愛德華生命科學 (EW) 2007 Q3 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Edwards Lifesciences third quarter 2007 earnings conference call. At this time, all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Erickson, Vice President, Investor Relations. 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 third quarter 2007 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 allocate the remaining time for Q and A. Our presenters on today's call are Mike Mussallem, Chairman and CEO, and Tom Abate, CFO and Treasurer. 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.

These statements include but aren't limited to sales, gross margin, net income, earnings per share and free cash flow targets for 2007, the regulatory approval and sales of Heart Valve Therapy products including Magna Mitral and Magna Ease, the competitive dynamics and market fundamentals of the heart valve market, the continued adoption, expected sales and product enhancements of the FloTrac system and/or the LifeStent product line The timing, progress, and results of the PARTNER, RESILIENT and EVOLUTION clinical trials, and the market opportunity for our transcatheter technologies in general and the European launch and 2008 sales of the Edwards SAPIEN valve. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements. Information concerning factors that could cause actual results to materially differ from those in the forward-looking statements may be found in our annual report on Form 10-K for the year ended December 31st, 2006, and our other SEC filings, which are available on our website at Edwards.com. With that, I will turn the call over to Mike Mussallem. Mike?

Thank you, David. We're pleased to report solid third quarter results. Total underlying sales growth trended up 7.8% with our critical care and vascular franchises once again making significant contributions. In addition, we reached another significant milestone during the quarter as we received CE Mark to begin selling the SAPIEN transcatheter valve in Europe.

Now turning to the quarterly reports. On a reported basis, total sales for the quarter grew 5.7% to $261 million, and grew 7.8% on an underlying basis. Reported growth was aided by foreign exchange and negatively impacted by discontinued businesses. Year to date, our underlying sales growth was 5.5%.

Now I will shift to a more detailed review of our product line sales, and an update on our new product pipeline, and then Tom will discuss the financial results. Reported sales for Heart Valve Therapy grew 4.7% to $123 million, which included a $2.7 million contribution from foreign exchange. We are pleased to see our growth rate accelerating. We gained share globally, led by double-digit growth in our line of Magna valves. In the emerging markets, we had very strong growth. In Europe, we had another solid quarter driven by Magna Ease and Magna Mitral, and in the U.S., we achieved modest growth led by a strong performance for Magna. Repair sales grew mid single digits globally, driven by our premium disease-specific products.

Overall we continue to believe the heart valve market fundamentals remain unchanged. We continue to estimate that the global market growth averages about 3 to 5% annually, led mainly by unit growth. We believe that for the first nine months of the year, U.S. growth has been at the lower end of this range. On a global basis, the market continues to be driven by mechanical to tissue valve conversion, and new product launches. We are pleased with the clinical performance of Magna Mitral in Europe, and believe that this is also an important valve for U.S. patients. We're looking forward to gaining U.S. approval as rapidly as possible. We recently received additional questions from the FDA regarding pre-clinical bench testing, and are actively preparing our response. As a result, we are no longer confident that we will obtain U.S. approval during the fourth quarter.

During the second quarter, we launched Magna Ease, our next-generation aortic valve in Europe. This valve builds on Magna's best in class hemodynamics and includes our ThermaFix enhanced tissue treatment. We're pleased with the level of enthusiasm this valve has generated with initial users because of its low-profile and ease of implantation. European sales continue to ramp up steadily, and we're looking forward to a U.S. introduction by the end of 2008. Additionally, we anticipate approval of our Magna aortic valve in Japan in the first half of 2008. We believe this market leading valve's superior patient benefits will make it the number one heart valve in Japan.

Our Edwards One surgeon-education program continues to generate strong interest, and we've added sessions to meet the increased demand. Edwards One helps prepare surgeons for future trans-catheter interventions by exposing them to the latest in innovative heart valve technologies and basic transcatheter training as well as intensive simulator-based learning experience. As we mentioned last quarter, in an effort to increase our field presence in the U.S., we've completed the initial cross-training of our cardiac surgery sales force and they have already begun to sell heart valves in the fourth quarter. Edwards has built its leadership position in the heart valve market through close collaboration with leading clinicians. As examples, we partnered with doctors Albert Starr and Alain Carpentier over the past several decades. Just this quarter, these innovators were honored by receiving the prestigious [Lasko] award for clinical medical research and their pioneering efforts in heart valve therapy.

We are very proud of their accomplishments. Critical care had its strongest quarterly growth rate of the year with sales of $97 million. The third quarter reported sales increased 13.7%, which included a $2 million contribution from foreign exchange. Global sales of FloTrac continued to be the biggest growth driver this quarter. In addition, continuing share gains at our world-leading pressure monitoring product also contributed to our growth. Earlier this month at the European Society of Intensive Care Medicine in Berlin, we hosted several round table discussions on FloTrac and sponsored an educational symposium on hemodynamic monitoring. At the symposium, Professor Joachim Boldt presented his study of FloTrac showing improved accuracy in a broader range of patients This study will be published in the Journal of Anesthesia. We're very pleased by the positive response that our FloTrac technology is receiving from leading European clinicians. We continue to make investments in FloTrac that enable it to address an even wider range of patients. We expect another enhancement to introduced in the fourth quarter, with additional enhancements coming throughout 2008.

In August, we introduced our PediaSat oximetry catheter, the first continuous venous/oxygen saturation monitor designed specifically for children. This advanced technology, previously available only for adults, builds on our history of critical care innovations. We are receiving strong positive feedback from clinicians who currently have few options for monitoring children. In addition, our PreSep central venous oximetry catheter received reimbursement approval in Japan during the quarter, which further strengthens our large hemodynamic monitoring franchise in this market. For 2007, we remain confident in our ability to double our FloTrac sales and achieve a year of outstanding growth in critical care.

In Cardiac Surgery Systems, reported sales for the quarter decreased from $21 million to $14 million due to last year's sale of our Brazil-based perfusion product line, and this this year's sale of the TMR product line. Cannula sales grew 3% during the quarter. Total reported sales of vascular products grew 27.3% this quarter. The very strong growth was driven by global sales of LifeStent products. Both U.S. and European positions continue to adopt our FlexStar technology in addition, base vascular products reported a slight increase. As we previously reported, six-month data from the RESILIENT pivotal trial was presented last May at EuroPCR, and the Phase II results were very encouraging.

Tomorrow morning at TCT, one-year results from our RESILIENT trial will be presented. This important study has been designated as the blockbuster trial of the day. As a result, there will be a one-hour session in the main arena dedicated to the RESILIENT trial, including the presentation of the most recent results by Dr. Barry Katzen. During the second quarter, we submitted our application to the FDA for pre market approval for an SFA indication. In addition to the RESILIENT data, this submission also incorporated both a new FlexStar delivery system, and longer stents, up to 170 mm. During the third quarter, we received questions from the FDA which will require additional bench testing, and we expect to respond in November. Although this did not reset the 180-day PMA clock, it has extended the approval time line, and as a result, we will not receive an SFA indication by the end of this year.

In 2007, we continue to expect to double our global stent sales and we'll maintain a 40 person sales force in the U.S. while waiting to receive this landmark PMA approval for the SFA. As part of our ongoing strategy to focus on proprietary products, we've decided to terminate our distribution of a third-party's line of intra-aortic balloon pumps in Japan. This will enable our Japan operations to increase their focus on selling FloTrac and PreSep, our recently approved critical care products. This lain represents approximately $27 million in annual sales, and we are terminating the distribution agreement at year-end. We anticipate that this action will have a moderately dilutive impact in 2008, however, with an increased sales focus, it is expected to be accretive in 2009.

At TCT, Edwards' leadership in transcatheter heart valves is being showcased in numerous presentations highlighting our clinical experience in over 500 cases. These presentations include data on the safety profile and outcomes in a high-risk patient population with limited life expectancy. In addition to these presentations, live cases are being performed which provide a great opportunity to demonstrate the clinical progress we've made on this promising technology. In the U.S., we continue to make progress on our PARTNER trial that's the pivotal trial of our SAPIEN valve and have currently enrolled over 60 patients. As expected during the quarter, we received FDA approval to expand to the full 15 trial sites in 600 patients. It's taken us longer than expected to get the required individual site approvals. However, it's still our goal to have all 15 sites trained and enrolling patients by the end of the year.

Our Ascendra Transapical is an important delivery alternative which will enable cardiac surgeons to also provide a minimally invasive treatment option. The FDA is allowing to us do additional feasibility cases in the U.S. as we seek approval to add it to the PARTNER trial. While we had hoped to have this completed by now, we continue to work with FDA to finalize the trial design. Although patient interest remains high, we now anticipate that enrollment in the PARTNER trial will be completed closer to the end of the 12 to 18-month time frame we initially projected. We continue to believe our progress in the U.S. gives us at least a two-year lead over the next closest competitor. As we announced last month, we received CE Mark to begin selling the SAPIEN valve in Europe with our Retroplex transformer delivery system, and we remain confident that we will receive the CE Mark for Ascendra transapical delivery system by the end of the year.

As expected, we reached our goal of having 15 European reference centers trained by the end of the third quarter. Our European commercialization activities have begun, and we're currently implementing a disciplined launch in train centers with available funding. Since receiving our CE mark we've seen an increase in the level of interest and enthusiasm for both cardiac surgeons and interventional cardiologists. We continue to expect to generate more than $20 million of transcatheter valve sales in 2008. We continue to be pleased with our progress on the development of a next-generation transcatheter heart valve with a reduced delivery profile, enhanced durability and unsurpassed hemodynamics. The valve's smaller delivery profile will make this technology available for an even wider group of patients. We anticipate the first clinical use of this new valve in the first half of 2008.

Recently, we also secured full ownership of the Anderson family of patents, which relate to the transcatheter heart valve technology. Edwards previously had an exclusive license to these patents that were acquired as part of the purchase of PVT in 2004. Last month we entered into a transaction with Dr. Henning Anderson and his two co-inventors who assigned full ownership of the global Anderson patent portfolio to Edwards. We also acquired Johnson & Johnson's remaining license rights to the Anderson patents, which they obtained as part of the Hartford acquisition in 2001. These two transactions provide Edwards with greater overall control of the prosecution and enforcement of the Anderson patents in Europe and the U.S.

Turning to transcatheter mitral repair, you'll recall during the first quarter we completed enrollment in the 60-patient EVOLUTION 1 feasibility study of our Monarch system for the treatment of functional mitral regurgitation. Yesterday at TCT, Professor Alex [Dehainian] presented updated interim results from this study, which demonstrated encouraging efficacy in the majority of patients at six months. Professor Dehainian also reported that a number of the patients experienced an undesirable compression of a coronary vessel, three of which resulted in clinically significant events. We'll be checking and analyzing additional clinical data and have decided to postpone enrollment of EVOLUTION 2 until 2008 when that analysis is complete.

We are continuing to pursue this technology and remain confident that patients with functional mitral regurgitation represent a very large and attractive potential market with few treatment options. As TCT continues, there will be additional clinical discussions and case presentations featuring our transcatheter technologies and peripheral vascular products. In addition, on Wednesday, we'll be hosting an analyst lunch featuring Dr. Gus Pichard, who will share his clinical experience with our SAPIEN transcatheter valve and RetroFlex delivery system, and Dr. Alex Powell, who will discuss the one-year results from our RESILIENT trial. For more information, or to RSVP to this event, please contact our investor relations department. Now I will turn the call over to Tom.

Thank you, Mike. Reported earnings per diluted share for the third quarter were $0.48 compared to $0.45 last year. Excluding special items, our third quarter 2007 non-GAAP EPS was $0.46 compared to $0.47 last year. Our gross profit margin for the third quarter was 65.3%, compared to 64.7% in the same period last year. This 60-point basis-point improvement was due to a more profitable profit mix and a positive impact from foreign exchange, partially offset by operating costs specific to the quarter. For the fourth quarter, we expect the rate to improve but fall below our prior guidance of 66%. Due to our hedging contracts, today's exchange rates have a slightly negative impact on our gross margin. For the full year 2007 we continue to expect an improvement between 100 and 150 basis points.

Third quarter SG&A expenses were $103 million or 39.5% of sales. This expected higher level of spending was due to additional investments for the SAPIEN valve launch in Europe, higher sales-related spending in the U.S., and the impact from foreign exchange. For the fourth quarter, we expect SG&A as a percentage of sales to fall below 39%. R&D investments in the quarter were $31 million, or 11.8% of sales, compared to $28 million last year. The increased level of spending was focused primarily on our transcatheter valve and critical care development efforts. For the fourth quarter, we expect R&D as a percentage of sales to remain at approximately 12%.

Net interest expense of $400,000 was lower than the same quarter last year, primarily due to lower interest expense on our declining average debt balance. For the fourth quarter, we expect net interest expense to remain around this level. During the quarter, a third-party warehouse fire destroyed our inventory in Brazil, but did not result in a significant disruption of operations. We recorded a $2.5 million special pretax gain in the quarter in connection with the estimated insurance settlement. In the fourth quarter, we expect to close our Puerto Rico employee pension plan by distributing the assets to the beneficiaries, to fully fund the distribution in accordance with IRS rules, we will record a pretax charge of approximately $9 million.

For the third quarter, our reported tax rate was 25%, compared to 24.3% a year ago. Excluding special items in both years, our tax rate was 24% for third quarter of 2007, and 25.1% for 2006. The reduced rate in 2007 resulted primarily from the favorable results of our 2006 U.S. tax return filing and the settlement of a foreign tax audit. For fourth quarter, we expect our rate to be approximately 26%. When compared to the same quarter last year, foreign exchange rates positively impacted third quarter sales by approximately $6 million. At current foreign exchange rates, we estimate a $10 million benefit to sales in the fourth quarter. Free cash flow generated during the third quarter was $43.7 million, which we defined as cash flow from operating activities of $59 million, minus CapEx of $16 million. For 2007 we continue to expect free cash flow of 145 to $155 million.

During the third quarter, we repurchased 1 million shares of common stock for $47 million. We have now repurchased 2.2 million shares this year for $107 million and expect to continue to actively repurchase. As previously announced during its regularly scheduled meeting in September, our board of directors authorized a new share repurchase program to acquire up to $250 million of additional shares. On the balance sheet, total debt at September 30th was $211 million, which included $61 million of long-term debt and $150 million of convertible debentures. Net debt at the end of the quarter was $35 million, a decrease of $7 million from the second quarter. Including receivables in our asset backed securitization program, days sales outstanding for the quarter was 73 days. Inventories were up from the prior quarter to $158 million.

Now turning to guidance, our previous full-year expectations remain unchanged. However, results may trend towards lower end of our sales and earnings guidance ranges if Mitral Magna is not approved done fourth quarter. Just as a reminder, we expect our full-year 2007 sales to be between $1.070 billion and $1.110 billion. For Heart Valve Therapy we expect sales between 510 and $520 million. In critical care, we expect 385 to $395 million. In Cardiac Surgery Systems we expect 55 to $60 million. Lastly, in vascular we expect 85 to $95 million. All of these projections assume foreign currencies remain at current levels.

For the fourth quarter 2007, we are projecting total sales of 275 to 285 million. We estimate that fourth quarter diluted EPS will be between $0.52 and $0.54 and continued to expect full-year non-GAAP diluted earnings per share between $2.08 and $2.12. With that, I will turn it back over to Mike.

Thanks, Tom. You know, even with a more unpredictable new product approval environment, our Heart Valve Therapy growth rate is improving, in part due to the decisive actions we're taking to increase our market share. Further, we believe the heart valve market is poised for additional growth in 2008 with the introduction of our transcatheter heart valve technology in Europe. In addition, our critical care franchise is evolving into a robust platform that's lifting the growth rate of the company and will continue to contribute more significantly to Edwards' performance than it has, historically. In all, we remain convinced that Edwards has a bright future as the leader in the treatment of advanced cardiovascular disease.

Before I open it up for questions, I would like to remained you about our 2007 investor conference, which will be held in New York on Friday, December 7th. At this event, we'll provide an update on our new technologies as well as a detailed financial outlook for 2008. We've also lined up several leading clinicians who will share their experiences with our transcatheter valve technologies. Additional details will be sent out shortly. With that, I will turn the call back over to David.

Thank you, Mike. In order to allow everyone a chance to ask a question, we ask that you limit your questions. If you have additional follow-up questions please reenter the queue, and we'll answer as many as we can during the call. Operator, we're ready to take questions.

Ladies and gentlemen, we'll now be conducting the question-and-answer session. (OPERATOR INSTRUCTIONS). One moment, please, while we poll for questions. Our first question is coming from Paul Choi with Merrill Lynch. Please state your question.

Thank you. Good afternoon. Could you, Mike, please give us a little more color on the sort of data that the FDA is requesting with respect to the Magna Mitral and your expectations for time of delivery of those particular responses to their questions?

Yes, thanks, Paul. Yes, we were -- we were a little surprised by this, Paul. Recall this is a PMA supplement. And what they've asked us for actually is some more detail and some more analysis around bench testing that's been associated with this valve. And so we're going through that right now and we expect to respond to them shortly. But frankly, it's -- it has surprised us, and so this is why we're showing uncertainty on exactly when we're going to be able to get this approval, , so although I'd like to be able to really pin it down to a more precise state, we just don't know right now,

So is it's more -- there's no safety data request, just performance that you can do in-house, correct?

Yes, this platform is really built off the very same platform that's out there in our Magna valve, which is the market leading valve and has an incredible profile in terms of safety and performance, but what the FDA has asked us for is beyond what they've asked us for historically, and so that's why we had not anticipated this, and so we're generating additional data. Again, it's bench testing and analysis that supports that.

Okay. Thank you very much. I'll jump back in queue.

Thank you. Our next question is coming from Larry Biegelsen of Wachovia. Please state your question.

Thanks for taking my call. Mike, last call you said that you would expect double-digit EPS growth in 2008. Is that still intact, and can you be more specific on what you meant by double-digit growth, and also how dilutive will the Japanese deal be?

Yes, thanks, Larry. I'm not going to give you a real satisfying answer here. What we do is we go through a very detailed process that's actually going to complete -- be completed at the end of this month in the first of next month where we go through and make all our trade-offs for 2008, and following that we'll have some very detailed guidance to be able to provide when we come to you and sigh you at the investor conference in early December. What I said on the last call is we have an internal goal. We'd like to get this to double digits. We'd like to get this to 10% for next year but we really need to work through the trade-offs and make sure it's in the best interest of the shareholders to run that it way. In terms of this particular transaction, as I mentioned, it's $27 million worth of annual sales. And so when that goes away, the gross profit contribution that's associated with that also goes away. That's say ing the $10 million neighborhood.

We have a couple of choices in terms of the way to run that. We can -- this is sold by the same sales force that sells our critical care products in Japan, so we can either reduce that expense or we can redeploy the sales force to sell more of our new exciting critical care products, like FloTrac and PreSep. It's probably going to be a balance of both. The reason that we said there would be some moderate dilution in '08 is we're anticipating that we're going to some redirecting of that sales force which means that we -- while they're ramping up hear we won't get the full benefit of their efforts but we expect that to turn out to be a good deal for people come 2009.

And percutaneous valves, or transcatheter valves in the fourth quarter, should we expect any sales at all in Europe in 4Q '07, and if so, could you give us a little sense of what that should look like?

Thanks, Larry. Again, we're going to have to let the others ask questions as well but for the fourth quarter we've always begun sales of transcatheter valves. We expect these to be really insignificant, pretty modest in the fourth quarter while we're ramping up. So if we do get better sales there, it will certainly be an up side to what we're projecting. It's not really in our numbers for the quarter.

Thanks. I'll get back in the queue.

our next question is coming from Glenn Novarro with Banc of America Securities.

Two questions. First, it really sounds like Magna Mitral won't be approved here in the fourth quarter. So just to clarify, are you more comfortable, therefore, at $0.52, in terms of EPS, and $275 million in revenues? That's question one. And then can you remind us the partner trial, just to clarify, when do you now expect that trial to officially end enrollment? Thanks.

Okay. Yes, I'll start out here, and Tom can add to this. What we said about Mitral Magna, if it doesn't show up in the fourth quarter, and again, maybe if we're being conservative we could assume that it doesn't happen, we gave a $0.52 to $0.54 range and we said we'd be at the lower end of sales and profit. So you interpreted that correctly, Glen to say, yes, closer to the $0.52 on profit, closer to the $2.75. Obviously there's many other variables but that's sort of it on a high level. Tom, do you have anything to add to that?

That covers it it, Mike.

In the PARTNER trial, again, what was your question specifically?

You said there's a little bit of delay in terms of enrollment, and you said on the call it looks like it's going to be closer to 18 months in terms of enrollment, so just wondering if you can just clarify to us exactly, is this early '09? Specific in terms of when do you expect --

We're still talking about -- thanks very much, Glen. We're still talk about 2008 there. Just to give you a little bit more color, there's two specific reasons that probably hurt us here that we said -- remember, we started this trial at the end of Q1 of this year, and so we're talking about that was the guidance that we gave at that time, that it it would take us 12 to 18 months to enroll from there. The reason that we've gone slower than we would have liked is, one, we've add tougher time getting centers up. It's a combination of it took a little longer to get through the IRBs. This is a fairly complex protocol for them. And also, FDA had plugged themselves in the process, probably added an extra 30 days on top of it that we hadn't anticipated. That's over at this point. We don't think the FDA is going to do that any longer. And we do expect to have 15 sites up and hopefully enrolling here before the end of the year but the other thick that's happened, Glen, because we don't have transapical in the trial it takes a group of patients out of that. And again, we're working hard to get transapical added into the trial, but that slowed things down a little bit.

One last follow-up on Magna Mitral. Let's say the FDA approves this December 15th. Can you book revenues the last two weeks? Can you ship product or, post a certain date in December? It's best just to launch it in January?

Yes, in general there, Glenn, I think you should anticipate that we would have sales if we got it in the 15th of December, but this isn't one of those product lines where you would do a lot of stocking of shelves and get a whole quarter's worth of sales all in the last two weeks. I would look at it more -- a little bit more sort of measured across the quarter.

Okay. Thanks for the clarity.

Our next question is coming from Tim Nelson with Piper Jaffray. Please state your questions.

One follow-up on the PARTNERS trial, if you will. If you got the Ascendra approved how much of that would speed enrollment?

This could have -- we think it could have a substantial difference. Of course, it's a little bit of speculation, Tim, but when we think about people that don't get into the trial, one of the key reasons why they don't get in the trial is access reasons. And so the transapical, the Ascendra delivery system. makes the difference. It certainly steps up the rate substantially from where we would be today. So you know, I don't know how to put that exactly in time. It depends on when we get it. But enrollment would be substantially faster.

What are the issues with the FDA in allowing you to include in that the trial? What do you need to do?

One of the things they'd like to do is to have all the data be poolable, Tim, and so they're going through and analyzing our results as it relates to transapical, and they also want to make sure the trial is very statistically sound, and so these are things that influence it and we're talking through a few different options in terms of how we might be able to add it to the trial. We're confident we're going to be able to ultimately do it but we're trying to have a trial that's really good for patients and also will have a favorable outcome.

One way or would you expect a decision on that in this quarter?

I'd like to think so, our goal is certainly to have a decision this quarter, but it's possible that it could drag out, if they tend to -- if they agree with us we'll have a decision this quarter, but we're -- this was kind of a top priority for us, Tim.

On LifeStent, can you give us a little better feel for when that final approval might come, what that delay is about and when in '08?

Thanks, Tim. We're going to have to make sure that we give everybody a chance to ask questions. Right now we would say we expect to have our LifeStent response in by November. And so it would restart the clock. So if everything went just great we'd have an approval in the first quarter. If we get additional questions it will go beyond that. Right now, we're hopeful that it's more near term.

Thanks.

Our next question is coming from Glenn Reicin with Morgan Stanley. Please state your question.

Two questions. If, in fact, LifeStent, the approval doesn't come in the first quarter but it comes later, is that actually material to 2008 sales? In other words, does that label really make a difference at the end of the day? And then on the transapical delay, are you absolutely certain that it will be part of the PARTNERS trial and what are the prospect for you doing just a whole separate approval track for that approach?

Okay. Yes, let's try and work through those, Glenn. So your first question is if we didn't get it in Q1, would that be material to us. I would say the ability to promote is certainly a positive. And we say that's a big positive. We have not given guidance for 2008 so it's probably a little tough to talk about materiality but the other thing that goes along with that is our sales force. Because we haven't made decisions yet on-ramping up sales force, that's an additional factor, and we're probably going to tie our sales force addition to the approval, Glenn, and those will go together.

In terms of the transapical delay and will we be able add it to the PARTNER trial, if you were to ask us internally, we do believe we're going to be able to add it to the PARTNER trial. We don't believe there's any philosophical or fundamental issue that's going to keep it out of that, but we are still also considering the option of a separate trial, and that's something that we'll consider in addition to adding to the PARTNER trial and we're working through that whole internal decision process ourselves.

What's the give and take? How does that affect life whether it's a separate trial or part of the PARTNER?

It it's additional patient experience. It allows more surgeons to get involved with the transapical procedure, which there's a tremendous amount of demand out there for them to be able to do exactly that.

Okay. I'll get back in line.

Our next question, Michael Weinstein with JPMorgan. Please state your question.

This is Chris Pasquale for Mike.

Hey, Chris.

Couple topics. First, valve repair growth has been down in the mid single-digit range now for about three quarters. And this was a segment that had been growing, I think low double digits prior to that. Is this an inflection point in the market growth? Are you guys losing share? Can you help us understand what's happening there and whether we should model it like this going forward?

Yes, I think your observation is correct, it has been growing more slowly recently. What we have is most of our growth here is coming in our premium products, our more indication-specific products, and we've had increased competition in the products that are more mature. And so I don't think it's a change in the market growth rate. I do think that we have had some share loss in the more mature products.

Is that something that's likely to change in your future?

We constantly are going to keep working on that but clearly the competitors are focused on being able to get into this repair marketplace. Although repair will continue to grow that will probably be a more competitive segment.

Then on partner, I don't think you mentioned how many centers were responsible for the enrollment in the quarter. Can you just update us on how many centers --

I'm sorry, can you clarify that question?

How many centers are up and running and actually enrolling patients.

I'm guessing right now that we have six centers up in PARTNER right now that are actually up. There are certainly more than that trained. I'm not certain of Chris, the difference between the trained numbers and the enrolling numbers. I think we're in the 5, 6 range on the enrolling, but the trained number is maybe twice that.

Thanks.

Yes.

Our next question is coming from Tim Lee with Caris & Company. Please state your question.

Can you give us the numbers for FloTrac and LifeStent? Looking at the fourth quarter, what should we kind of think of the contribution from the discontinued products are if we're trying to get what your organic growth could be in the fourth quarter?

Let me take a shot at -- FloTrac and LifeStent, Tim, We're trying to stay out of reporting quarterly numbers on those product lines. Both those lines, as we indicated at the start of the year, we expected their sales to double in 2007 versus what they did in 2006, and we're right object track to do. That I think if you looked at the growth rates in clinical care and in the vascular product line, you'll see that they're driven by these new product, so they're growing nicely. We'll get back into it. Maybe our guys can give some additional color if you want to talk to them after the call. Tom, can you provide some more color?

Fourth quarter you're looking for --

you want a full year or run rate or what would be ideal?

All of the above. How's that? Well -- fourth quarter is fine.

Third quarter we've got $10 million, and nine months to date it it's about 31, 32. And that should be -- I don't have the full-year number in front of me but it should probably drop down. I want to say something around in the neighborhood of 6 or 7 in the fourth quarter but you can double-check on that detail.

But then again, it would pop up again starting in 2008 as we discontinue our distributed business in Japan.

Thank you.

our next question is coming from Amit Bhalla of Citigroup.

Thanks for taking the question. First question, you mentioned you're designing a new valve for the transcatheter program. As you move to a smaller valve sizes do you need to move to a self-expanding stent platform?

You know what, we've not spoken to that particular, but the short answer, Amit, is no, that's not a self-expanding platform. We're able to apply technology to our balloon expandable platform and be able to do. That what we're excited about is that we're going to be able to take substantial size of the system, maybe four French sizes out of this, which will make it far more deliverable and applicable to more patients.

So what does that get you down to?

Well, you know, what happens it's always difficult for us to throw out a specific number because in our case we have various valve sizes. Recall we have a 23-millimeter, a 26-millimeter, we're going to have a 29 millimeter valve. Each of those will have slightly different delivery dimensions. And so we'll have some that are below 20 French, but we might actually have some that are, I don't know, 21 French. It depends on valve size. The good news is if you need a big valve usually your anatomy is a little bigger, too.

There's been some discussion at TCT about pacemakers being implanted in the older patients post-transcatheter valve procedures. Can you comment on that and what kind of spins you're seeing in your patients?

Yes, I think, if I remember correct, what John Web reported recently and maybe also was repeated out at Columbia was a pacemaker implantation maker, maybe the 3, 4% rate. The competitive valve had one that maybe 10 times that rate, running much higher. I can't explain exactly why that is but it appears that there's a difference at this point in time, although we'll say that the data is still early for both valves.

But is that due to a geographic difference, or is there a product difference?

I'd be speculating at this point. I think it's probably best to talk to clinicians about what they think the difference might be.

Our next question is coming from Kristen Stewart with Credit Suisse. Please state your question.

I was wondering if you could comment more on the Anderson patents that you have now full ownership of. Did you have to pay anything to J and J for them to give up their licensing rights?

Thanks for the question. I know this maybe sounds agent confusing to the audience because this was one that we already had exclusive license to. But what we've done is to step this up to full ownership. And actually there was a financial transaction both with Dr. Anderson and also with Johnson & Johnson although we're not disclosing the terms of that. It's not really material to Edwards. It was pretty nominal sort of terms but what does it is it puts us in a position to have greater overall control of the prosecution and the enforcement of these, which is important. We're already in an enforcement action in Europe, and so we wanted to have maximum control as we're going through that process, which we would expect to be tested over time?

Are there any other payments that are required going out?

For the most part this clears it all up. There's a little bit that will be going across and that's really nominal. It it's really not material to us. Really, it's pretty much all in at this point.

Then just kind of a bigger picture question. As you look at pretty much the FDA across a whole host of areas, they're increasingly more conservative, seeing with it the Magna valve, your SFA stent now and how do you think about that going forward in terms of aus look to further develop the transcatheter program with bringing in additional sizes, bringing it below a 20 French? Is that something you may consider doing to hold up your existing trial to get that in, or is that something where you'd to have start a whole new trial down the road and wait several years to bring that to the market?

Well, a couple things. One is we know that FDA is working hard to make sure that they protect the public, and so they're -- I think they're pushing everybody to make sure that we do a great job with the products that we bring to market. And we feel like we know more about heart valves than most people and we're pretty expert at this. We still have struggled to be able to predict our approval times so we are sort of taking up our level of effort and our commitment to try and deliver even more than we have in the past. We know the the burden of proof is probably higher today than it has been in the past. In terms of going forward, I hate to generalize on things, when we go to our next-generation valve, we're anticipating that will be a new approval process with a new clinical trial. I think when we have changes to delivery systems for the most part, we expect that to be supplements but it depends on the nature of the change, of course. But, you know, we've sort of thought this through in terms of what's going to happen, if there's more specificity, we're open to the question.

So would a 20 French system would be more of a supplement type process?

Just specifically, if we talk about our next-generation system we would expect this to be -- we should -- we think of it as the new approval process that it's not clear exactly how that will go, but what we're expecting here is that We'll have a new approval process that we'll work through, although, I would also tell you I don't think the next time through the approval process will be as long as first time through it.

Thank you.

Our next question is coming from Alex Arrow with Lazard Capital Markets.

Thanks. Could you tell us how your inventory is situated for SAPIEN for your European launch? Now that you're launched there, should we assume that you've got enough SAPIEN to meet whatever demand there is in Europe, or is there a supply issue to consider?

You may have noticed our inventory numbers stepped up a little bit this quarter versus last. We built some inventory. It's in place.

One of the reasons for the increase in inventory, along with Magna Mitral.

So we feel like we have the inventory in place to be able to support the launch and don't expect that to be a constraining factor.

Would you be willing to be quantitative, and how many valves you have ready?

No, probably not, but I'd say we built a couple million dollars worth of inventory.

Okay. And can you say how long -- is it a fair question to ask how long it takes to make a SAPIEN valve?

We're not finding making this valve is grossly different than making one of our traditional heart valves. It's a process. We have actually people that would make the surgical heart valves, the same people that have been trained to be able to make this, and there's not a big difference, Alex, between the time and effort. The costs are a little higher now, but it's pretty straightforward, and we expect here with a little bit of volume that it will be very similar in terms of manufacturing capability and output.

Okay. Thanks. And I apologize. I jumped on the call late. Did you give updates on the enrollment status of the PARTNER trail?

We did. I don't know if we said it specifically but in the prepared comments we said more than 60 patients at this point. And we expect to have 15 sites that will be trained and hopefully enrolling by the end of the year in the U.S.

And did you say how many sites have enrolled so far?

We said in the 5, 6 range.

Thanks, bye.

Our next question comes from Ashim Anand with Natexis Bleichroeder. Please state your question.

Two questions. You said you gained market share in heart valves, if you can comment on from where did you gain that, and second is basically regarding distributor products, and in terms of carpet strategy, it looks like you are moving away from distributed product and focusing on critical care, and this is resulting into a dilution where we see that critical care actually provides higher gross margins and also we see that you have an increase in investment from unconsolidated affiliates. Is this regarding this transaction?

The first question related to market share. Could you say that again, please?

So you said that you gained market share in heart valves.

Yes.

So if you could comment from where you would have -- which firm you would have gained the market share.

I don't know exactly where it came from in terms of what firm but this would have been primarily international growth. That's where we saw it, and especially saw it in Europe and what we call Intercontinental, which is Asia and Latin America, so that's where the growth in particular came in heart valves. In terms of distributed product and that as a strategy, we don't have very many distributed products. We used to do much more of that in the past, but as we've sharpened our focus on the products that we manufacture, meaning those ones in particular that are proprietary products with leadership position it's a much better use of our people's time to be able to offer those to physicians. And so by discontinuing focusing on the distributor products and focus on our proprietary, ultimately, this is going to be very good for not only our customers from a technology point of view but also from our profitability and growth. Although there may be some short-term dilution we don't think that's going to last very long. We think it's going to be accretive as they focus on our new product. I'm not sure that I followed the last question, unless you did, Tom.

No, I'm sorry.

Investments in unconsolidated affiliates has -- I was wondering if this was related to this Japan transaction.

No, it's actually related to the investments that we need to carry on the balance sheet have to be marked mark to market, and as a result of Sangamo's appreciation, that's primarily the lion's share of that change.

Remember we own quite a bit of Sangamo's stock as a result of the most recent transaction.

Thank you.

Sure.

Next question?

Our next question is coming from Larry Biegelsen with Wachovia Securities. Please state your question.

Thanks for taking the call. Mike, could you please just clarify, you said over 60 patients enrolled in PARTNERS. Is that the same as treated, if you could clarify on that. And I still -- I wanted to revisit the hangup on Ascendra. You talked about the poolability. Can you talk about whether that has anything to do with the clinical trial results from the feasibility study in the U.S.? Is that part of the issue? It's still unclear to me what the hangup is with the FDA.

Okay. Well, first, the 60-patient number is an enrollment number, not a treatment number. In terms of the Ascendra trial, we're trying to work through this right now, the poolability data, most of it has to do with the maturity of the data. We've been at the transfemoral for longer and we have far fewer cases in the U.S. with the transapical procedure, so trying to do those comparisons has been more challenging, and FDA has given us more time to collect that data, and also given us more patients. I think they gave us an additional group of patients so that we can continue to enroll in the U.S. We are going to try and generate that data while we reach a conclusion on how to make sure that this trial is designed in such a way that it's a fair deal.

It has nothing to do with the results of the feasibility trail in the U.S. with the results? And also, can you tell us how many patients have been treated in the U.S., Mike? Thanks.

I don't remember how many have been treated in the U.S., Larry. It must be in the dozens range but I'd to have think of what that number. It must be around 30 or so. I think it's not so much that results -- we don't have enough results to have significance here so that we can say certainly that it's comparable to what we have today.

Thanks.

Our next question is coming from Glen Reicin of Morgan Stanley.

Just a couple of follow-ups here, I'm a little bit in the weeds here, but just some clarification. Firstly, on the Puerto Rican situation, the charge in the fourth quarter, I assume that's a cash outlay in the fourth quarter.

Yes, that's correct.

Okay. And then, in terms of the distributor products, those are all in the category distributed, correct?

Correct.

And then, the third is, can you explain how FX works here? What was the contribution of FX this quarter? What were you anticipating the contribution of FX being? Then next quarter I just wanted to think through this, if there's an extra $4 million of FX, how does that effect the bottom line?

I can tell you what's happening, Glenn. We had a little more FX than we had planned on. The technique we use is a combination of collars and forwards. The rates have gotten to the point where they're going through the top end of the collars. So what it tended to do in this quarter, is it probably costs us 20, 30 basis points in margin, as we have to -- as we don't get the benefit of that further increase. Looking forward to the fourth quarter if these rates were to continue it's about double that size in terms of basis points. That's one of the reasons that I talked about the margin there, a little bit differently than last time. For them to stay at those rates they're pretty well above the top end of the instruments that we have in place.

So I'm just -- that was a little bit too complicated for me.

We'll try it again.

Just in terms of maybe a net contribution on a dollar basis, maybe EPS basis this quarter, versus next quarter?

This quarter/next quarter. On the sales side, we're saying it's probably going to be $10 million versus $6 million of sales.

Okay.

All right. But if you remember the improvement, and I don't know exactly the number, but the improvement we've seen recently is probably very little, going to have a drop-through effect, because of the fact that we've got to give that back as a result of the contracts that we put in place to protect the downside.

Okay. So you're saying not much?

Yes. Okay, thank you very much.

Our next question, Kristen Stewart from Credit Suisse. Please state your question.

Wondering if you guys would comment on whether or not one arm of the PARTNER trail may be enrolling faster than the other.

Sorry, Kristen this is one that we're committed not to comment on that. What we'll always try and do is give you a current enrollment number whenever we do these kind of conference calls to let you know where we are but what we do is we jeopardize the trial itself to get into that kind of commentary. So sorry about that.

Thought I would try. Thanks anyway.

There are no further questions at this time. I would like to turn the floor back over to management for any closing comments.

Okay. Well, thanks very much for your continued interest in Edwards. Tom and David and I will welcome any additional questions by telephone. With that, I'll go 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 also be found in the investor relations section of our website at Edwards.com. 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 passcode 256909. I'll repeat those numbers. 877-660-6853, or 201-612-7415, the account number is 2995, and the passcode is 256909. Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you very much.

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