愛德華生命科學 (EW) 2008 Q3 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Edwards Lifesciences third quarter 2008 earnings conference call. (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 2008 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, then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem; Chairman and CEO, Tom Abate, CFO and Treasurer; and Don Bobo, Corporate Vice President-Heart Valve Therapy. Before I turn the call over to Mike, I would like to remind you 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 profit margin, net income, earnings per share, and free cash flow goals for 2008; the regulatory approval and sales of Heart Valve Therapy products, including Magna Mitral and Magna Ease, and the competitive dynamics of the heart valve market; expected sales and product enhancements for the FloTrac system; the timing, progress and results of clinical studies, including the PARTNER trial; the market opportunity for Transcatheter heart valve technologies; and the adoption in Europe and expected 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, 2007, 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 very please to report strong third quarter sales and earnings growth led by our Heart Valve Therapy franchise. We also benefited from a lot of visibility about Edwards new technologies during the quarter. At the recent EACTS and TCT meetings, our Transcatheter technology was showcased by leading clinicians with growing enthusiasm that this therapy will have a prominent place in the future treatment of heart valve disease. In addition, we also received U.S. approval for Magna Mitral during the quarter, and expect it to be a future contributor to our growth. Now turning to results. On a reported basis, total sales for the quarter grew 16% to $304 million and grew 12% on an underlying basis. Currency again helped sales this quarter. Before I provide a more detailed review of our sales results Don Bobo, Corporate Vice President for Heart Valve Therapy, will discuss our surgical heart valve franchise. Following my remarks, Tom will have -- will review the financial results. And with that, I would like to introduce Don Bobo. Don?

Thanks, Mike. I am very pleased to have the opportunity to discuss our surgical Heart Valve Therapy franchise with all of you. At last year's investor conference, we laid out our 2008 forecast for the Heart Valve Therapy franchise; and as you remember, we planned for U.S. growth rate in the 0 to 2% range for the year, which included the impact of competitive launches. Outside of the U.S., we expected significant growth in the double-digit range and forecasted a 4 to 6% growth globally on a blended basis. When you added in Transcatheter valve revenue, we forecasted a heart valve franchise growth rate of 8 to 10%. We are executing on this balanced plan, and are exceeding our growth projections.

Reported sales for Heart Valve Therapy were $148 million for the third quarter, an increase of 21%, which included a $5.4 million positive contribution from foreign exchange. On an underlying basis, growth was 16.7% for the quarter, led once again by strong performance in international regions, including Transcatheter heart valves in Europe. Transcatheter Heart Valve Therapy is generating additional market growth in Europe, as patients who were previously untreated now have more options for therapy. The introduction of this technology has dramatically lifted market growth in Europe from its historical rate of 3 to 5% to more than 25%. Mike will provide more detail on Transcatheter heart valves later. My comments will focus primarily on our surgical heart valve franchise. In the U.S. valve sales growth was 4%, driven by gains in both units and price. We're particularly pleased to see this progress in the face of two competitive launches earlier this year.

Outside of the U.S., our base heart valve business continued to achieve double-digit underlying sales growth, driven by the expanding adoption of our Magna heart valve platform. During the third quarter, we were very pleased to receive approval from FDA for the Magna Mitral, and began our launch in September. Due to the timing of this approval, this valve had only minimal impact on this quarter's sales. Our Magna Mitral has a unique design that provides it with the lowest effective profile, and therefore the lowest ventricular projection of any tissue mitral valve. We are pleased with clinician feedback from their initial implants, and expect sales to sequentially ramp up as we expand the launch.

In Japan, we introduced the Magna Aortic Valve in June, which contributed an additional $2 million to growth in the quarter. Based on this now superior patient benefits, we fully expect this product to continue to accelerate our growth rate and become the number one heart valve in Japan. Turning to the status of our Magna Ease Aortic Valve, we will respond to FDA's outstanding questions in the next few weeks. We continue to anticipate a U.S. launch in 2009 pending regulatory approval. Based on this valve's performance, we expect it will surpass our Magna valve to become the global market leader. And turning to repair, sales growth in the quarter continued in the mid-single digits, led by our disease-specific products. We had our first experience with a Physio 2 ring during the third quarter, and concluded that some modification to the ring accessories are necessary. As a result, we now expect to launch this product in the U.S. and Europe during the first quarter of 2009.

This new ring represents the next-generation repair product for the degenerative mitral valve disease, which is the largest segment of repair, and where we've experienced the most competitive activity. Summarizing our surgical heart valve franchise, for 2008 we are confident that our underlying growth rate will exceed the 4 to 6% range that we initially estimated. This is driven by our better than planned performance in the U.S. and the continued strong sales outside the U.S. Combining this growth with Transcatheter heart valves, Heart Valve Therapy is having an impressive year, exceeding the 8 to 10% growth rate originally projected. We now expect heart valve underlying growth to be 15% this year. I look forward to responding -- to reporting on our continued progress. Now I'll turn the call back over to Mike.

Thanks, Don. So turning to Transcatheter heart valve sales, although we experienced the expected seasonality during the third quarter, we finished the quarter strongly, achieving $13 million in sales, most of which was in Europe. Continued clinician enthusiasm combined with an increase in the number of active centers drove both procedures and sales. In Europe, we implanted approximately 400 valves during the third quarter, and our selling price remained within our previous range of 15,000 to 22,000 Euro. Our sales continued to be driven by implants, with 90% of the units sold be implanted in the quarter. We expanded from about 50 centers performing cases in the second quarter to 70 centers performing cases during the third quarter.

We continued to be -- there continue to be centers eager to join our program, and we've expanded our training capabilities. We expect to add at least five centers per month for the remainder of the year. I am very pleased to report that in our year-to-date commercial sales, the combined acute procedural success rate remained high, at around 95%. Regarding reimbursement, we continue to expect most European countries to establish formal reimbursement in 2010. In the meantime, the same dynamics surrounding funding continue to exist. Although interim funding is not assured, we're pleased hospitals are currently able to support these procedures. We expect this to continue as we make progress towards securing formal reimbursement. Based on our momentum in Europe, we expect our global Transcatheter heart valve sales to surpass $50 million for the full year. At last week's TCT meeting in Washington, D.C., our SAPIEN Transcatheter valve was featured in a large number of clinician presentations and live cases, including showcasing our new RetroFlex III delivery system, which will be rolled out later this year.

Early experience for the Trans-Apical delivery of SAPIEN was also presented during the quarter by surgeons at the EACTS meeting in Europe. Our Transcatheter valve technology continues to generate significant interest among both surgeons and interventional cardiologists. We're committed to introducing this technology by executing a rigorous clinical program and providing regular updates on the clinical experience to the scientific community. We'll also continue to promptly communicate this information to the investment community, as we did during the last quarter. Given the high level of investor interest, we're happy to take individual calls to discuss any of this content, and we plan to provide additional information on our European experience during our investor conference in early December. Turning to the U.S. PARTNER trial, we now have about 20 centers that are actively enrolling patients; and at the end of September, we had enrolled over 450 patients in the PARTNER trial, which is consistent with the timeline we presented at our investor conference last December.

In addition, we remain on track to have 600 patients enrolled by the end of 2008. At this projected enrollment rate, we continue to expect Cohort B to complete enrollment near the end of the year. In addition, we continue to expect enrollment in Cohort A to be completed by the end of the third quarter of 2009. No other competitor has yet initiated a U.S. clinical trial, which leads us to believe our progress gives us at least a two-year lead. Starting in the second quarter, patients began receiving a SAPIEN valve with the Ascendra delivery system within the PARTNER trial. This addition gives cardiac surgeons the opportunity to PARTNER in this transformational technology; and most importantly, it allows us to address even more patients. As a reminder, the PARTNER trial includes measurements of both mortality and patient benefits, like quality of life and functional improvement.

We believe the SAPIEN technology is highly likely to distinguish itself in the treatment of these patients, and we remain confident in the PARTNER trial design. We're making good progress on our next generation Transcatheter valve, now called the Edwards SAPIEN XT. We're particularly excited about this important development, as we expect clinicians will welcome its smaller delivery profile and the state of the art valve design. The combination of a smaller delivery profile along with our established expertise in valve design will accelerate the use of this technology. We're continuing our dialog with the European regulatory agencies, and remain on track to start a SAPIEN XT trial before the end of the year in support of a mid-2010 CE mark. We continue to anticipate that this will be a non-randomized trial comparable to the study design of our first generation technology.

We continue to make progress on our 30-patient U.S. feasibility trial of the SAPIEN valve in the pulmonic position. To date, we are one third of the way through the enrollment of this trial. As announced last week, a German trial court found that Corevalve does not infringe our Anderson patent; and while this decision is disappointing, we will vigorously pursue a reversal of this appeal -- on appeal. We -- as we've stated before, we also have a case in the U.K. where we're awaiting a decision, and a separate case in the U.S. where we expect key decisions beginning next year. We're prepared for a prolonged legal battle and expect to ultimately prevail. We believe Edwards has the strongest Transcatheter valve patent portfolio and are investing to broaden its reach. We're committed to leading in the Transcatheter valve space, but enforcing our IP is only one element of our broad leadership strategy. Developing the best solutions and technologies for patients remains our number one priority, and we're pleased with our progress in that regard.

Now turning to our Critical Care business, for the third quarter, Critical Care reported $110 million in sales, up 14%, which included $4.5 million contributed from foreign exchange. Underlying sales growth was 9.2%. Sales of new products, led by FloTrac, continued to be the biggest growth driver this quarter. In addition, our growth is becoming more diversified with increased adoption of PreSep, strong adoption in emerging markets, and share gains in our hemofiltration and pressure monitoring product. Earlier this month at the European Society of Intensive Care medicine in Lisbon, we sponsored an educational symposium on hemodynamic monitoring. At this standing room-only event, a number of studies were presented supporting the use of hemodynamic monitoring to enhance patient care and outcomes. Our market leading Swan catheters, complemented by our innovative FloTrac and PreSep monitoring systems, continue to provide vital information to clinicians caring for critically ill patients. Enthusiasm for FloTrac continues to grow. In addition to its ease of use, Edwards has continuously improved the FloTrac algorithm to provide more value for clinicians and new market opportunities for the product which will extend our leadership position.

Our next significant introduction is a substantial upgrade that enables the system to provide enhancements targeted for the medical ICU. This innovation will continue to broaden the application of FloTrac. During the quarter, sales of PreSep, our innovative catheter for early detection of sepsis, continued to ramp up. Detection and treatment of sepsis remains a clinical challenge, and PreSep is gaining adoption. We continued to take market share in pressure monitoring products and hemofiltration. These products contributed significantly to Critical Care's total growth. Turning to cardiac surgery systems, reported sales for the quarter increased 55% to $21 million, primarily due to the continued strong performance of the CardioVations MIS product line. Year-to-date, CardioVations growth is around 25% on an underlying basis, as we continue to increase our penetration into existing accounts and introduce MIS therapies into new accounts.

In addition, our base cannula products were up 3% on an underlying basis. We're please to have successfully integrated the CardioVations product line into our cardiac surgery systems franchise. The timely execution of our integration and training plan has led to stronger than anticipated sales growth in this business. We've retained a CardioVations salesforce, improved product quality, and increased manufacturing capacity to meet the rising product demand. CardioVations offers real synergy with our heart valve business, and we're committed to leading the way in developing MIS products that facilitate novel valve procedures. Total reported sales of vascular products were $23.5 million this quarter. Sales of our high margin base vascular products remained relatively constant at $14 million versus the prior year.

Now turning to Transcatheter mitral repair, at TCT, clinicians discussed the progress of our MONARC system, including the EVOLUTION II clinical trial. This trial will study up to 150 patients with moderate to severe mitral regurgitation and heart failure in Europe and Canada, and we expect to begin enrollment before the end of the year. Now I will turn the call over to Tom.

Thanks, Mike. In addition to the strong sales that Mike and Don have already discussed, I am pleased to highlight that excluding last year's special gain, our diluted earnings per share grew more than 20% during the quarter. As previously announced, during the quarter we discontinued securitizing our U.S. accounts receivable, resulting in a $50 million reduction in our free cash flow. Terminating our U.S. program was a financing decision and did not affect our working capital. Our balance sheet remains strong, with our cash and short-term investments exceeding our total debt.

For the third quarter, our gross profit margin was 65.4% compared to 65.3 in the same period last year. This nominal increase resulted from a more profitable product mix, which was largely offset by the temporary impact of foreign exchange hedges and contract manufacturing. In the fourth quarter, we expect our gross profit margin to increase 200 basis points sequentially to approximately 67.5% as a result of our strengthening product mix, and improving foreign exchange hedge outcomes. For the full year 2008, we expect gross profit margin to be approximately 66%. Looking forward, based on the continued strengthening of our product mix, we continue to expect our gross profit margin to exceed 70% within the next few years. Third quarter SG&A expenses were 39.3% of sales or $119 million. The $16 million increase versus last year was due primarily to a significant impact from foreign exchange, higher levels of sales related spending for the SAPIEN launch in Europe, and compensation expenses related primarily to our strong sales performance.

In the fourth quarter, we expect SG&A to be nearly flat in dollars, while SG&A as a percentage of sales is expected to decline to approximately 38%. For the full year 2008, we continue to expect SG&A to be between 38 and 39% of sales. R&D investments in the quarter were 35 million or 11.6% of sales compared to $31 million last year. This increase in spending was focused primarily on our surgical and Transcatheter valve programs, as well as our Critical Care development efforts. For the full year 2008, we continue to expect R&D as a percentage of sales to be approximately 11.5%.

For the third quarter, our reported tax rate was 24.5% compared to 25% a year ago. This quarter's rate benefited from the favorable results of our 2007 U.S. tax filing. In addition, as a result of the recent renewal of the Federal R&D tax credit, our fourth quarter rate will be significantly lower, and our full year 2008 rate, excluding special items, will be approximately 24%. FX rates positively impacted third quarter reported sales by approximately $11 million versus the prior year. As a result of the change in foreign exchange rates since our last earnings call, reported sales were approximately $4 million less than we expected, and the bottom line effect was $0.02 to $0.03. Excluding the impact of terminating our U.S.

securitization program, free cash flow generated during the third quarter was $52 million, which we define as cash flow from operating activities of 64 million, minus CapEx of 12 million. For the full year, we continue to expect free cash flow to be at the upper end of our 155 to $165 million goal, excluding the impact of terminating our U.S. securitization program. In the third quarter, we repurchased 1.2 million shares for approximately $71 million. Given the current stock price, we expect fully diluted shares outstanding to be approximately 58 million in the fourth quarter. On the balance sheet, total debt at September 30th was $203 million. At the same time, we had a cash and short-term investment balance of 215 million. Including receivables in our securitization program, day sales outstanding for the quarter was 69 days. Inventories at the end of the quarter were 144 million. For the third quarter, domestic sales grew 15% to $136 million and international sales grew 17% to 168 million.

Turning to sales guidance, as a result of dramatic changes in the foreign exchange rates, particularly the weakening of the Euro relative to the dollar in the last 90 days, we now expect full year total sales to be at the low end of our previous 1.24 billion to $1.28 billion range. While current foreign exchange rates are expected to negatively impact the fourth quarter sales by approximately 15 million compared to our previous guidance, we see no change to the strength of our business, and our underlying growth rate expectations remain unchanged. For Heart Valve Therapy, we expect 2008 sales to finish within the lower end of our 605 to $625 million guidance range. This includes Transcatheter valve sales that surpassed $50 million.

In Critical Care, we expect total annual sales to be at the low end of our previous 455 to $475 million range. In cardiac surgery systems, we continue to expect 2008 sales to be between 85 and 95 million. And lastly, in vascular, we expect total annual sales to be between 85 and 95 million, which includes contract manufacturing of stents. All of these projections assume foreign currencies remain at current levels. For fourth quarter 2008, we are projecting total sales of 305 to 325 million, including the adverse impact of foreign exchange to our last guidance of about 15 million. We estimate that our fourth quarter 2008 diluted EPS will be between $0.75 and $0.79. We are raising the bottom of our full year range by $0.02 to between $2.52 to $2.58, excluding special items. This represents a 2008 EPS growth rate of approximately 20%. And with that, I will turn it back over to Mike.

Thanks, Tom. We're continuing to drive strong growth in our core franchises. Our product lines are generally not susceptible to weakening consumer spending, and our underlying sales growth rate expectations remain unchanged. 2008 is shaping up to be an excellent year, with strong earnings growth momentum really accelerating in the second half. We're very pleased with our Transcatheter sales ramp in Europe, and expect full year sales results will surpass our previous guidance even with the weaker Euro. And importantly, from a long-term perspective, the impressive clinical results reported on our Edwards SAPIEN valve in Europe continue to improve, and our Transcatheter valve platform represents a truly transformational long-term growth opportunity. Before we open it up to questions, I would like to remind you about our 2008 investor conference which will be held in New York on Thursday, December 11th. At this event, we'll provide an update on our new technologies, as well as a detailed financial outlook for 2009. We've also lined up leading clinicians who will share their experiences with our Transcatheter valve technologies. Additional details will be sent out shortly. And with that, I will turn it back over to David.

Thank you. In order to allow everyone a chance to participate, we ask that you limit the number of questions; and if you have additional questions, please re-enter the queue, and we'll take as many as we can during the remainder of the call. Operator, we're ready to take our questions.

(OPERATOR INSTRUCTIONS). Our first question is coming from David Lewis with Morgan Stanley. Please state your question.

Good afternoon.

Hi, David.

Mike, could you talk about two things. One, transfemoral/transatrial mix at the end of the third quarter; and I also wonder if you can give us even qualitatively from the second to third quarter, how did growth trends look like on the transatrial arm and transfemoral arm from second to third quarter?

Yes. Broadly, David, the mix for transfemoral/transatrial is about 60% transatrial to 40% transfemoral. And that's pretty similar, I think, for the second and third quarter. I think in terms of growth rate from second to third quarter, I think what I reported, the third quarter we had around implants of 350, and in the fourth quarter we had implants around 400. We think that's pretty impressive growth considering that it is a seasonably weak quarter there, you know -- there really is a hiatus during August. We saw things pick up nicely in September. So you can sort of do the math here in terms of what that does for both transfemoral and transatrial growth.

Okay. Mike, if -- on a relative basis -- if you had to say which arm was stronger in the third versus the second, was it transatrial or transfemoral?

Well, I would say the mix stayed about the same, so they both picked up, I would say, very similarly, David.

Okay. And just looking at your heart valve business, looks like from second to third quarter the growth rates were largely flattish. Would we expect -- or should we expect -- a reacceleration into the fourth quarter with the new product launch?

Don, why don't you take that one?

Hi, David, this is Don. We -- as we said -- as I said in the call, the Magna Mitral valve got approved late in the third quarter, so we do expect that valve to contribute more growth in the fourth quarter than we exceeded -- than we experienced in the third quarter, so that does represent in the U.S. an acceleration in growth rate in the fourth quarter.

Okay. And last question and I will jump back in queue. I have may have missed it. But on the medical management arm, Mike, could you give updated enrollment number for that arm, and has the timeline for fourth quarter changed?

You know, we typically don't give enrollments by arm, David. We just give total enrollment, and so I think we said more than 450. I want to say the precise number that was reported was like 456 for the trial at this point in time. That's at the end of September.

Do you expect to continue enrollment or complete enrollment for the medical management arm in the fourth quarter still?

Yes. What we've said is -- yes, Cohort B -- we said we expected it to be around year end.

Great. Well, thank you very much.

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

Hi. Good afternoon, and thanks for taking my call.

Hi, Larry.

Hi. First, Tom, R&D tax credit wasn't in the original guidance. Is that right?

One more time, Larry, which rate are you referring to?

The R&D tax credit wasn't in the original guidance?

No, absolutely not.

And my math -- by my math that adds about $0.03 from the prior guidance, but you raised low end of your guidance by about $0.02. Is my math accurate?

Well, yes, we lowered the low end by $0.02 and the impact is roughly about $0.03; but keep in mind that we also had the foreign exchange that was going the other way.

I think you meant to say that we raised our low end by --

I am sorry. Did I say the opposite? I'm sorry. So that part is correct, Larry. I just -- when we look at the fourth quarter and we look at the pluses and minuses, we had a $15 million upside. I was very pleased with the outcome of our hedging program, but there is a cent or two that comes to the bottom line. So I look at that and the tax upside as sort of evening out, and I am happy under these conditions to say we're sticking and taking the guidance up.

So to follow that, Larry, we got -- so at the same time we get the improvement from R&D, we have a lowering of sales versus the last time we gave guidance, right?

I got it, thanks. And regarding the U.S. PARTNER trial, a lot of people -- including the speaker at your analyst meeting the other day -- have been concerned that the patients on medical management in Cohort B will do too well, and there won't be enough deaths at twelve months to show a significant difference between medical management and SAPIEN. Do you think this is a legitimate concern? And if you don't have enough deaths at twelve months, does the trial continue until there are at least 150 deaths, and does this increase the likelihood the trial succeeds in your view?

Okay. Thanks, Larry. Let me try and take that on. That's sort of multi-faceted. You know, first of all, as it relates to that group of patients, that's one of the things that's unknown, and so we really don't know how that group is going to do. At the same time, we're probably having better clinical results in our SAPIEN treated patients than we anticipated when we designed the trial. So overall we're very comfortable with the trial design. As I tried to mention in my comments, remember the PARTNER trial measures both mortality and patient benefits like quality of life and functional improvement, so we think that those all get considered, and we really expect SAPIEN to distinguish itself in terms of what it does for patients. In terms of the 150 deaths, we really don't think that's going to come into play, Larry. I think that's more of a safeguard that's out there that's not going to be relevant. We think the timelines that we provided are consistent with what we believe is going to happen in terms of approval.

And lastly, valves per center per month -- on the last call you said about 3 to 4. How did that compare in the third quarter? Did it increase or decrease?

Could you repeat that again, Larry? I am not sure we understood it.

Valves per center per month, I think you said about 3 to 4 in the second quarter. Is that -- was as that consistent in the third quarter, or did it increase or decrease?

I would say it is unchanged. It is still pretty consistent, 3 to 4. You will note that we said that there were around 50 centers implanting in the second quarter, and 70 in the third.

Thank you.

Our next question question is coming from Jason Mills with Cannaccord Adams. Please state your question.

Thanks, Mike, Tom, David, for taking the question. Mike, the underlying sales growth for U.S. surgical was a bit better than expectations, notwithstanding you didn't have Magna Mitral. It was -- I think 4% you said, right, versus 0 to 2% were your original expectations? Just wondering if you could give us a sense for where you're seeing it go in the fourth quarter? You mentioned, Don, that you expect it to accelerate, but I assume modestly so. Perhaps you can give us a little bit more granularity in your expectations for underlying heart valve sales growth in the U.S. in the fourth quarter. And then I know you're probably not prepared to talk specifically about 2009, but directionally, could you give us some color on whether you expect underlying U.S. growth to be in 2009, given that you won't have comped Magna Mitral until the third quarter? Actually the fourth quarter?

Yes. Thanks, Jason. Since we've got Don here, why don't we let Don take this on?

Hey, Jason, thanks for the question. So as you think about -- first of all, going back to Q3, we do feel pretty good about how the business performed in the U.S. given the late approval of this product; and as we look at Q4, we do expect Magna Mitral to contribute to the quarter, I think 2 to $3 million. And then as we go into 2009, you know, we have a couple of other products that will be coming out. I mentioned Physio 2 in the script, and we also are very hopeful that the Magna Ease product receives approval. So 2009 is a year we expect will continue to see more growth and more momentum in the U.S. And probably in December at the investors conference is where we'll bring to life exactly how we're framing 2009 and what we would expect.

That's perfect. Just two quick follow-ups. One I suppose for Mike, and then one for Tom. Mike, your Critical Care business is now starting to bump up against some more challenging comps, given your significant growth rates over the last four quarters. Could you give us some thoughts on the trajectory of growth in that business in Q4 and perhaps directionally in 2009? And then for Tom, you said -- I think you said free cash flow guidance you expect to be in the upper end of your original range for 2008. Could you also give us some thoughts and what you're planning for in 2009 on that front, and then an update on where you stand on the share buyback as well? Thanks, guys.

All right, Jason. First on Critical Care, you will recall that when we started 2008, we gave guidance we thought Critical Care would grow in the 8 to 10% growth range; and for the first couple of quarters of the year, it actually exceeded 10. This quarter was 9. We expect it to stay in that 8 to 10% growth range. We had a strong fourth quarter last year; so you're right, comparisons are tough, but we still see the business operating at a very high level. There is great momentum within FloTrac, and we really probably don't have anything more to change in terms of going forward. Does that answer the Critical Care question? And I will kick it over to Tom.

Yes. So you see a pretty stable business as you move into 2009 at 8 to 10% level at this point?

We do. We haven't changed anything there.

Okay.

And then Jason, in regards to cash flows, we don't typically give dollar guidance, but there is no reason -- there's nothing unusual this year that would cause me to think of it any differently than in the past. And I would expect it to grow right along with earnings in a similar percentage, and when we come out with that, that will all be consistent.

Perfect.

Share buyback, I am particularly proud of where we are at this point. We've exceeded all the expectation that we put out at the beginning of the year. We purchased somewhere in the neighborhood of 6 million shares for the first three quarters, which, with the 58 million that will end the year, that is about a 4 million share improvement of where we ended 2007, so we obviously remain very bullish on the shares.

Great. Thanks, guys.

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

Hi. Good evening.

Good evening.

Was wondering if you can talk a little about the number of centers you added. You were previously looking to add kind of 3 to 5 a month, and I know now you're looking at 5. You were at 50, now you're at 70. I think that was kind of around where you were targeting originally at the onset of the year, so can you just talk about what's kind of going a little better than expected? And I have to imagine when you bring a new center on board you're feeling pretty good about the outlook from the reimbursement standpoint, so any comments around that would be helpful.

Yes, Kristin, what we said is that we'll expect to add more than five centers a month for the remainder of the year; so part of what's going on here is we have increased our capability because we've added a second center that does training, our training capability has gone up, and we're -- we have a good understanding on how to do this. We've maintained our high standards that says we really would expect a center to have the ability to purchase valves before we train them and add them to the program. But the other thing I will add is, we're -- in the very first quarter of the year we had to track things like training centers, because it was one of the few leading indicators we had on how sales were going to go. At this point, it is probably getting a little bit more complicated. You have some centers that are just excelling on their enrollment and others that are going slow, and so the mix is changing to some extent. But the center addition continues to be one that will drive growth, and it continues to be a very -- let's say popular amongst European centers wanting to be added to this technology.

Okay. And just the higher guidance for the full year upper Transcatheter valves -- is that just the additional centers that are coming on line, or continued optimism on the underlying procedure growth rate?

Yes. It is a combination of both. We're just real pleased with the ramp. One of the things I think is noteworthy - and I don't know if everybody keeps track of this -- but when you consider how much the Euro has changed here, and that's probably a 10% change in itself -- to not only to hit the top end or exceed the top end of the range, really says that it is continuing to go very well, even better than we expected right along the way. So we're pleased with our sales growth ramp in Europe, and there are going to be more centers doing it and probably doing the cases a bit more.

And then just real quickly for Tom, foreign exchange -- I know you touched upon it, but what can we expect -- I know you're not going to give 2009, but obviously can you just talk a little bit about your hedges? You commented there is a little bit of a headwind impacting earnings this quarter. How much is impacting the 4Q, and kind of what can we expect in broad terms for '09?

You know, for 2009, what I can give is just a general. As you know, we don't have the sales detailed out or so forth. But I would estimate somewhere in the neighborhood of 40 million headwind from currencies from where they stand today. In the fourth quarter versus our prior guidance, we probably saw about 15 in sales negative impact as a result of those currencies, but the hedge program is in great shape for the quarter and looks like it will produce a nice result if everything works the way we think, and it should be very minimal on the bottom line -- very minimal. Now, next year we're also pleased -- we continued to maintain a hedging program this year that's come composed of forward and collars, and the rates -- what we generally do is we go one year in advance. So if you're looking at Q1, you can look at the prior Q1 and get a good idea of where rates are going to go. And GP -- obviously, what's happened and what we we're predicting in Q4 is a bit of an alleviation of the hedge contracts that we've been dealing with all year is finally lifting in the fourth quarter to be essentially negligible.

Okay. Great. Thank you.

Our next question is coming from Mike Weinstein with JPMorgan. Please state your question.

Evening. Thanks for taking the questions. I guess a couple questions on SAPIEN. You commented that the transfemoral/transatrial mix had shifted now to about 60% in transatrial. Can you give us a sense of where you think that's going to be in the quarter or two? Is that going to keep shifting in that direction? And then, what can you do in the short term to offset the Corevalve size advantage, because I know they've commented at TCT they were up sequentially in the third quarter. Thanks.

Yes. Actually, we don't expect a big shift in terms of that mix, Mike, going forward. We think that the transatrial seems to be going even better in sales than we thought. It is popular among the surgeons. There is a lot of strong surgeon support, so that's going well. Transfemoral is going well also; but clearly the profile is an issue, especially with the sick group the patients, and so the smaller profile is preferred by cardiologists at this point. And it is one of the reasons why we're very excited about moving forward with SAPIEN XT, because we think at that point when we have that available to clinicians, it puts them in a position where they won't have to compromise between profile and valve performance.

And so is there anything you think that might, I guess, change the current pace? Because it just looks like, just based on what -- at least what Corevalve gave us at TCT -- that they're seeing sequential growth in their transfemoral business. Your growth is coming from the transatrial business. Is there any way to take back some of that transfemoral business from them between now and mid-2010?

Well, we haven't lost transfemoral business, if that's what you're wondering here. I mean, we've had growth in transfemoral. It is just that I would think there is more transfemoral share today that's with Corevalve than it is with us. We're thinking the strength of our results pretty much speak for themselves. We're experiencing some nice growth. Remember that transatrial happened after transfemoral, so you had some pent up demand, and part of that -- part of what you're seeing right now in just that shift was just that coming into play. But we really like our chances in transfemoral to be a share leader in the long run. We think we're very well-positioned to do that.

Let me ask you a question or two just on the PARTNER trial. Marty just made this -- had this slide at TCT, which Larry was asking a bit about earlier, where the primary end point for Cohort B has -- appears to have changed and from twelve-month mortality to the later of twelve-month mortality or 150 deaths, which would be a 43% mortality rate for that arm of the study. When did that occur?

You know, Mike, there hasn't been any changes in the PARTNER trial. The change in the PARTNER trial occurred back when we added transatrial -- remember, that was about a year ago now, and I guess it was at the investor conference that we laid that all out when we talked about it, and we really haven't had any changes to the PARTNER trial since then, Mike.

So that 150 deaths possibility at the end point, that was incorporated when you made the changes last December, January?

Yes, to the best of my knowledge. You know, this one is really an obscure one, Mike, and we don't expect it to to really be a factor in this whole equation.

And then my last question is -- I guess is, why not? Why do you think there will be 42% of patients dead in Cohort B by twelve months?

Remember, it is not just in twelve months. It is all accumulative experience, and the short answer is yes, yes, we do.

Okay. That's helpful. Thank you.

Yes.

Our next question is coming from Amit Bhalla with Citigroup. Please state your question.

Hi. Good afternoon. I wanted to ask a question about reimbursement. I know you said that the interim through 2009 you don't have reimbursement secured, but could you give us a feel for which countries have done a better job of securing '09 reimbursement, and which have higher hurdle rates?

Yes. We know that this is an area of high interest. We're just not prepared at this point to layout country level detail on reimbursement. But when we get to our investor conference in December we'll try to provide some more visibility on that. It is possible for us to even have a country come in toward the end of '09 or two. We're working hard on that. It's a high priority. But what we were trying to indicate is that the bulk of countries probably put formal reimbursement in place in 2010.

Maybe I can just get two more in, then. Question for Don. Physio 2, you indicated that there is some changes you need to make with the accessories. What are different about the accessories for Physio 2 versus the other disease-specific rings? And then if you could also just give us an update on the progress with the FDA for the SFA indication for life stent, maybe just an indication of the dialog you're having with them? Thanks.

All right, Amit. Let me go ahead and take the Physio II questions, and maybe, Mike, you can say the SFA/PMA question. So going back, Physio 2 is an important product for us, because it really goes at the biggest segment of mitral valve repair, and that is the degenerative segment. As we had a chance to get some usage with some of our closest physician partners in this product, they identified the way the ring is sized, so the accessory is the sizer. And some of the larger sizes of the ring were not optimal, and so we made the call to step back and actually modify two or three of the sizes for the larger size rings so that as physicians pick this up, they're able to have an easy time sizing the ring to the disease. So it's -- it was -- it came out of an experience we had with some of our KOLs, and we made the call to stop and fix it before we broadened it to more physicians.

Yes, and on life stent, Amit, because this product loin has been sold to Bard and it's far more material to them than it is to us at this point, we really think that future guidance should be provided by them, and I would encourage you to talk to them about it. I will just add that we're highly aligned. I think they're very anxious to get the product line and have it approved, and we're anxious to have them get it. We would just as soon discontinue our contract manufacturing and have them take that over as well. So we're working together in a very positive way, but we'll let them give that guidance.

You are responsible, though, for the PMA, correct?

Yes, that's what was in the contract.

Okay. Thanks.

Sure.

Our next question is coming from Paul Choi with Merrill Lynch. Please state your question.

Hi. Thanks for taking the questions. If we could go back to SAPIEN for a moment, can you break out what the clinical trial sales were versus the commercial? And secondly, with respect to the European market next year, given that hospital funding is starting to tighten up a little bit -- I am sure many hospitals have sort of planned for this for next year -- but can you forecast what you think a potential market growth rate would be in 2009? I think you guys mentioned 25% so far for this year?

Yes. So, Paul, I would say this year, most of the sales obviously was Europe. What was outside Europe, that was about a million dollars. That's a combination of what happened in the PARTNER trial in Canada, et cetera. In terms of what we were trying to represent by that 25%, we would say the European market. which is typically grows at 3 to 5%, if you take our sales plus what we think we hear about what Corevalve sales are and combine that, we would say the European market has accelerated to around a 25% growth rate. That's been the case since -- I don't know, probably second quarter of this year. We would expect that to continue for some time. I can't give you exact projections. We're really going to work this hard during our planning process, and we'll have that in place to be able to discuss in greater detail by the time we get to the December investor conference.

Okay. Great. Thank you for that. And then for Tom, a question on the guidance. I think you said SG&A in Q4 would be flat on a dollar basis. Is that relative to -- sequentially to Q3?

Yes, that is, Paul.

Okay. Great. And then in terms of SG&A, I think year-to-date it has grown about 19% versus last year, whereas your top line has grown about 16%, and it is averaging about 38 -- not quite 39% of sales. How long do you think you guys want to continue to sort of spend level in terms of supporting SAPIEN, and is that -- is there a longer term target rate that you would sort of think of perhaps for next year?

Well, what we're trying to -- obviously, we're signaling in the direction you're interested, and that is is that as a percentage of sales we see a definite decrease coming in Q4. We'll give more guidance next year, but we are pretty much feeling that we hit a high water mark. And if you look all the way back to last year -- and we're very specific in the Q2 earnings release, and we've talked about investing -- the investment really showed up from the first time in a significant way with Q4 last year. And I am happy to say if you take the guidance range that we gave you and you took it as a percentage increase over prior year, you start to see some big leverage come through as soon as next quarter. I think you're in the mid-30s in terms of earnings growth next -- on fourth quarter over prior year.

Okay. Thank you for that.

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

Hi. Thanks for taking my follow-up. Tom, one for you. On the tax rate, 24% in '08. Is that a good number to use for '09 and beyond? And then I just have one other question.

Well, you know, Larry, as you asked me earlier, we generally can't put the R&D tax credit in until it is approved, and each year it ends up being -- is this a two-year one? I am told it is a two-year one. I guess that would be the same, and I am trying to think of this provision. It is a lot of moving pieces. I think there is no reason to see a big fluctuation year-over-year.

Okay.

I would say -- I will give guidance in a few weeks, Larry, on taxes. It is a little complex to take a guess for a full year.

Okay. And secondly -- and again on the PARTNER trial -- how will the transatrial data in Cohort A in the PARTNER trial be evaluated by FDA? If -- according to the slide that Marty present last Monday, it said it may not be poolable -- or it will be poolable, if possible, with the transfemoral data, and it is not powered independently according to Marty's slide. I am sorry to ask such a detailed complicated question, but I hope you have seen the slide that I am talking about.

Yes. I think you know what you're -- I think I know what you're referring to. You're saying in Cohort A of the trial, the way the trial is designed, Larry, is you combine the transatrial and transfemoral results, and so you're comparing the control in those two different delivery methods with the actual valve patients in those two delivery methods, and it is those combined results that get evaluated for the ultimate approval of the process. There is an opportunity to do subset analysis to be able to look at those independently, but the approval is driven by combining the transfemoral and transatrial.

Thank you.

Sure.

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

Hi, thanks for taking the follow-up. Wondering if you guys could break out what FloTrac was in the quarter? And I believe that you had some new upgrades that you were rolling out over the summer. Just maybe update on the status of where those are and kind of where you see the business?

Let me try and dig up that number. FloTrac -- remember, for the full year what we were projecting is that FloTrac would generate around $50 million in sales. We had a really good quarter again in the third quarter. I think it would have probably been above the average of Q1 and Q2, so we're very much on track to hit the $50 million for the full year, so a nice growth rate. We have rolled out one of -- some software enhancement; but the bigger software enhancement really is going to come later on -- it's going to come towards the end of this year. We decided to roll a few things together to make it more impactful. So starting the end of this year going in the first quarter will be the more impactful rollout of software that really affects the ICU patients.

Okay, and sorry if I missed this on Magna Mitral, but have you guys quantified if you are pricing this at a premium and what that premium level is and how the reception has been to accounts?

Yes, let me take this over to Don.

Hi, Kristen. Actually, yes, this is being priced at a premium, as we've been out there just relatively short period of time. The response has been very solid from accounts and from physicians who have used it, and we have priced this at a premium. I think 10 to 20%.

Okay. Perfect. Thanks, guys.

Sure. Okay. Well, thanks for your continued interest in Edwards, and Tom and David and I welcome any additional questions by telephone. And with that, back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call which include underlying growth rates and amounts adjusted for special items are included in today's press release and can 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 able for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415, and use account number 2995 and pass code 288895. I will repeat those numbers. 877-660-6853 or 201-612-7415 are the telephone numbers. The account number is 2995, and the pass code is 288895. Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you very much.

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