our Coronary Sinus Device as safe and easy to deploy. As previously mentioned we identified opportunities to improve the device and have made significant progress on an enhanced design. We expect to resume clinical evaluation in the 4th quarter with the goal of completing enrollment in the feasibility study by the end of the year.

Several upcoming meetings will provide updates on Percutaneous Repair and Replacement Therapies. In September, to promote collaboration among cardiac surgeons and interventional cardiologists, the AATS and CRF will present a new program called Valvular Heart Disease 2005, Advanced Surgical and Interventional Therapies directed by Doctors Toby Cosgrove, Marty Leon and Craig Smith. And in October, the TCT meeting will be held in Washington, D.C. At these meetings several clinicians including Dr. Maurice Buchbinder, Alan Cribier, Greg Stone and John Webb will present their experiences with our Percutaneous Technologies. We plan to host an analyst meeting at one or both of these events so stay tuned for more details over the next couple of months. And now I will turn the call over to Corinne.

Thank you, Mike. In the second quarter the strength of our Heart Valve Business drove the improvement of our gross profit margin to 62.1%. We continue to expect gross margin to be slightly more than 62% for the full year. Second quarter SG&A expenses were $90.1 million or 34.9% of sales. Primary contributors to the increase over the prior year were sales in marketing expenses particularly in you are U.S. Peripheral Stent and Heart Valve Product lines, International expenses due to foreign exchange rates and higher IP related legal expenses. We now expect SG&A as a percentage of sales for all of 2005 to remain at current levels. In the second quarter we increased R&D investment by 17% over last year to $24.2 million. This increase was attributed primarily to investments in our Percutaneous Valve Program. We continue to expect R&D investments to be approximately 10% of sales for 2005.

Interest expense of $3.3 million for the quarter declined slightly compared to the same quarter last year primarily due to a lower average debt balance partially offset by higher interest rates. We expect a slightly lower level of interest expense for the third quarter and now estimate that the total expense for 2005 will be approximately $11 million. As a result of increasing profits and lower tax jurisdictions, our tax rate this quarter was 1% lower than in the previous quarters. Excluding special items the tax rate this quarter was approximately 25%. For the third quarter we expect the tax rate to be slightly lower and, as a result, for the full year we are expecting the average rate to be approximately 25%, excluding the potential impact of foreign earnings repatriation and special items.

Our long-term incentive plan includes an equity component to reinforce the ownership culture that has been important to Edwards’ success. Recently in order to moderate the dilution associated with employee stock ownership, we broadened our use of restricted stock. In the second quarter restricted stock expense was approximately half a million dollars pre-tax. For the remainder of the year we expect this expense to be approximately $1 million per quarter and is included in our guidance. As we said last quarter we will adopt a revised FAS123 and begin expensing stock options as required by the accounting standard which is currently expected to be in the first quarter of 2006.

In June we were pleased to announce the restructuring of our development and supply agreements with 3F Therapeutics. This transaction accounted for a majority of the $27.6 million net pre-tax charge we recorded this quarter. This quarter changes in foreign exchange rates compared to the same quarter last year lifted reported sales by about 2 1/2%. Given the recent strengthening of the dollar and the substantial size of our international businesses, current FX rates are estimated to reduce our sales by about 5 to $6 million each quarter compared to previous guidance. As a result we also expect FX to have a slightly negative impact on earnings for the remainder of the year. We have an active hedging strategy and our current program substantially mitigates our exposure foreign exchange fluctuations on the bottom line over the next 12 months.

Once again I'd like to provide a bit more detail on the difference between the reported and underlying sales growth rate. As Mike mentioned our underlying sales growth of 11.6% is higher than our reported growth this quarter. This is because the underlying growth rate excludes discontinued businesses in both years which more than offsets the contribution from foreign exchange. We expect this trend to continue for the rest of the year. During the quarter we repurchased 80, 000 shares of common stock for $3.5 million. This is significantly lower than our normal rate of repurchase due to an extended blackout period this quarter.

Long-term debt of June 30th was $269.6 million resulting in a debt to cap ratio of 28.9%. Total accounts receivable decreased $2.8 million from last quarter. Including receivables in our asset back securitization program day sales outstanding for the quarter was 69.1 days, an improvement of about two days over the prior quarter. Inventories increased to $131.3 million from last quarter. Free cash flow generated during the quarter was $45.6 million which we define as cash flow from operating activities of $32.6 million minus CapEx of $9.8 million excluding $22.8 million related to the 3F Therapeutics transaction. For 2005 we expect to meet or exceed our free cash flow goal of 115 to $125 million. With regard to the American Jobs Creation Act, we expect to make a final decision on the repatriation of approximately $250 million in foreign earnings by the end of the year.

And with that I'll turn it back over to Mike.

Thanks, Corinne. Based on our year to date results and the outlook for the rest of the year we remain solidly on track to achieve another year of strong performance and meet or exceed all of our 2005 financial goals. Specifically we expect total sales between 980 and a billion 20. We also expect to meet or exceed our goals of increasing gross profit margin by more than 100 basis points, growing net income 13 to 15%, excluding the impact of special items and generating free cash flow of 115 to $125 million. At current foreign exchange levels we project third quarter EPS of $0.43 to $0.45 and are comfortable at the higher end of our previous 2005 EPS guidance of $1.90 to $1.95 excluding special items.

In conclusion, we're pleased with the progress we're making to improve our underlying top line growth rate. Investment in our R&D pipeline is already demonstrating encouraging results, particularly in our Proprietary Tissue Heart Valve Replacement and Repair Products, Minimally Invasive Critical Care Monitoring and Peripheral Stent Product lines. The strength of our core franchises provides a strong platform for sustainable growth. Additionally we will remain very optimistic about the potential of our innovative Percutaneous Valve Programs as we continue to lead the development in this field.

Before we open it up to questions, I'd like to encourage you to mark your calendars for November 29th and 30th when we will host our 2005 Investor Conference at our Corporate Headquarters here in Irvine, California. At this event, we will provide an update on our plans for continued growth and our product pipeline. Watch for more information about this event later this year. And with that, Corinne -- Corinne and I are ready to answer your questions and in addition we have Stu Foster with us here.

[OPERATOR INSTRUCTIONS] Tim Nelson, Piper Jaffray & Co.

A couple questions. One, on the Heart Valve, particularly the repair side, there seems to be a re-acceleration of the Repair business. Is that -- do you figure it can be sustained at that level? I think you said 15% or is that just kind of an easy comp?

We said more than 15% and, no, this wasn't an im -- an easy comp. We -- we feel very good about the growth of the business and we think that the -- the new products that were introduced here were really contributors to growth and we expect it to be a strong grower going forward.

Can you help us sort of pick apart the Heart Valve sales in terms of all the new products all premium priced. What's the -- what's the mix versus -- I mean the average selling price or volume versus the impact on that revenue line? Could you help break that down for us?

Well I'll -- I'll do what I can, Tim. I think in -- in general much like we've said in the past out of the 15% growth rate that we reported, probably about 1/3 of that came from price. And the rest of it came from unit volume. And that unit volume you might anticipate came from sort of two places. Maybe half of it was market growth and the other half was market share gains.

Okay. That's very helpful. Switching businesses to -- one quick question on Cardiac Surgery. At 16.9% underlying growth rate seems pretty healthy for a business we all think is a slow to no grower. Is that the -- the TMR impact that you mentioned pretty much for the quarter? Or could you give us the normalized growth rate for that business?

Yes, clearly that business was helped by this unusual set of circumstances around TMR growth. And I think we related that there was about $1.5 million of sales of TMR lasers that were deferred last year to the third quarter. So as a result of that, the second quarter growth rate was pumped up by about a million and a half. In the third quarter will -- will be -- the growth rate will be detracted from probably that similar million and a half dollars. Now, if you were to back those out, the Cardiac Surgery growth rate was I think between 7 and 8%.

Okay. That's helpful.

Most -- most of that being the growth in the Cannula Business.

All right. Now on -- on the Peripheral Vascular side, are you getting a bit frustrated? It seems to me the tune isn't changing in terms of, you know, we're waiting for new products, we're waiting for more sizes, we're waiting for the delivery systems. It is taking a lot longer than original expectations. You know, how much longer is it going to take before we can really see some real -- real zip -- zip to that business?

Well, I'll remind you that our sales in the first quarter was about a million dollars, Tim so. Sales in the second quarter being $2 million was about a doubling of that. We actually had hoped to do even better than that. But nonetheless we're still projecting that we'll be on the low end of that 10 to $20 million range by the end of the year. So there's still a pretty hefty ramp that we're anticipating.

Let's move on to our next question please.

Katherine Martinelli, Merrill Lynch.

I can’t find too much to criticize, but just maybe a little more clarity. The Magna sales were they up sequentially as well in the quarter?

Yes, they certainly were, Katherine. The Magna sales have continued to grow and this is one of the success factor that's we've been enjoying. You know, this quarter we also -- also mark the substantial launch of Magna with ThermaFix which also contributed to our growth and even that product is probably getting a modest premium beyond what Magna was already getting. So we -- we've past the anniversary, we're well past it. I think we're probably at close to the 18 month mark from the launch of Magna. And as we tried to relate in the past, it is not really a step function in terms of the product launch like Magna, but more of a ramp. And so that just continues to grow and as we said we are really proud that this quarter we actually had higher sales in Magna than we had in the PERIMOUNT Product line. So it really has become the number one heart valve in the U.S.

Could you give us any sense for what percent of the Magna was the ThermaFix and where you would expect that to be at year-end if it is getting incremental -- if it is getting incrementally higher ASPs?

Yes, it was still a small number. Let me look for that, Katherine. I want to say Magna with ThermaFix was probably a few million dollars. So it was -- it was still a -- still a small number, probably only on small percentage.

And then just in terms of the competitive backdrop with [St. Jude] target in their Q4 launch of the tissue valve and obviously they are a much smaller player outside the U.S. where they have a valve on the market, but in terms of your guidance, what have you assumed if anything in terms of an impact of them coming on the market?

Yes, when we say that based on our past results and the momentum of our new products that we feel comfortable that we'll be in excess of 10% for the full year. We fully anticipate that there will be a launch of competitive products in the second half of the year. We don't think our competitors have products that's are comparable in anyway to the Edwards products that are in place, especially the Magna Valve and its durability. But we have anticipated that in our guidance.

Okay. Great. Thank you.

You're welcome.

Mark Landy, Susquehanna Financial Group.

Evening, folks. Congratulations on a good quarter.

Thanks, Mark.

Mike, just your comments on Valve Market growth, is it the overall surgical volume that's growing, or do you think a faster cannibalization of mechanical valves by tissue valves?

You know we tried to look at this pretty carefully, Mark, and there's not -- there's not great external data that we can count on in this regard. So we really look at our own data, plus what we can surmise about competitors. But we think, as we said, that if you look at the first half of the year in total, probably market growth rate was pretty typical in terms of what we see. With this -- with there being more in the second quarter than there was in the first, there is some small anomalies that occur. There is a difference in billing days in Europe in Q2 versus there were a year ago and there is a difference in holidays and so forth that might attribute as to why there was more growth in the second quarter versus the first. But in general we think the market's pretty comparable. We do think we certainly gained share versus Mechanical Valves and that is -- that's a trend that is continuing and certainly contributed to our growth.

You know and then we actually try and kind of figure out the impact Japan had had, so for a full year it kind of helped and a full year it hurt and now it should help again. Apples to apples, is it possible to X Japan out of the mix and what would the growth have been if we took Japan out?

I'll see if I can help on that. We passed the anniversary of the return of a competitor in March. And so we went from what was pretty much a flat growth rate in Japan into one that turned into double digits. The size of the Japan Heart Valve Business is approximately $50 million. So if you can think about the fact that that business is now growing in double digits or you think about mid-teens you can sort of anticipate what that does. So it probably added -- added a little bit to the overall growth rate. I'll remind you the U.S. was -- was 15% in terms of the growth rate itself. So although Japan probably added a point or two it -- it's a minor contributor.

And then just quickly, Mike, if we move on to the pvt side of things. What's the Parsonnet Score that you guys are targeting in the U.S. trial?

You know what, we are not targeting a Parsonnet Score, Mark. There is -- there is some specific agreements that have been reached in terms of the -- the patients that are selected, that -- that Parsonnet Score related. Are you there, Mark?

Yes, I'm still here. I think I lost some. So basically it's, you are not going by Parsonnet Score. But in the European experience it is extremely high. Would it be fair to see a similar score in the U.S.?

No, I would say that the patients that have typically been done in Europe are -- are even more compassionate and more seriously ill patients than the ones that we have been approaching in the U.S. So as opposed to nonsurgical patients, these would be patients that would be -- I call them high risk surgical.

So low teens, right?

Well, You are now speaking -- you are trying to speak to Parsonnet?

Well yes, you know, in a [inaudible] candidates would probably be in the low teens.

Okay. You know, this is -- we end up using -- I don't know. It gets fairly complex to get into it. We use a logistic Euro score and I'm not sure it is not easy to relate to, but what you should think of is that yes non-surgical patients could be included, but it also could use the -- the higher risk surgical patients that are constantly enrolled in the U.S. trial.

And then a last question clarification, basically, Mike, just on -- on the trial. You had said that you'd hoped to begin enrolling by year-end. You know, should we -- should we think of that as year-end enrolling beginning and would it be fair to assume your goal of completing the feasibility portion is already the 60 patients might be pushed out a little bit?

Yes. It's -- it's not clear exactly what the timing is going to be, Mark. What our intention here is to resume enrolling and there may be a new agreement and exactly how many patients are going to be necessary in the feasibility portion of this, and that's part of the discussions that are going on with FDA. But we feel quite confident that we'll be enrolling -- using the retrograde system before year-end and we're looking forward to that and we expect enrollment to be pretty rapid.

Okay. So my last part of that was there is discussion with the FDA on patients. Would it be fair to assume higher or lower patients at this point?

I'm not sure that I'm prepared to share anything in that regard, Mark.

Okay. Thanks very much.

Thank you.

Glenn Novarro, Banc of America Securities.

Thank you, guys. I have a question for Stu on -- on the Peripheral Stent side. Stu, I'm wondering if you could elaborate little bit more on the market dynamics and some of the challenges that you're facing in terms of penetrating accounts. And I'm wondering if some of the challenges may be the fact that what you're selling is just a Stent and not a complete product offering which would include balloons, guide wires and catheters. And then as a follow-up I'm wondering if you have any plans either internationally or to go externally to add a those products to your portfolio? Thanks.

Hi, Glenn. You know, the two things that have sort of limited the ramp to some extent are the availability of enough inventory to stock consignment accounts and the build up of our distribution channel. And you will recall that earlier in the year we were -- we were very inventory limited and as a result we sort of slowed down a little bit on the hiring and so although we're ramping up now, it has been slower than expected now. In terms of your question, though, is it a big handicap to -- to not have a full bag? You know, yes and no. I think no in the fact that physicians that -- that do these procedures are interested in using the best products. And we think with our self-expanding and balloon expandable assistants they have the best products and they don't tend to buy these things in bundles necessary. So with the right products for the right indication we think we can be very successful. Now having said that, to make our distribution channel more efficient, I think what has always been part and parcel to our strategy to had a products to the bag and they may be international products and they may be external products and we're -- we're definitely taking a look at that. But first priority is get that channel in place and get successful with products that we believe are best in class for the indications that's we're specifically going after.

Just one follow-up on the hires. As we talk to other companies, it seems like there are some very talented people out there looking for jobs, particularly as a result of the pending Guidant - JNJ merger. So I'm wondering why are you finding it so challenging to hire reps? Are you setting the bar too high or is it just an international decision to, you know, stagger the hiring process a little slower?

Yes on both. We are setting the bar very high. I think I have explained that on a number of occasions. We expect to get people who bring experiences to the company that we don't have. And so, yes we're being pretty picky about who we hire. On the other hand, as I've said, you know with the lack of inventory availability in the first half of the year, now that we're past that, we're -- we're ramping up again, but we did certainly try to stagger it a bit in order to make sure the expense and the -- and the sales are -- are in tune with each other and that we're able to train these people effectively in a -- in a way that doesn't overwhelm us as well. So we are back on the hiring ramp now and we think over the next few months we will be able to complete that -- that channel.

Thanks, Stu.

David Zimbalist, Natexis

Hi, thanks. Very nice quarter. Wonder if you could give us a little more color on Magna. You mentioned that in the U.S. it has become sort of the number one valve. I presume that means it's well in excess of 50% of your PERIMOUNT sales. So if you talk about adoption in the U.S. versus Europe and versus Japan?

Yes, thanks, David. Magna has -- the primary growth in Magna has been in the U.S. The U.S. is the much larger market and it has been -- most of the performance is a reflection of what's happened in the U.S. Now having said that the performance in Europe has been quite nice. And it continues to be on a ramp even though that spin was introduced more than two years ago. And they are a little more selective when it comes to premiumly priced products. They are indeed also driving this 20% premium and continuing to grow Magna sales. Magna is not yet approved in Japan. – As you are aware the approval processes in Japan are quite slow and so we're still pursuing that.

And we're at a point where the non-Magna PERIMOUNT Valves are declining in total?

You mean is there some cannibalization of PERIMOUNT from Magna? Yes there -- there is. And so that's probably true.. As -- as I don't know whether I noted, certainly there is a -- a faster decline in porcine valves by comparison and we are gaining share. But there is some cannibalization of our own valves which we are happy to do.

And also just along the same lines, have you seen an acceleration in the Tissue Valve market overall subsequent to the recent articles about under utilization of tissue valves?

You know, we -- we did see as I tried to indicate what we think is pretty typical market growth for the first half. Although faster in the second quarter. Our sales team has attributed that faster growth in the second quarter just the way that the calendar fell , holidays, etcetera. Those sort of things. But we really don't -- can't say at this point that we're experiencing market growth as a result of recent articles. The trend from certainly mechanical to tissue is continuing.

Okay and this again, similar vein, the Mitral -- the Theon Mitral Valve, are you seeing that contribute at all? Or can you give us some color on how that contributed in the quarter?

Yes, it did contribute. We have probably an even slightler -- slightly faster growth rate in the Mitral position than we saw in the Aortic position. And I think the Theon System contributed between 1 and $2 million to our overall growth in the quarter.

Great. And then finally, you know, you made a mention that Interventional contributed a lot of the growth in Vascular. Is Interventional -- that's more than Peripheral Stents, correct?

You know, really probably more precisely it was Peripheral Stents that was the largest driver of the Vascular growth in the second quarter. There -- we also distribute the AAA product, but that was minor by comparison.

Thank you.

You're welcome.

Mike Weinstein, J. P. Morgan.

Thank you. Nice quarter, guys.

Thanks, Mike.

A couple of questions. One, I wanted to understand maybe what the burn was right now on the Peripheral Stent initiative to get a sense how much that's -- that's hurting 2005 earnings. You know, I have a follow up.

Yes, the burn is in excess of probably $20 million, Mike. So in terms of our total investment in the Peripheral Stent Program. But I will also add that some of that is capability building that helps us broadly in our pursuit of being interventionally capable. So it ends up sort of broadening over and helping us in -- in many ways including our Percutaneous Valve Programs.

So you think -- you think it's going to -- you're going to spend $20 million on that -- on that initiative this year?

Well I'm just saying if we take combined everything that we have going on in R&D and our sales force compared to the gross profit contribution that would be -- that would be fair.

Okay. That's helpful. And then I just wanted to -- to understand your thinking on the -- on the second half guidance. You -- you obviously had a good quarter here. You -- you beat the Street by -- by $0.03 and then the tax rate is going to be a little lower in the back half of the year which is probably about -- it's probably another $0.02 on the year. So that gives you $0.05. And if [inaudible] the street which is at $1.93 to only go to $1.95. And I just want to get a better understanding and make sure I understand the offsets or if you guys are just trying to be conservative.

Yes. There's -- there's a few things here and I'll ask Corinne to jump in as well. But, you know, I'll -- I'll remind you that we are now using a larger component of restricted stock and that that will have some sort of drag and that probably comes close to offsetting the tax rate, if you will. And also the foreign currency changes that have occurred over especially the last quarter are not only going to put a drag on the top line, but to a small extent on the bottom line and could have an impact of say a penny a quarter in the back half of the year.

And maybe the Peripheral Stent Business will start performing a little bit.

Well, the -- I think the -- we sort of indicated what we thought the Peripheral Stent Business would do which is probably at the low end of that previously stated range of 10-20.

Right. It is probably a little more of a drag in the second half than you originally estimated.

Not really.

Not much? So the principal two factors then are the incremental stock expense and then currency?

Yes, I think so. And then I'll just remind you always that Q3 is seasonally our lightest sales growth quarter of the year as a lot of our clinicians take vacations and so forth.

And as you mention that will be offset slightly by the -- the improved tax rate.

And, Corinne, the tax rate carries into next year?

We -- yes -- we expect that that tax rate would carry into next year.

Okay. And then just with what you guys are doing with your stock compensation. Based on the way have you changed your plans, assuming that everybody adopts FAS 123 in the first quarter, what -- what do you think that that incremental expense would be per share?

Well, historically we have said that it would probably be in the 15 to $16 million range. And that it might be slightly higher than that. So that's -- that's probably where we would be next year.

Yes, the changes in introducing a component of restricted stock doesn't have a -- a big impact immediately, Mike, but over the long-term it does.

Because it has to weigh in, right, is that what it is? It is a rolling average, is that what I'm understanding?

That's part of it. And also the restricted stock component helps moderate the dilution from the shares. So that's the other offset.

Got you. But you still have this hit next year on a book basis if -- if, you know if it FAS 123 moves forward.

Of course.

Thank you. That's very helpful.

Thanks.

Alex Arrow, Lazard Capital Management.

Thanks. Good afternoon. If I could first start with the FloTrac. I know have you targeted launch. Can you say when you expect the full launch and if you said what expectations are specifically for FloTrac this year?

Yes. I think what we -- the way we have approached this, Alex, is to be thoughtful in what customers we go to first. It is not our intention to cannibalize our own product line, but rather to use this to gain competitive business. And we're rolling it out with that in mind. I think as we said from the very beginning, this is a pretty substantial sales cycle associated with FloTrac and we don't expect it to have a very big impact in 2005. And we expect it to contribute meaningfully in 2006 when the first of those trials really starts conversion and translating into performance.

Do you anticipate any impact from the -- from the CardioDynamics combined EKG machine that they're now launching since that would also measure cardiac output and also have the EKG component?

We -- we really have not seen that as substantial competition. I don't know, Stu, if you have anything to add.

You know, CardioDynamics uses impedance to measure cardiac output which we think is not really the best measurement to use on patients who are seriously ill and intensive care units which is the kind of patient we're aimed at. So we think those are maybe not really competitive.

Okay. Great. Next, on the Peripheral Stents, if you look at the SFA opportunity and the -- and the Critical Care opportunity can you give as you sense of where you -- strategically where you think the -- which of the two is greater and which one is nearer and anything you can give us on that?

Well usually, you know the SFA stent opportunity doesn't normally get divided between claudication, which are people that have pain walking versus critical ischemia. But generally speaking those procedures are used -- are used in the claudication. Critical ischemia is a different -- a different kind of an animal. You know and our angiogenesis trial was aimed at that. So generally speaking when we talk about the opportunity for SFA standing, the vast majority of that is going to be in claudication.

Okay. So SFA is in artery. Critical ischemia is a -- .

Critical ischemia is the patient's condition. It is an acute situation where the limb is threatened by lack of blood flow. Okay, we say SFA we say stenting of the superficial femoral artery, most of which occurs in patients who do not have critical ischemia, but it is claudication which is pain when they try and walk.

Alright, so critical ischemia can also occur in other arteries but also can occur in the SFA?

That's correct.

Okay, thank you. And then as far as having the SFA indication, I know that most of the Stents you'd be competing with do not have a -- have an FDA approval for SFA or some nonspecific approval. How much of an advantage are you planning on that indication?

You know, we -- we think it is an advantage, but this would allow us to promote what we think is the right stent for that application which we can't do now, nor can anyone else because of the biliary indications. So I think other than that, we also will have first level one clinical data that shows the efficacy of the stent and that is also unique in the marketplace. So I think the combination of having clinical data that shows the efficacy of the stent and being able to actively promote that data is a real advantage.

Great, and if I could just have one last topic would be the Percutaneous Valve. Your start-up potential competitor Core Valve made some fairly large amount of noise recently. I'm just wondering If you can say on the Anderson Patents, how long will you wait before you would take action with the Anderson patents? Would it -- I guess legally specifically they are not infringing until they launch . Is there anything you can do before that or would you wait until sometime after they launch? Would it be right when they launch? Anything about that?

Yeah, I suppose you could say there is not much damage if they don't have any sales, Alex. And so this is not a very acute situation from our perspective. I think they're certainly aware of our patent position.

Okay. And then on the retro -- last thing on the same topic. On the retrograde delivery System, in Canada, can you say what centers in Canada that was?

You know, we haven't specifically talked about that. You know that Dr. Webb has spoken at meetings and I think it's up to him wether he wants to invite people to -- to really participate.

All right, thank you very much.

Sure.

Amit Bhalla, Morgan Stanley.

Hi good afternoon folks. Two questions on the stents. The first is can you give us a little sense about account penetration of LifeStent this quarter versus the first quarter?

You know, I don't have exact numbers for you, but I can tell you, you know, our sales about doubled and it wouldn't be -- it wouldn't be an unreasonable assumption to make that -- the number of accounts where we, for instance, have consignment and also at least doubled in the quarter.

Any ballpark in terms of what that number is?

I'd rather not.

Okay. In terms of RESILIENT, how many sites are actually enrolling patients at this point?

Okay well, we are -- we have 25 sites that were approved for, I would say, as of this point, probably around 15 are actively enrolling.

Okay. And just lastly, do you care to give revenue guidance for the third quarter?

You know, we don't typically give revenue guidance by quarter. As I indicated it tends to run lower than any other quarter during the year. It's a -- it's a pretty pronounced seasonal effect. And so I think if you were to look at past years you will be able to get a pretty good idea of what we would anticipate happening this year.

All right. Thanks a lot.

Sure.

Jason Mills, First Albany.

Hey, Mike, congratulations on a good quarter. Following up on Mike's question on the second half guidance, specific to the -- the revenue model and Heart Valve Therapy, wanted to see if you could be more specific with respect to your full year Heart Valve guidance of exceeding 10%. It would obviously be 11% growth on a year over year basis. If that's what you were to produce, it would imply 8 to 9% back half '05 guidance. I'm wondering if -- if you could give a little more granularity to your Heart Valve guidance as opposed to just over 10%?

Yes, well, here are the -- here are the pieces that you can use, Jason. Thanks for that question. You know -- you know what the first half is already, and we projected that full year annual sales would be between $465 and $480. So in terms of an actual number, you can sort of back into it that way. From a sales growth perspective, actually the underlying sales growth is going to be, we think will be quite strong. Certainly in excess of 10% in the back half of the year. And that's by virtue of our new products and the continued double-digit growth that will occur in Japan. So I don't know, does that help answer your question? Is there something -- ?

Yes, it does. So second half of 05 you're modeling -- you're thinking 10%. So that would imply that you are looking toward the top end of your Heart Valve guidance for the year?

No what -- well -- we're -- we're guiding to more than 10%. We think that we'll have more than 10% certainly. I don't know that when you actually back into that and you consider that there's $6 million, to say 5 to $6 million worth of impact each quarter in the second half of the year that probably considering the Heart Valve Business is almost half of Edwards. So the half of that impact probably is a haircut off of the actual heart valve reported results. So maybe that helps land you on the range a little closer.

Okay. Yes. That's helpful, thanks. On to Theon, you mentioned a little bit of stocking in the quarter throughout your Heart Valve Business, is that mostly Theon or can you qualify what the stocking in the quarter was for Theon?

Yes, I think that Theon probably was a substantial component of that there may have been a little bit of the Magna with ThermaFix as well that was part of that number. But I think that our main reason for mentioning it is to just let you know that a year from now, you know it was about $1 million. This quarter -- and it was comparable to last quarter.

It was really a substantial driver of any growth this quarter.

Okay, and of course on the Percutaneous Aortic Valve effort we're all interested in the details and I see you're working through that with the FDA. So maybe a question you can help us out with, just to sort of frame timing, is if you have any upcoming meetings that you can talk about sort of timing of those and how you think that may play out over the next five to six months leading up to enrollment of the retrograde?

Yes. You know the -- the upcoming meetings will be occassions were we'll actually report our clinical results and then you can be sure the clinical investigators will be quite fullsome.

I'm sorry Mike, I meant meetings with the FDA, just kind of -- do you have things scheduled with them?

Yes. No there's -- there's ongoing interaction. It's quite iterative. And so I'd rather not put a specific date out there but you can be sure, Jason, as soon as we have something that you'd be interested that we will be actively communicating that.

Okay. And one for you Corinne. Obviously your -- your debt-to-capital is -- is falling as your paying down your debt. It looks to be both level and quite some time you do have a shelf out there last I checked that you can use a number of different instruments. Could you characterize broadly if you were to make acquisitions, have you thought about sort of what you would use, your cash? Would it be debt? Would it be your stock given that it is up quite nicely over the last year? Could you just help us out with that?

Yes. Unlikely that we would use stock. But we certainly have debt capacity. We might use some type of convertible instrument based on our success. Historically where we were able to issue a convert that had features that were more debt-like than they were equity-like. So that would be within our [inaudible]. And then of course, if we do decide to repatriate we will be generating additional cash through the repatriation of foreign earnings as well.

Yes, in general -- in general you would expect us to be buying stock at these levels.

Sure. Also your currency -- worth more as well. On the repatriation Corinne, you -- you mentioned that -- have you covered that for us as far as a dollar amount before? Maybe I missed it.

Yes, we said that -- historically we said $150 to $250 million and last quarter we said probably closer to the high end of that range. And we're -- we reiterated that this time.

Okay, thank you very much guys.

Thanks, Jason.

Mike Weinstein, J. P. Morgan

Can you hear me?

Yes Mike.

Thank you, I wasn't expecting that but that's [inaudible] a nice surprise to the end. You -- you guys said that, and I just happen to catch this, that said you didn't buy back as much stock this quarter because you had an extended blackout period. Can you just tell us why that was?

We had a number of situations that extended our blackout period this quarter but we certainly expect that on an ongoing basis we will continue to repurchase shares. Along the lines of what we've done historically and really to offset the dilution from employee stock exercises.

Alright, I understand but can you disclose what it was that --?

One of -- one of them certainly was the 3F transaction, Mike.

Okay. And just on that last question relative to M&A and thinking about your -- what you're doing in Percutaneous Valves and as well what you're trying to in Peripheral Stents. Would you consider making a more aggressive move into the interventional field to maybe help bolster your efforts in Peripheral Stents as well as if you thought there was an interesting technology out there?

Yes, thanks Mike. Our strategy -- our growth strategy has been very consistent over time. There's some areas where we really look to -- to build our portfolio and extent our leadership and that is in Heart Valve Therapy and Critical Care Monitoring. And the treatment of Peripheral Vascular Disease and we're -- we're always on the out look of something that sort of enhances us and helps us build even more strength.

And you've taken one kind of one year hit and the deal [inaudible] you've only taken one I would call hit [inaudible] when you did PVT. But the market seem to receive that fairly well as I recall. And you ended up having a pretty decent year in spite of it. Tell me with -- with that experience under your belt what's -- what's your view? Would you -- would you want to do another transaction of that profile? Or maybe something that's less then [inaudible]?

Yes, in general, Mike, we have very strong franchises and we'd always be looking for new technologies that would probably be smaller in nature that we would add to it. If we did find something that we thought was really valuable and really strategic like PVT, we would not -- we would not hesitate to do that.

Okay. That's helpful. Thank you.

Alright, thanks.

Okay well thank you very much for your continued interest in Edwards. Corinne David, Stu and I welcome any additional questions by telephone. Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the call which include underlying growth rates, and amounts adjusted for special items are included in today's press release and can also be found on out website in the Invertor Relations section. If you missed any portions of today's call a telephonic replay will be available for 72 hours and to access this please dial area 877 - 660 - 6853 or area 201 - 612 - 7415 use account number 2995 and passcode 158340. I'll repeat those numbers, area 877 - 660 - 6853 or area 201 - 612 - 7412. The account number is 2995 the passcode is 158340. Alternatively an audio replay will be archive on the Investor Relations section of our website at Edwards.com. Thank you very much.

Thank you ladies and gentlemen. That does conclude this afternoon's teleconference. You may all disconnect your line at this time and have a wonderful day. Thank you.