愛德華生命科學 (EW) 2008 Q4 法說會逐字稿

Greetings, ladies and gentlemen and welcome to the Edwards Lifesciences fourth quarter 2008 earnings conference call. A 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 fourth 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 and then use the remaining time for Q&A. Our presenters on today's call are Michael Mussallem, Chairman and CEO; and Thomas 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 profit margin; net income; earnings per share and free cash flow goals for 2009; the regulatory approval and sales of heart valve therapy products including Magna Ease and Magna Mitral Ease; the competitive dynamics of the heart valve market; the timing, progress and results of clinic calling studies, including the PARTNER trial; the continued adoption in Europe and expected 2009 sales of the Edwards SAPIEN valve; expected sales and enhancements for the FloTrac system; and the development of continuous blood glucose monitoring technology.

Although we believe them to be reasonable, these 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 press release, our annual report on to Form 10-K for the year ended December 31, 2007, and our other SEC filings, which are available on our Website at Edwards.com. With that, I'll turn the call over to Mike Mussallem. Mike.

Thank you, David. 2008 was another successful year for Edwards on several fronts. We achieved substantial earnings growth, successfully introduced the SAPIEN Transcatheter heart valve in Europe, and continued to make substantial investments in our future. This is our best year yet for top line growth, with total underlying sales for 2008 increasing 12%. In Heart Valve Therapy, we introduced our Magna Mitral valve in the US and our Magna Aortic Valve in Japan.

During our first year of transcatheter heart valve sales in Europe, we achieved $53 million, which was significantly above our initial estimate of greater than $20 million. We continue to make great progress on our US clinical trial. And began a CE Mark trial in Europe for SAPIEN XT, our next generation transcatheter heart valve. At the same time, FloTrac continues to generate solid growth within critical care. In addition, we unveiled our continuous glucose monitoring plans, which represent a potential new growth platform. And lastly, we successfully integrated the CardioVations MIS product line.

Just to recap, our 2008 financial goals, excluding special items items, our total sales reached $1.24 billion, exceeding the top of our range of $1.21 billion. We improved our gross profit margin by 90 basis points, which was just below our 100 to 150 basis points goal. Our net income growth of 16.2% exceeded our 11% to 14% range. And free cash flow for the year of $166 million achieved the top end of our goal.

Now turning to fourth quarter results. On a reported basis, total sales grew 5.7% or $310 million and grew 13.2% on an underlying basis. Overall, we were able to achieve excellent sales results and were fortunate to see little impact in the fourth quarter from the economic downturn.

Now, I'll shift to a more detailed review of our product line sales and progress on new products and then Tom will discuss the financial results. For the fourth quarter, reported sales for Heart Valve Therapy were $150 million, an increase of 13.9%, which was reduced by $4 million of foreign exchange. Additionally, as we signaled last December at the investor conference, our sales results were also reduced by $5 million by the retrieval of our IMR and Myxo repair products from customers. I'll discuss the product retrieval in more detail in a few moments. On an underlying basis, growth was 21% for the quarter, led by strong performance from all regions.

Transcatheter heart valve sales continued to expand in the quarter, exceeding $18 million and, as previously untreated, patients now have more options for therapy. For the full year 2008, reported sales for Heart Valve Therapy, which includes our Transcatheter heart valve sales, were $607 million, an increase of 17.9%. On an underlying basis, growth was 16.2% for the year, which is well above the 8% to 10% growth rate projected before the start of 2008.

Turning to surgical heart valves. In the US, we gained share this quarter and grew approximately 6% even with two recent competitive product launches. Outside the US, our surgical heart valve business continued to achieve double-digit underlying sales growth, driven by growing adoption of our Magna heart valve platform. The fourth quarter was our first full quarter of Magna Mitral sales in the US. Clinician experience and feedback has been very positive. And although its contribution to growth this quarter was modest, we look forward to it driving future share gains. The valve is uniquely designed for the mitral position, combining clinically superior performance with ease of use benefits. In Japan, our Magna Aortic Valve, which was launched in June, continued to drive growth during the fourth quarter.

Turning to the status of our Magna Ease Aortic Valve, we responded to the FDA's questions and are waiting for the Agency's response. We continue to anticipate a US launch in the third quarter of 2009 pending regulatory approval. In addition, we expect to launch an enhancement to our Magna Mitral Valve called Magna Mitral Ease in the second half of 2009 in both the US and Europe. The unique design of the Magna Mitral Ease will continue to improve its ease of implantation, which is beneficial for both traditional and MIS procedures. We believe these clinical advantages will make the Magna the leading mitral valve.

Now turning to repair. Growth in the quarter was in the low single digits on an underlying basis, excluding the impact of the product retrieval. As explained at our investor conference in December, we voluntarily suspended shipments and retrieved our IMR and Myxo repair products from US customers as we await FDA clearance of our 510(k) submissions. Following FDA clearance, we expect to return the products to customers. For perspective, these specialty products together remitted less than 10% of our 2008 US repair sales.

As announced at STS last week, we received clearance for our Physio II ring and are launching it in the US and Europe in the first quarter of this year. This new ring represents the next generation repair product for degenerative mitral valve disease, which is the largest segment in repair and where we've experienced the most competitive activity. To summarize. For the full year 2008, our surgical heart valve franchise achieved 7% underlying growth, above the 4% to 6% range that we had initially estimated. This was driven by our consistently improving performance in the US and continued double-digit sales growth outside the US. We've been aggressively investing in our heart valve therapy pipeline and 2009 will be an unprecedented year of planned introductions across the aortic, mitral and valve repair categories.

Now, turning to Transcatheter heart valve sales. We had a strong finish to the year, achieving fourth quarter sales of $18.5 million. Continued clinician enthusiasm, combined with additional active centers centers drove growth in procedures. In Europe, we implanted approximately 650 valves during the fourth quarter and our selling prices remain stable. While new centers do make stocking purchases, our sales continued to be driven by implants, with approximately 85% of the units sold being implanted in the quarter. We expanded from about 70 centers performing cases in the third quarter to over 100 centers performing cases in the fourth quarter. We'll continue to train centers throughout 2009.

I am very pleased to report that in our commercial sales the combined Transapical and Transfemoral acute procedural success rate remained high, at about 95%. Global demand is strong. And we recently expanded to centers in Asia Pacific and the Middle East. For 2009, our goal is to double the number of Transcatheter heart valve procedures compared to 2008. Based on our momentum, we feel confident in meeting our $75 to $95 million expectation for global Transcatheter heart valve sales for the full year.

Regarding reimbursement, we continue to expect formal reimbursement to be established in most of the major European countries between 2009 and 2011. With the first country coming online in 2009. In the meantime, the same dynamics surrounding funding continue to exist. We remain pleased that hospitals are currently able to support these procedures and while not assured, we expect this to continue as we make progress towards securing formal reimbursement. At last week's STS cardiac surgeon meeting, enthusiasm for Transcatheter technology remained strong. There were several presentations on the Transapical procedure that showcased the benefits for high risk patients and the advancements in that procedure.

Turning to the US PARTNER trial. To date, we've enrolled 700 patients in the PARTNER trial. We continue to expect to complete enrollment in Cohort B before the end of the first quarter. In addition, we still expect enrollment for Cohort A to be completed in August of this year. No other competitor has yet initiated a US clinical trial.

We're excited about our next generation Transcatheter heart valve called the Edwards SAPIEN XT. In December, we completed an important milestone, the first three implants were performed in our CE Mark trial. We expect to complete enrollment in the second quarter of 2009 and gain a US IDE approval to begin a clinical trial before year end. Our SAPIEN XT valve is particularly well suited for transfemoral procedures. Offering a smaller profile and further leveraging our expertise in heart valves.

In addition, we recently received CE Mark approval for our new RetroFlex III transfemoral delivery system, which simplifies the delivery of the SAPIEN valve. We expect to roll this out across commercial sites this year. We're also continuing to make progress on our 30 patient US feasibility trial of the SAPIEN valve in the pulmonic position. We expect to complete enrollment this April and then transition to a larger humanitarian device exemption trial.

As we announced last month, while the UK court upheld the validity of our Andersen patent for Transcatheter valve technology, it found that a competitor's specific product design did not infringe. We're planning an appeal on this aspect of the case. Separately, we have a THV patent infringement trial in Germany later this quarter, brought against us by Cook. And we have the US CoreValve trial scheduled for early 2010. We believe Edwards has the strongest Transcatheter valve patent portfolio and are investing to broaden its reach. We're committed to leading the Transcatheter valve space and enforcing our IP is only one element of our broad leadership strategy.

Now, turning to our Critical Care business. For the fourth quarter, Critical Care reported $118 million of sales, up 4.6%, which included $1.8 million negative impact from foreign exchange. Underlying sales growth was 6.5% against a substantial prior year comparison. Sales of new products, led by FloTrac, continued to be the biggest growth driver this quarter. In addition, sales of our pressure monitoring and Embol filtration products also contributed to growth. FloTrac continues to be a very strong performer and we expect it to continue to expand the market. To date, FloTrac's success has been primarily focused on expanding our monitoring presence in the high risk surgical environment.

In 2009 we'll strengthen FloTrac's applicability in the medical ICU with two new product launches. We anticipate launching an algorithm enhancement in the second quarter. And in the third quarter, we plan to launch a substantial upgrade for FloTrac based on the intellectual property, which we purchased last year. Also in the third quarter, we anticipate launching a new hardware platform that will result in a simpler, more intuitive informational display and ultimately consolidate all of our parameters into one platform.

In our hemofiltration segment, as we mentioned in December, our solutions supplier struggled to meet demand, which lowered our growth rate in the fourth quarter. We expect this shortfall to continue in the first quarter and anticipate improvement beginning in the second quarter.

During the quarter, we announced a partnership with DexCom to develop products for hospital-based continuous blood glucose monitoring. There is a substantial clinical interest in tight glycemic control for improving outcomes for critically ill patients. We intend to leverage our global sales channel and extensive experience with catheter based monitoring to provide the best in-hospital continuous glucose sensor. In 2009, we plan to complete clinical studies to support regulatory approval and hopefully introduce a first generation product in Europe before the end of the year. Tight glycemic control represents an an exciting new opportunity to accelerate our Critical Care growth rate.

Turning to cardiac surgery systems. Reported sales for the quarter increased 52% to $23 million, primarily as a result of the CardioVations MIS acquisition. For full year 2008, MIS growth was approximately 25% on an underlying basis, as we continue to increase our penetration into existing accounts and introduce MIS therapy in the new accounts. Our base Cannula products were up about 4% on an underlying basis.

We're committed to leading the way in developing MIS tools and implants that enable surgeons to meet the demand for less invasive valve therapies. In 2009, we'll continue to invest in professional education that supports MIS procedures. In the US, we unveiled a new training program, at the STS, designed to provide training and customer support to our surgeons and our OR teams.

Our reported sales of vascular products were $19 million this quarter. Sales of our market leading Fogarty based vascular products remained relatively constant at $14 million versus the prior year. And now, I'll turn the call over to Tom.

Thanks, Mike. In addition to the strong underlying sales performance that Mike reported, our fourth quarter results were further enhanced by a 210 basis point improvement in our gross profit margin. We are very pleased to see this significant upward movement in our reported rate. In the quarter, we were able to further leverage the combination of sales growth and the gross profit improvement to lift our non-GAAP diluted EPS growth to more than 39%. Additionally, we are very pleased to achieve a full year non-GAAP diluted EPS growth of approximately 20%.

Before I go through the P&L, I would like to spend a minute on the accounting treatment for the retrieval of our repair products. Our GAAP results include an approximate $5 million reduction to sales, gross profit and pre-tax income. This estimate represents the sales value of all products impacted by our actions, plus the cost of executing the retrieval. Upon receipt of FDA's clearance, the product will be returned to customers and a sale will be recognized in the future period. To date, we have contacted approximately 90% of the customers affected by retrieval and the vast majority have simply asked us to return the product when we receive FDA clearance. So far, we have only been asked to issue credits totaling $500,000. On our non-GAAP results reflect only these credits and not the full $5 million estimate in our GAAP results. Going forward, when we return these products to customers, we will not record a sale in our non-GAAP results. We believe this offers the cleanest comparison of sales and earnings between periods.

Moving forward. We recorded diluted EPS for the fourth quarter of $0.66, compared to $0.27 last year. Excluding special items and the impact of the product retrieval, our fourth quarter non-GAAP EPS was $0.78, compared to $0.56 last year, the 39% increase I mentioned in my opening remarks. For the quarter, our gross profit margin of 68.1% compares to the 66% we reported in the same period last year. This quarter's improvement was due to an equal contribution from product mix and foreign exchange. Over the last several quarters, we have seen our product mix steadily strengthen as we successfully launched new technologies while divesting more commodity based products. In the fourth quarter, as the downward pressure from FX rates subsided, the benefit of our product mix became more visible. This is a great starting point for 2009, where we continue to expect full year gross profit margin to be between 68% to 70% of sales.

For the quarter, SG&A expenses were $120.2 million, an increase of $5.7 million. This dollar increase was driven by spending for the SAPIEN valve launch in Europe and compensation expense related to our strong sales performance, partially offset by foreign exchange. For the full year 2009, we continue to expect SG&A to be between 37% and 39% of sales, with a declining trend throughout the year. R&D investments in the quarter were $35.8 million or 11.6% of sales, compared to $33.5 million last year. In increase is primarily the result of additional investment in the Transcatheter heart valve program, partially offset by the discontinuation of peripheral stents. For full year 2009, we continue to expect R&D as a percentage of sales to be between 13% and 13.5%, as we continue investing in the development of SAPIEN XT and our glucose program.

As we previously discussed at our investor conference, we expect a number of special items this quarter. The items recorded on the special charges line totaled a net $15.8 million charge. The components were primarily transaction related events. A $23 million gain related to the receipt of a life stent milestone payment; a $13 million charge for the purchase of glucose technology rights; a $13 million charge for the purchase of Critical Care monitoring technology; a $5 million charge for the purchase of structural heart intellectual property; and an $8 million charge related to previously capitalized patent enforcement costs. This amount primarily represents the expenses related to our AAA litigation that began back in 2003. Since we no longer expect future revenue from AAA products, we are expensing all related legal fees. Additionally during the quarter, we settled prior year tax audits resulting in a $10 million income tax benefit and initiated the previously discussed repair product retrieval. The impact of all of these items resulted in a reduction of net income of $7.1 million. A reconciliation table accompanies the press release.

Other expense of $4.4 million for the quarter, consisted primarily of balance sheet related foreign exchange losses resulting from the significant currency movement and the loss associated with our investment in an enhanced money market fund. For the fourth quarter, primarily as a result of our special items, we actually recorded a $4.1 million tax benefit, compared to a $3.8 million tax expense a year ago. Excluding the impact of our special items, the effective tax rate was 17.1% for the quarter. This quarter's rate benefited from the renewal of the federal R&D tax credit and a full year adjustment to our country profit mix. Including these adjustments, the underlying rate for the full year is 22.6%.

For 2009, we continue to expect our rate to be approximately 24%. When compared to the same quarter last year, FX rates negatively impacted fourth quarter reported sales by $6 million but resulted in a slight benefit on the bottom line. At current foreign exchange rates, we anticipate only a $40 to $50 million negative impact on 2009 sales, an improvement since December's guidance.

Free cash flow generated during the quarter was $76 million, which we define at cash flow from operating activities of $81 million, minus CapEx of $18 million, plus a $13 million payment to favorably settle certain prior year tax audits. In the first quarter, we plan to discontinue securitizing our Japan accounts receivable. Similar to the discontinuation of our US program in the third quarter of 2008, the Japan program no longer offers us attractive financing alternatives. Although terminating the Japan program will reduce 2009's free cash flow by approximately $45 million, it does not impact our ability to generate future cash. For 2009, we continue to expect free cash flow to be $160 to $170 million, excluding the impact of terminating our Japan securitization program.

During the fourth quarter, we repurchased 395,000 shares of common stock for $21 million. For the full year, we repurchased a total of 5.8 million shares for $306 million. At the same time, we ended the quarter with total net cash position of $43 million. Total debt at December 31 of $176 million was less than our cash on hand of $219 million. Including receivables in our securitization program, day sales outstanding for the quarter was down to 68 days. Inventories at the end of the quarter were $152 million.

Turning to our 2009 sales guidance. We are projecting no change in the underlying strength of our sales. They remain the same as we presented in December. As a result of the improvement in foreign exchange rates since our investor conference, we're now projecting total sales to be at the upper end of our full year guidance of $1.24 to $1.3 billion. For Heart Valve Therapy, we expect sales at the upper end of $640 to $670 million, representing a 14% to 16% underlying growth rate. In Critical Care, we expect sales at the upper end of the $455 to $474 million range, a 6% to 9% underlying rate. In cardiac surgery systems, we expect $90 to $100 million, a 9% to 11% underlying growth rate. And in vascular, we expect $50 to $60 million. For the first quarter 2009, we project total sales of $300 to $320 million. And finally, we estimate that first quarter diluted EPS will be between $0.66 and $0.70. For full year 2009, we continue to estimate that diluted EPS will be between $2.93 and $3.03. With that, I will turn it back over to Mike.

Thanks, Tom. Overall, we expect to carry our 2008 momentum into 2009 and deliver strong results, while making substantial investments in our future. In Heart Valve Therapy, we anticipate launching two new valves in the US and doubling our SAPIEN Transcatheter heart valve procedures. In Critical Care, we have planned for additional extensions to our FloTrac system. And hope to introduce a continuous glucose monitoring system in Europe by the end of the year. And lastly, in 2009 we anticipate completing enrollment in our US PARTNER trial and gaining a US IDE for the approval of SAPIEN XT.

We're going to remain focused on achieving our previously stated financial goals, which include generating total sales between $1.24 and $1.3 billion. Increasing our gross profit margin between 68% and 70%. Achieving diluted EPS growth of 15% to 19%. And generating free cash flow of $160 to $170 million. And with that, I'll turn the call back over to David.

In order to allow everyone a chance to participate, we ask that you limit the number of questions that you ask. If you have any additional questions, please reenter the queue and we'll answer as many as we can during the remainder of the call. Operator, we're ready to take questions, please.

Thank you. (Operator Instructions). Our first question is from Jason Mills with Canaccord Adams. Please state your question.

Thanks, guys, congratulations on a good quarter. My first question, Mike, is out of Europe and is specific to the SAPIEN franchise. You mentioned -- reiterated plans to double procedures year-over-year. I'm wondering if you could help us out a little bit with same-store sales growth implicit in this expectation? And in addition to that, your new center expansion update? I am really trying to get -- I think for the last few quarters you've mentioned pretty strong growth in procedures or implants as a percentage of the total sales that you've reported. And I'm wondering if we sort of look at the expectations you've given for 2009, if we're seeing much in the way of center expansion implicit in your guidance? Thanks, Mike.

Yes, thanks, Jason. Again, maybe the most important thing that we're saying is that we've set a goal to actually double procedures next year. Some of that will come from new centers. We expect to add new centers. I don't know exactly what that will work out to be. We said we had approximately 100 centers in planning in the fourth quarter. Maybe we'll add somewhere 50 to 100 range again next year. But we certainly expect there to be growth within the existing centers as well and that's sort of net to a doubling of procedures. Does that get at your question, Jason?

It helps. I know that there were more sort of "stocking" probably in the first 1.5 quarter of launch and earlier in 2008. But I wondered, for the full year percentage of implants relative to sales, is it sort of 65%, 70% in 2008? Can you give us some feel for the number in 2008 so that we can sort of extrapolate forward the mix between center revenue and sort of "same-store" sales revenue in 2009?

Yes. Just for clarification, our practice has not changed. It was just more obvious in the first quarter when we were adding centers before we had a run rate going. Because we have both transapical and transfemoral and we have two sizes in each, people were typically putting the complete complement on the shelf as they got started. And that was one of the requirements. I'd say full year probably worked out with procedures equal to about 70% of sales, maybe a little higher than that for full year. And we'd expect that to continue to climb as we have a more mature business.

Okay. So just before I get -- one question for Tom, before I move on there. If I kind of take that number, then we're looking at sort of $35 million in implant sales, $35, $40 million. Doubling that, assuming ASP's are stable, you are already getting to the lower end of your range before you add sort of new centers and stock into those centers. Am I thinking about that right?

You lost me with the reference to $35 to $40 million. What were your referring to there?

If I take 70% or something like that implants relative to $53 million reported.

I think that there's a number of factors when you get and you convert everything into dollars. Not the least of which, as you know Jason, primarily these sales are coming out of Europe and are going to be affected by the euro. So towards the end of the year, the rates had changed dramatically, so that you need to factor that in. But we feel good about the dollar range that we gave and I think that's probably the best way to think about it at a high level.

Great. And just one question for you and I'll get back in queue. With respect to the R&D, you're obviously expecting to ramp the spending in 2009, largely driven by the CGMS project. I'm wondering if you see any slippage in product development here? Not to say that there will be, but certainly that is an area that will require a lot of development and perhaps projects could be pushed out. I'm wondering what is sort of implicit in your guidance for that? If you see some slippage in product development on that side, I'm asking, would that drop down into the bottom line and perhaps be accretive? If there again is some slippage here and there, which I don't think would be out of the realm of possibility given that it is somewhat of a new area.

Jason, this is Mike. I think we have fully accounted for what we think spending is going to be in 2009. So, the spending is all in there. And when you take a look at products like XT and glucose, there's really, not in terms of much in the way of sales or gross profit. So there's not really a downside exposure, if that's what you're getting at, during 2009. Of course, it would affect future periods but we're expecting to execute at a high level.

I'm actually asking perhaps if there could be some accretion to the bottom line given --?

R&D savings? You're referring to potential R&D savings?

That's right, not spending as much as you factored in.

It's not in our current thinking, Jason. I think that would be being, I don't know, optimistic, whether you call it optimistic or not but no, that's not really in the plan.

Okay. Thanks, guys.

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

Hi. Thanks for the call and the questions. On Magna Mitral, did you give a number for what that contributed in the quarter or what FloTrac contributed in the quarter as well from a sales dollar perspective?

We didn't. Magna Mitral, I think we sold something in the neighborhood of $5 million in the quarter. But the bulk of that, Kristen, would have been replacement of our existing products with an upgrade to Magna Mitral. So incrementally, it probably only added a little over $1 million in the quarter. So it wasn't a big contributor. Certainly, it was a contributor in the US and in the mitral position but in aggregate, not that much. FloTrac, I think the question was; How much for the quarter?

Yes.

Or for the year?

For the quarter.

Okay. Well, I think for the quarter it was a little bit north of $15 million. We did more than $50 million in the year and it was an increasing progression.

And then just two questions for Tom, more housekeeping. The other expense line item jumped up to about $4 million. What was in that? And then just reconciling back to the gross margin, are you adding back $4.7 million in sales to get to the 68.6? How are you -- what's the mechanic side of the number science.

Are you referring to the product retrieval on the second part, Kristen?

Yes, to reconcile back to the adjusted number? I assume you're adding something to the sales base and then something in the [gross margin], is that right?

Okay. Let me start with other expense. We had two large items. One was, we referred to it back in Q3 when we gave guidance, that we're going to see on that line a negative impact from FX. That was slightly greater than 50% of the amount. And then there was a $2 million amount, which occurred towards the latter half of the quarter that related to the valuation of one of our enhanced money markets by Columbia Strategic Fund. So we had to take it down. Now originally, we're down to a total balance in that fund of something less than $11 million and probably have $3 million of charge that we took this year. So the net balance on the balance sheet is down to about $8 million as we're trying to get out of that fund. Does that answer the other expense question?

Yes, that's perfect and then just the gross margin.

And then, on the gross margin, what's in the gross margin was penalized on the reported. Obviously, it was affected by the, what would you call it, it the charge of $5 million to sales. It was just about an equal charge to GP. We added there's a little bit on the retrieval costs. We did not do a return to inventory, as the inventory belongs to the customers since we have haven't issued credit. So it's pretty straight forward difference between the two. Now, remember on the non-GAAP, the adjustment was more like $0.5 million and that reflected the actual credits issued.

But I think it is fair to say, Tom, that the gross profit rate did get depressed, what we're reporting here, because of the retrieval.

It was dinged about 50 basis points.

Okay. And with the full year tax rate at a little under 23%, you still think the full year for '09 is going to be closer to 24%?

Kristen, good question. I think it's within the realm of possibility, we're using 24%, I'd say; Could it could be plus or minus 1%? Yes, very possibly it could be. This is a nod at the end of the year. It ran lower than we had originally expected but I still think 24% is a good number.

Perfect. I'll get back in the queue, thanks.

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

Good afternoon. Thanks for taking the question. A couple of questions here. Just given the number of centers that you're now in and on the SAPIEN side, given the number of centers that your competitors are in, are you going more head to head? Are you seeing them out in the field more? And how are you fairing in those bake-offs?

Yes, Tim, our first year of introduction, largely we were staffed with just clinical resources. And so we really focused on training and we focused on just helping people get up and to do good procedures. So it was just a lot of market expansion, and I wouldn't say there was a lot of head to head fighting. We're just adding sales resources at this point. I'd say, for the most part, I expect 2009 still to be a year of expansion. There will be some competition but I don't think there's anything to report at this point in terms of real share battles.

And then just a point of clarification on the 100 centers that you're in. Were they all active in the quarter or were there some centers that ran out of funding as the year progressed?

That's actually the number of centers that had an implant in the fourth quarter. There were 100, you'd call those active centers.

And then, one last one here. Of the 650 plus implants that you performed during the quarter, were there -- does that include the PARTNER trial enrollment as well?

No. That was, I think, a reference purely to Europe.

Okay. Great. Thanks for the clarification.

All right. Thanks, Tim.

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

Hi, good evening and thanks for taking my call. Tom, Just for clarification, can you tell us how you're getting to the $0.78? What -- the tax rate I think you said was 17.1%. The gross margin is 68.6 in the release. What are the other components? Is the other income, is it that $4 million? We're having trouble getting to $0.78.

Well, it should be all in the P&L as, let's say the $0.78 difference would be -- I think what you're having, is you're reconciling what was reported. We had the 68%. The other expense -- are you fully considering the other expense component to this, Larry?

Maybe it's better to do it off line with David after the call. Just another clarification question, then. On restocking of $5 million, is that in your guidance for '09, the sales guidance?

The restocking -- you're saying the sale as it returns for the customers?

Is that in your guidance for next year?

No. No.

And Larry, let me just add on the other one, there is the attachment that does the full reconciliation. So you've got a complete list of what reconciles the two numbers.

Okay. I'll follow up on that afterwards. Let me ask my real questions then. So transapical/transfemoral mix in Europe, can you tell us what that was in the quarter, please?

It was approximately 2/3 to 1/3, 2 to 1 transapical to transfemoral. And your SAPIEN guidance, just to follow up on an earlier question, you did $18.5 million in the quarter. So, the -- you're at a $74 million run rate but your guidance is $75 to $95 million. And I appreciate the uncertainty around FX but it does seem conservative. Is there anything that makes you conservative in terms of reimbursement in Europe or impact from the economy? No. You said it, Larry. We are being conservative. We feel very confident, obviously, and putting up a quarter like this one makes us feel confident. We continue to like all the dynamics. Naturally, we're a little thoughtful about it when you have these products that are being paid for by government that are going to go through a tough economic time. We're mindful of that but no, we don't have any new facts that cause us to be extra conservative.

Just a last quick one. US sales for SAPIEN in the quarter, Mike, how much were those?

I think they've been running between -- it's a little over $1 million, certainly less than $2 million. So, it's in that range, Larry.

Thanks. I'll get back in the queue.

Our next question is coming from David Lewis with Morgan Stanley. Please state your question.

Good afternoon.

Hi, David.

Mike, could you just tell us the assumptions for transapical and transfemoral mix, as well your transfemoral market share expectations that underpin 2009 guidance?

As we said, we've been tracking probably at this rate of 2 to 1 transapical versus transfemoral. We would expect that, particularly as XT comes on, that we're going to be gaining share in the transfemoral position. We think that that's going to be very popular in transfemoral and so it will cause that percentage to go up as a percentage of our sale and also cause us to gain share. The doubling of procedures, I think, is something that we can do without gaining an awful lot of share. I think most of that is there through market expansion. And if we do get substantial share gain, it's probably upside.

Mike, what do you think transfemoral market share would trough before launch of next gen?

We might have already troughed earlier this year. If anything, we feel like transfemoral's share might have improved for Edwards in the fourth quarter. It's still not that favorable for us or I think the competitor probably has 3 to 1 in the transfemoral position, something like that, so just to give you a sense for it. But the other side of this is transapical is doing very well. And so, when we talk about these ratios and you compare transfemoral to transapical and we're the only ones in the transapical position, it sort of makes our transfemoral not look quite as good just because of the comparison.

And just a couple of quick ones here. New centers are coming on. Is there any reason to believe that new centers are going to be at a relatively lower level of utilization, given that you're moving down market? Or that their mix of transapical to transfemoral would be different because you're getting -- you're scrutinizing less in terms of making sure they're committed to transapical?

David, my recollection of all of our modeling here is no substantial change of the new centers compared to what we're experiencing. As you might imagine, they're probably -- they tend to be a little smaller centers but we wouldn't expect much change in the dynamics.

Okay. And then just lastly and I'll jump back in queue. Tom, so if we assume the mix remains favorable and gross margins prove to be conservative, are you inclined to spend any gross margin upside and invest in the international market for valve or would you drop that through to the bottom line? Thank you.

Well, we have put out -- in the guidance, we already had a pretty big range and an expectation to possibly top out as high as 70%. We also had R&D growing over 20% to like 13% to 13.5% of sales. So I think we've put a lot in the P&L. I would think at this point, if there were additional upside, we'd have to look at that hard to find another place for it.

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

Thanks, for taking the questions. It's a little bit tough to hear you guys in the room. I think it may just be the speaker. Let me just follow up on the questions on SAPIEN first. You obviously had a very strong step up sequentially this quarter. You added more than 30 centers. Any reason to think that sequentially, as we look at the first quarter, sales wouldn't increase significantly?

Mike, thanks for the question. Let us know here, if anybody ever gets an answer that you can't hear, please let us know and we'll repeat it or try and make sure we get that back out to you. Sorry about that. There's no -- we don't have any reason to believe that the first quarter is not going to be a continuation of the trend lines that we're on right now. So nothing like that that we're foreseeing.

Can you give us help for modeling, Mike, on a blended ASP for SAPIEN right now?

Our pricing has been pretty stable. So, although there might be some country mix that changes a little bit from quarter to quarter, but the pricing within a country has continued to be very stable. And we've been disciplined about our pricing. So I'm not sure I can give you a whole lot there. We don't expect there to be much of a story in pricing in 2009.

That 15 to 22,000 that you've given is a pretty wide range. Can you narrow it at all?

It's pretty tough. We feel like at this early stage of the market, it's pretty tough for us to give something like an ASP. So, we'd prefer to keep it in this broad range. And as we get a little bit more maturity, Mike, it will zero. But if it's -- I think that's pretty reasonable.

Okay. And let me just -- two financial items, just to clarify here. The tax rate coming in at 17% for the quarter, part of it was the R&D tax credit and the other was you said was adjustment to your country profit mix. Why -- obviously, R&D tax credit, we understand, we all know the timing of when that was implemented, so that shouldn't have surprised you guys. But why did the country profit mix come in so differently in the fourth quarter? Why was there such a big adjustment and why did that catch you guys off guard? Obviously, it's positive in terms of how it helps your tax rate in the fourth quarter but you weren't anticipating that in October when you gave guidance. So what was the big swing in the fourth quarter that led you to make the adjustment? Thanks.

That's a good question, Mike. Let me start off by saying, no, we absolutely, I didn't anticipate it back in October nor in December. And basically, as the tax department goes through all of the profitability, and you're talking about roughly $200 million of profit and getting it in the right buckets by country. The adjustment and we didn't really mention the adjustment, but it's somewhere in the neighborhood of $2 million, slightly less. It could be a little more or less than that. So it's not a huge adjustment but I did want to disclose it specifically. It belongs in the year. It belongs in the full year rate. It's just the way that you went through and as we did the more precise calculations at year end, it's the way it turned out.

Okay. And then the last question. And I think we touched on this at the meeting in December but just wanted to get your feedback on the free cash flow. Free cash flow hasn't been growing the same rate at which your net income has been growing. And you're guiding to flat free cash flow in 2009 versus 2008. So just wanted to maybe just to understand that a little better. Thanks. Sure.

If we focus just on the difference between 2008 and 2009. First off, let me say, I think we're fortunate, we have a very cash rich business. And it's very consistent and we've been very fortunate in that regard. In your comparison of '08, you need to remember that in 2008, performance was relatively weak. And the incentive payouts fall into the following years. So where we paid under target for 2007, that fell into the 2008. It was an upside. And the 2008 performance, which was above target, falls into 2009. The difference between an under in one year and the overage in the other year was 10 under and possibly 15 to 20 on the overage side. You need to put those two together when you're comparing the two years. So, it's a pretty significant impact. There are other things. I'd say working capital, I am very pleased with all of the elements of working capital and the basics of what's being driven by the operation. So, nothing to report there of concern. Capital spending is pretty much in line. So as you look at DSO's and things that are critical to generating future cash flow, everything seems like it's in great shape. That seems to be the number one exception.

Okay. Thanks for taking the question.

Sure.

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

Good afternoon. I wanted to ask you a couple of questions on Critical Care. The Critical Care number came in a little bit lighter than our expectations. So I wondered if you'd go into a little bit more detail about the impact of the hemofiltration supplier issue? What was the dollar impact there? And can you also clarify the $13.2 million charge for the purchase of a Critical Care monitoring technology? I think I may have missed that.

Okay, yes. I think if we -- what we tried to signal at the investor conference, Amit, is that we were having some supply issues. Our supplier was struggling and we had had a real strong year prior, in hemo filtration. And that was probably $1 million easily that it cost us in the fourth quarter. You also have just heard about, we were also concerned actually that it was going to be tougher than this on the capital side but it actually worked out to be pretty good. But I think the thing to keep in mind is, we had just a blowout quarter in Q4 2007. And so it made the comparison tough and we anticipated that going into it. But overall, we weren't too disappointed with the way things turned out.

In terms of the monitoring technology, we were able to buy some technology that does a couple of things for us. One, it is a great enhancement to FloTrac. And particularly, helps FloTrac as we want to move into the medical ICU. And so we're going to be incorporating that and as a matter of fact, expect to launch that product later on in 2009. Additionally, what came along with that is very neat hardware, which gives us a hardware platform for the future and allows us to potentially consolidate a number of these items. I think we're able to mention all of these in the December conference, and Tom might have even had it detailed on his schedule. So I hope it wasn't a surprise to anyone.

Thank you. And on the Heart Valve Therapy side, are you still getting, even though you've got a $5 million Magna Mitral contribution in the quarter, were you still getting about a 10% to 20% price premium there? And can you give us an update on EVOLUTION II trial enrollment?

Yes, sure, Amit. First of all, in terms of the premium, yes, we're getting a premium on Mitral Magna. It's probably in the 10% range and so we're pleased with that and we look forward to that ramping up during 2009. In EVOLUTION II, we're actively screening right now for that trial. So this is one that we look forward getting enrolled here in the first half and getting some results reported here before the end of the year. So it's one we look forward to really getting some results but we've got sites that are actively screening patients as we speak.

Okay. Thank you.

Sure.

Our next question is coming from Joshua Zable with Natixis Bleichroeder. Please state your question.

Hi, guys. Congrats on a great quarter and thanks for taking my questions here.

Sure, Josh. Thank you.

A couple of housekeeping items here real quick. Sorry about that. First, just on the foreign exchange, I know obviously it bounces around and it's hard for you guys to accurately predict it. And I'm not asking to you do that. But given that kind of we're at the guidance call here. We had a December meeting and October guidance. So I'm trying to gauge because foreign currency bounces around so much and we're fortunate enough to get a lot of updates, I'm just trying to understand. Can you give us a range of sort of how we should think about it? Because I know you said look to the high-end of the range. But if currency kind of fluctuates, just so we're sort of prepared for what kind of moves it will be?

Wow. What we've tried to do is we said, at today's rates, we're thinking $40 to $50 million of impact. Back at investors conference, it was more like $75 million. So just in that short period of time, it changed $30 million. All right?

On total Company sales.

On total Company sales full year 2009. So big swings are possible, Josh. But I'd say to give you an idea also, though, when I'm looking at rates in the $1.30 to $1.35 on the euros, probably YEN90 to YEN95. So, it tells where you we're at, and that's a relatively tight range admittedly. But rather than give a really wild big range, I tried to say, look, at relatively these rates we're falling into ranges that look like that.

That's very, very helpful. And then just quickly on the gross margin, obviously really impressive this quarter and I know you guys talked about expansion for next year. Can you just kind of help me walk through a little bit more granularity here as far as, is this really just a mix shift to new products along with sort of a discontinuation of products or is it just all mix shift?

Well, when we talk about product mix, we're looking at new products, new technologies, clinically or superior new introductions. But also the discontinuation of the commodity related products. So those two together is what we're thinking about when we talk about product mix. In terms of the composition, it was pretty much an equal split in the quarter. Are you more interested in the quarter, Josh?

Quarter and outlook.

Well, in the quarter, it was pretty much a 50/50 split in comparison to last year. But what's underlying it and what we've been talking about for a number of quarters now is that the rate has been improving but we were suffered from suppression as a result of FX. So as FX lightens up, you're starting to see the benefit of all of these moves show up in our rates. So, yes, we were very pleased with the rate this quarter and it's pretty -- it's coming in line with our expectations for next year. Next year, we actually had to chart back at the investors conference that was also about 50/50, I think 150 basis points of FX. And the midpoint of the range we gave is probably another 150 of product mix. So once again pretty evenly split.

Our next question is coming from Suraj Kalia with Sanders Morris Harris. Please state your question.

Good afternoon, Mike. Gentlemen, congratulations on a nice quarter.

Thanks, Suraj.

I'm not sure if this has been mentioned. And in terms of Europe and the SAPIEN implants in Europe, would you be willing to share what kind of patients are being implanted? I understand the transapical is 2/3 (inaudible).

Yes, for the most part -- can you -- I'm sorry, was there more, Suraj?

Yes, sorry about that. What kind of patients are you seeing getting implanted, on an average, with the transapical or transfemoral? And the reason I'm -- the rationale for the question (inaudible).

Suraj, we just lost you towards the tail end there.

Pardon me, I'm getting some background noise here. I'm just trying to understand whether patients who were candidates for surgery or were not candidates for surgery are getting -- what's the mix shift there for the SAPIEN?

For the most part, we think people that were not really coming forward are coming forward today in a broader way. We would broadly characterize these patients as being high risk for surgery. So that's really what our indication is in Europe. And we think that the clinicians have been quite consistent in terms of doing that. The average age of these patients, I think, has been running somewhere around 82 years old. So it gives you a sense for that. I would say in general, the transapical patients are probably a little sicker, because they tend to have peripheral vascular disease, than the transfemoral patients. But they're at high risk of surgery. There's some that are non-operable but less so in that category.

(Inaudible question - background noise)

I'm sorry, Suraj. We only got about every other word here. Somehow we're not getting a good signal.

Hopefully, this goes through. Mike, in terms of Europe, what are the lessons being learned from the initial experience for the SAPIEN, ID, the SAPIEN, the next generation SAPIEN, what are you seeing that are leading to either design changes and/or patient targeted patients?

Well, actually, we continue to learn a lot. And not to say that we're not confident in the trial design for PARTNER. We are very confident of that. We continue to love the idea that people are working as partners. That surgeons and cardiologists work together. We continue to get great results. We get that. We're very pleased to see that we're actually getting -- people are able to learn this procedure and learn from those that go on before them. And so the fact that we have acute procedural success of 95%, approximately, is one that we feel very good about. People are finding the money because they're finding this a high value procedure. So overall, there's an awful lot of learning that's taking place. Having said that, we also know that cardiologists would very much prefer a lower profile for these transfemoral procedures. And we're pretty much at the limit of size here. And so our SAPIEN XT is going to be very important to make the cardiologists have an easier approach in the transfemoral vein -- or transfemoral artery.

One last question, Mike, and I'll get back in the queue. What is the anecdotal experience from Europe in terms of, not acute procedural success but let's say, the 30-day mortality or 12 month? Whatever you all have from anecdotal experience what, are you seeing in (indiscernible).

There is some data exists that's been reported on at some of the recent meetings and will continue to be reported on that has some 30 day results and some six month results. And we look forward to having some one year results during 2009. And so, I'd say, stay tuned for that and look for for it at the upcoming clinical meetings. Enthusiasm has stayed high. I'd say, in general, there aren't a lot of secrets out there. And one of the reasons why clinician enthusiasm is high is I think their feeling is that their patients are doing well, as they lead these. And so, maybe rather than me trying to generalize, I'll just leave it right there, Suraj. Thanks.

Gentlemen, thank you for taking my questions.

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

Hi, thanks for the follow-up. Mike, I just wanted to touch base again on the comment on additional clinical data. Is there anything specifically we should expecting at meetings like ASP or Euro PCR, will it just be updates to some of the PARTNER EU experience or the registries?

Yes, I would say probably the next substantial amount of data, you'd look toward the PCR. I think you'd see an update on the PARTNER EU data. I think you'd see an update on the source data that we're collecting out of our commercial experience. Maybe -- I would imagine there will be some reports on early experience with the SAPIEN XT and some live cases. So I think it's going to be pretty prominent at PCR, Kristen. So that's one that would be a good one to get an update at.

Do you have any updates on just kind of SAPIEN XT with respect to the US and trial design or are you still just kind of working through that? And on talking with the FDA, anything with the questions carrying back on the Magna Mitral valve that was surprising? I know you reiterated your timelines but anything out of the ordinary with some of the questions?

No. We're not really seeing anything out of the ordinary there. There continues to be a tremendous amount of diligence on the part of the FDA. They focus not only on trial design but they obviously focus on the design of the products themselves and how they perform on the bench. And so, I think we learned an awful lot going through our whole Micro Magna experience and going through the experience, as well, on SAPIEN so far. And I wouldn't say there's been a real shift over the recent past.

Thank you.

Okay. Thanks, Kristen. All right, well, thanks all for your continued interest in Edwards. 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 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, telephonic replay will be available for 72 hours. And to access this, please dial 877-660-6853 or 201-612-7415, use account number 2995 and pass code 308787. I'll repeat those numbers, call 877-660-6853 or 201-612-7415. The account number is 2995 and the pass code is 308787. Finally, an audio replay will be archived on the Investor Relations section of our Website. Thank you very much.

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