愛德華生命科學 (EW) 2009 Q1 法說會逐字稿

Greetings ladies and gentlemen, and welcome to the Edwards Lifesciences first quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. 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 first quarter 2009 financial results. During our call today we'll focus our prepared remarks on information that compliments 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 Tom Abate, CFO and Treasurer. Before I turn the call over to Mike, I would like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions and projections.

These statements include but are not limited to: sales, gross profit margin, expenses, net income, earnings per share and free cash flow goals or expectations 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 clinical studies including the partner trial, the continued adoption in Europe and expected 2009 sales of the Edwards SAPIEN valve, expected sales and enhancements of the FloTrac system and the development of continuous blood glucose monitoring technology. These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after the date they are made. 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 containing factors that could cause actual results to differ materially from those in the forward-looking statements may be found in our press release, our annual report on Form 10K for the year ended December 31, 2008, and our other SEC filings, which are available on our website at edwards.com. With that I'll turn the call over to Michael Mussallem. Mike?

Thank you, David. We're pleased to report strong first quarter results, highlighted by robust heart valve sales, the achievement of important product development milestones and P&L leverage which drove strong bottom line performance. On a reported basis, total sales grew 5.6% to $313 million. Our total underlying sales growth was 11.5% for the quarter, and we made important progress at our US PARTNER trial and our new SAPIEN XT transcatheter heart valve. While the impact on our results was modest, we felt the effects of the slower global economy this quarter which was most pronounced in the US. More specifically in critical care, although sales of disposable products did not seem to be impacted, the smaller hardware component of our business slowed. In surgical heart valves we are experiencing a more deliberate process of new product adoption.

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 first quarter, reported sales for heart valve therapy increased to $170 million, which was negatively impacted by $5 million of foreign exchange. On an underlying base, sales increased 20% for the quarter, led by robust quarter from our transcatheter heart valves and a strong performance from our Magna platform. Turning to surgical heart valves, on a global basis we grew 8% in the quarter on an underlying basis driven by our new products. We continue to take global surgical market share as we have over the past four quarters. In the US, we gained share in valves, which grew over 6% in the first quarter. Our strong valve performance help to offset declines in repair that occurred because our [Mix O] and IMR rings were temporarily off the market. Outside the US, our surgical heart valve business continued to achieve double-digit underlying sales growth, driven by expanding adoption of our Magna heart valve platform.

Our Magna Mitral sales in the US continued the ramp up driving double digit Mitral valve growth in the first quarter. This valve is uniquely designed for the mitral position, combining clinically superior performance with ease of use benefits. Clinician feedback has been positive, and we expect this valve to take share and continue to drive growth. In Japan, we are still in our first full year of sales of the Magna aortic valve. This valve continues to drive growth in the first quarter, and is now the most implanted heart valve in Japan. Turning to the status of our Magna Ease Aortic valve, last quarter we believe that we fully responded to the FDA's outstanding questions, and continue to anticipate a US launch in the third quarter of this year, pending regulatory approval. This valve has the potential for leadership in the largest segment of the surgical valve replacement market. In addition, we continue to expect the launch and enhancement to our Magna Mitral valve called Magna Mitral Ease in the second half of 2009 in both the US and Europe. The Magna Mitral Ease will extend the Magna platform by providing improved MIS capabilities and ease of implantation.

Now turning to repair, growth in the quarter was flat on an underlying basis. During the first quarter we launched the Physio two ring in the US and Europe, and are seeing nice growth. This new ring represents the next generation repair product for degenerative mitral valve disease. This is the largest segment in repair and it also is where we've experienced the most competitive activity. We expect this product to help reignite our growth and become the leading repair ring. In Japan, we received approval for the IMR ring and plan to launch this product during the second quarter. As previously discussed, last quarter we voluntarily suspended shipments and retrieved our [mix-0], and IMR rings from US customers as we awaited FDA clearance of our five 10K submissions. The absence of these products negatively impacted sales by approximately $1 million. This month we received FDA clearance for both rings, and are in the process of returning them to customers. To summarize, our plans for 2009 called for surgical heart valve underlying growth of 7% to 9%, driven by three new product launches in the US and global share gains. We are executing on this plan and remain on track to achieve our goals.

Turning to transcatheter heart valve sales. For the first quarter we achieved revenue of $24.6 million driven primarily by sales in Europe with modest contributions from new markets and our US clinical trial. Our strong performance in Europe is being driven primarily by market expansion as an increasing number of patients previously untreated by surgery have benefited from this new technology. In Europe, there were over 850 valves implanted during the first quarter and our selling prices remained stable. While new centers do make stocking purchases, our sales continue to be driven primarily by implants. A key factor driving growth this quarter was deeper penetration into existing accounts, more so than the addition of new centers. In Europe, our presence continues to expand. During the quarter, more than 125 centers performed cases in approximately 20 countries. In addition, during the quarter, we began transitioning sites to full independence, which means an Edwards representative is no longer required at cases.

We are very pleased that acute procedural success rate continues to remain high at around 95% in our commercial sites. Based on our momentum we now expect to exceed our goal of doubling the number of transcatheter heart valve procedures compared to 2008. For 2009 at current foreign exchange rates we expect to achieve our previous sales guidance and achieve more than $100 million in transcatheter heart valve sales.

Turning to the US PARTNER trial, to date we have enrolled over 850 patients in the PARTNER trial. Last month that we completed enrollment in cohort B, the 350 patient nonsurgical arm of the trial. In addition, we received FDA clearance to cohort B for all of our existing PARTNER sites under the same randomization scheme and protocol. With regard to cohort A, we continue to expect enroll inspect this surgical arm of the trial to be completed in August of this year. No other competitor has yet initiated a US clinical trial. We continue to be very excited about our next-generation transcatheter heart valve, called the Edwards SAPIEN XT. Our XT valve is probably well suited for transfemoral procedures offering a smaller profile and further leveraging our expertise in heart valves. We have enrolled more than 30 patients in our CE mark prevail trial and expect to complete enrollment in the second quarter, leading to European approval in the first quarter of 2010.

With regard to SAPIEN XT in the US, the FDA has recently clarified that it expects all companies to submit full and clinical pretrial testing prior to starting any IDE trial. We are aggressively working to meet these requirements and hope to gain an IDE to begin a clinical trial before year end. Last quarter, we received CE mark approval for our new RetroFlex III transfemoral delivery system which simplifies delivery of the SAPIEN valve. We continue to roll out this product across our commercial sites and are receiving very positive feedback from clinicians. In addition, we have received IDE approval to use RetroFlex III in our US PARTNER trial. We plan to begin converting sites as they gain IRB approval. We continue to make progress on our 30-patient US feasibility trial of the SAPIEN valve in the pulmonic position. To date we have enrolled 11 patients in the trial. And while this is somewhat slower than we originally anticipated we expect this rate to increase as sites work through securing IRB approvals. We now expect to complete enrollment by the end of the second quarter, and then transition to a larger humanitarian device exemption trial.

As we announced last month, a German court determined the Edwards SAPIEN valve does not infringe on the Cook transcatheter valve patent. We are scheduled for the US Cook trial this quarter and separately we have the US core valve trial scheduled for early 2010. That was the UK Cook trial that's planned for this quarter. We believe Edwards has the strongest transcatheter valve patent portfolio and are investing to broaden its reach. We're committing to leading in the transcatheter valve space and enforcing our IP is an important element of our broad leadership strategy. At the upcoming Euro PCR meeting there will be a several presentations featuring a number of our innovative technologies, including a case featuring SAPIEN XT. In addition, we expect to provide updates on our source commercial registry, which has accumulated a large number of patients, and one-year follow-up on our partner EU study. Lastly, we're planning to host an informal analyst reception during the week and details will be available soon.

Now turning to critical care. For the first quarter, critical care reported $105 million in sales, which included a $3 million negative impact from foreign exchange. Underlying sales growth was up 1.7%. Sales of new products which included FloTrac, [precep], and [pediastat] continued to grow strongly this quarter. Offsetting their performance was negative growth in hardware sales of approximately $3 million which can be attributed primarily to constraints on capital spending in US hospitals. Continuing supplier issues with our hemofiltration solutions provider also impacted results. FloTrac continues to be a very strong performer and we remain on track to achieve growth of approximately 40% for the year as we 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.

During the first quarter we launched a third generation algorithm for FloTrac that enhances its accuracy when used in patients with sepsis and other critical illnesses. Results from the first multicenter validation study were recently presented at the international symposium on intensive care and emergency medicine. They showed that the software was accurate when used on patients with sepsis, even in the presence of very low peripheral vascular resistance. and at the end of the third quarter we expect to launch a substantial upgrade that will strengthen FloTrac's applicability in the medical ICU, enabling more patients to receive enhanced monitoring. This upgrade will be integrated into our FloTrac system, and is based on the intellectual property we purchased last year. Also at the end of the third quarter we plan on launching a new hardware platform that will provide a simpler more intuitive information display and ultimately consolidate all of our parameters into one platform.

In hemofiltration, our solutions provider continues to struggle to meet demand and has limited our sales. We now anticipate improvement in the second half of the year, as we continue to work through the issue. Also in the quarter, we voluntarily retrieved specific lots of Swan-Ganz catheters manufactured on one of our production lines. When using the affected catheters, one parameter was not displayed on our monitors. There were no patient safety incidents associated with this issue, we responded aggressively, and have already replaced the affected units. In the fourth quarter we announced a partnership with DexCom to develop products for hospital-based continuous blood glucose monitoring. This remains -- there remains substantial clinical interest in glycemic control for improving outcomes for critically ill patients. The recent nice sugar study highlighted the continuing need to further define appropriate target glycemic levels in critically ill patients.

In assessing this study, key opinion leaders continue to express the need for accurate and continuous glucose measurement. If our clinical studies over the next two quarters demonstrate successful performance, we plan to seek regulatory approval and start our first generation product -- and launch our first generation product in Europe before year end. Glycemic control represents an exciting new opportunity to fill an unmet need and accelerate our longer-term critical care growth rate. In summary while critical care had a challenging first quarter, we expect new product introductions to elevate our growth during the remainder of the year, and we remain committed to achieving our annual underlying growth target of 6% to 9%.

Turning to cardiac surgery systems. Reported sales for the quarter increased to $22 million, which grew 8.8% on an underlying basis. MIS disposables continued to grow by more than 20% in the quarter. This growth was partially offset by slower sales from reusable instruments. For a perspective, our reusable instruments represented only about $2 million of our 2008 sales. Our base [cannula] products grew 3% excluding foreign exchange. In June we plan to launch our endo-direct arterial cannula system which provides cardiac surgeons with an additional minimally invasive alternative when femoral access is not an option. At this year's SDS meeting, we unveiled new programs designed to provide training and customer support to our surgeons and their OR teams, and these programs are very well received. Due to the strong interest in MIS procedures, we continued to invest in professional education, and remain confident in achieving our full year underlying goal of 9% to 11% growth.

Total reported sales of vascular products were $16 million this quarter. Reported sales declined due to lower sales of the divested LifeStent products. Sales of our market-leading Fogarty-based vascular products remained relatively constant versus the prior year at approximately $13 million. In the first quarter, we received a milestone payment associated with the PMA approval of LifeStent, and remain on track to complete the final step of this transaction midyear. Also during the quarter, we sold our European distribution rights for a specialty vascular graph. Sales of that product in 2008 were approximately $3 million. Now I'll turn the call over to Tom.

Thank you, Mike. In addition to the strong sales performance that Mike has discussed, we achieved non-GAAP diluted EPS of $0.70, a 25% increase versus prior year, driven primarily by a strong gross profit margin expansion. This EPS improvement was achieved at the same time that we increased our R&D investment by 21% in the quarter. For the quarter, our gross profit margin was 69.1%, compared to 65.3% in the same period last year. This quarter's 380 basis point improvement, was due to product mix, and favorable FX hedge outcomes which were partially offset by critical care manufacturing variations. We have increased confidence in achieving our full-year gross profit margin guidance of 68% to 70%.

For first quarter SG&A expenses were $122 million, or 38.9% of sales, an increase of $7.3 million over the prior year. Increased expense for the SAPIEN valve program in Europe, and sales and marketing expenses in both heart valve therapy and critical care drove the increase. This was partially offset by foreign exchange. For the full year, 2009, we continue to expect SG&A as a percentage of sales to be between 37% and 39%. R&D investments in the quarter were $40 million or 12.7% of sales compared to $33 million in the prior year. This increase was primarily the result of additional investments in our transcatheter heart valve and glucose programs. For the full year 2009 we continue to expect R&D as a percentage of sales to be between 13% and 13.5%.

During the quarter, we recorded three special items that resulted in a pre-tax gain of $30.8 million. The largest item was the receipt of a $27 million, milestone payment associated with the LifeStent PMA approval. Additionally, we recognized a $2.8 million gain associated with the sales of our European distribution rights for a specialty vascular graft, and a $1 million gain associated with the completion of lifepath AAA clinical obligations. For the first quarter, our reported tax rate was 28.8%. Excluding special items this was rate was 24.4%. For the full-year 2009, we continue to expect our rate to be approximately 24%, excluding special items. When compared to the same quarter last year, FX rates negatively impacted first quarter reported sales by approximately $10 million. At current foreign exchange rates, we now anticipate an approximately $60 million negative impact on 2009 sales, which is $15 million higher than the last quarter's guidance.

Free cash flow generated during the first quarter was a negative $8 million, which we define as adjusted cash flow from operating activities of $3 million, less capital spending of $11 million. Consistent with our practice this adjusted cash flow differs from reported cash flow of negative $36 million, due to the exclusion of the $39 million impact of terminating our Japan securitization program. The $8 million negative free cash flow was caused primarily by compensation payments associated with our strong 2008 performance. For 2009, we continue to expect free cash flow to be $160 million to $170 million, excluding the impact of several items. During the first quarter we repurchased 463,000 shares of common stock for approximately $27 million.

Turning to our balance sheet, we ended the quarter with a net cash position of $24 million, total cash of $147 million exceeded our total debt of $123 million. Our days sales outstanding at the end of the quarter was 68 days, consistent with the prior quarter. Inventory turns were 2.7, a slight improvement over the prior quarter. Turning to our 2009 sales guidance. We continue to expect strong underlying sales growth. The improved outlook for our transcatheter heart valve sales is being offset primarily by an approximately $15 million adverse effect from foreign exchange. We continue to project total sales toe be at the upper end of our full-year guidance of $1.24 billion to $1.3 billion, representing a 10% to 12% unlying growth. For heart valve therapy we are increasing sales guidance by $20 million to $660 million to $690 million.

In critical care we now expect sales at the lower end of our prior guidance of $455 million to $475 million. In cardiac surgery systems, we continue to expect sales of $90 million to $100 million, and in vascular we continue to expect sales between $50 million and $60 million. For the second quarter 2009, we project total sales of $315 million to $335 million, and excluding special items we estimate that second quarter diluted EPS will be between $0.73 and $0.77. For full year, 2009, we are raising the lower of our guidance for diluted EPS by $0.02, to $2.95 to $3.03, and we remain comfortable with our goal of growing EPS by 15% to 19%. With that, I'll turn it back over to Mike.

Thanks, Tom. Overall, 2009 is off to a great start. In heart valves our transcatheter technology continues to build momentum, and we are gaining share in surgical valves. In critical care, we expect several upcoming product introductions later this year to elevate our growth, and continue to anticipate the achievement of important milestones that will bring innovative products to more patients. We look forward to sharing our continued progress with you. And with that I'll turn it back over to David.

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

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. (Operator instructions). Our first question is coming from Amit Bhalla, with Citigroup. Please state your question.

Hi, good afternoon. I had a couple of quick questions to start on SAPIEN in Europe. Can you give us kind of a mix and share between transfemoral and transapical in the quarter?And go a little bit deeper in to your comment that your growth in the quarter was deeper penetration in existing accounts. Maybe you could quantify that, maybe this quarter versus last. Start there.

Yes, I would be happy to. It was much the same. The mix transapical to transfemoral was much the same as it has been in past quarters running about two to one transapical to transfemoral. In terms of what we mean by increased penetration, we track the number of procedures per month that each account does. So for example, how many are doing three procedures a month, eight procedures a month and so forth. And if we track that data, we're seeing that accounts are doing more cases. So that's why we are saying, a good part of this growth is coming from single accounts that are just growing larger, and less attributed to new accounts. We still added new accounts as you noticed in the quarter, but the penetration is the biggest driver.

Mike, can you -- you didn't answer the question on share. I think last quarter you said you felt like you were getting a turn in transfemoral share upward. So address that one. And two other quick ones. Germany, reimbursement, update there and SAPIEN XT. And you did see full preclinical testing is required. Why is that a change?

Okay. Yes, let's see if I gets the both, Amit. When you are talking about share, then obviously we need to know if you are talking about competitive share, we need to know what that is. What I meant to say is of our own sales about 2/3 of our sales were transapical and 1/3 were transfemoral. Were you asking about shares versus competitor, and if so that one is a little tougher to discern. We are hoping it's going to be reported publicly now, their quarters are a little different than ours, but we continue to think that if we have a similar amount of share as the competitor in Europe. Now, it's a little different mix, because we have all of the transapical share, but transfemoral might be running three to one somewhere on that, Amit. If that answers that question?

Yes.

I'll answer the next one and then we'll ask you to get back in the queue just to be fair to the others.

Okay.

On what FDA is expecting, it has been a little bit more vague in the past. It seems as though they came out and very specifically clarified that they want full preclinical testing complete before you start an IDE study. In the past it might have been possible to most of your pre-clinical testing and got additional approval once you completed the testing later. That no longer appears to be the case. We've already been proceeding very aggressively down that path, and we're still hoping to get an IDE approval before the end of the year, but it seemed like the bar went up for everybody just recently.

Okay. Thanks.

Sure.

Our next question is coming from Glenn Novarro from RBC Capital. Please state your question.

Hi, thanks, guy. Couple of things. I was jumping between calls. Did you talk anything about -- talk about SAPIEN pricing in the quarter? That's question one. And then also on the reimbursement side, Amit just asked about Germany, but can you tell us about reimbursement in specific countries in the quarter? Thanks.

Yes, thanks, Glenn. What we reported is that pricing was stable this quarter. Really no big changes. We see a little bit of mix based on country mix, but pricing really is consistent. In terms of reimbursement, there's really nothing that has changed substantially there. We still expect the major countries to be in place here over the next couple of years with the first of substantial countries coming on before the end of this year, so we're still operating without formal reimbursement in place, but are making good progress down that path.

I just ask one quick followup. I'm just curious does Medtronic buying core valve, what does that do to the overall market? Does it expand the market? Can there be some dislocation in the business in the near term that you can pick up share? Just your thoughts there and I'll get back into queue.

Well, I'll report on the first quarter. I'm not sure we saw much difference in Q1, Glenn, it remains to be seen what will happen in the future. We know that Medtronic has a history of developing markets, and so we look forward to their help on that one, but I'm not sure that I have much more than that.

Okay. Great. Thank you.

Sure.

Our next question is coming from Michael Weinstein from JPMorgan Chase. Please state your question.

Thanks for taking the questions, just a couple of follow-ups, first the number of centers, you have gone to what I think was about 50 centers at the start of the first quarter, to now, nine months later, less 125 centers. Talk about the training requirements for each center? Is that different in any of the geographies meaning Europe versus say the Middle East or elsewhere. And the second question is if we think about the XT pathway in the US, can you give us any sense on the size of the trial, design of the trial, and how much follow-up you'll need? Thanks.

Yes, first of all in terms of training, yes, I don't remember where we were in the third. In the fourth quarter, I think we said we had 120 sites that implanted and this first quarter 125 sites that implanted. So you could see there's growth. We probably trained 20-plus centers again this first quarter. In terms of training requirements, they are very much the same, Mike, as we have seen right along the path. So really no difference there. When we go internationally, we obviously try to be efficient with our time, make sure they are committed, that they have a partner team in place, that they are committed to buying valves, and have procedural success at the top of our mind, but, again, this quarter those centers were a very small part of the additional growth. In terms of XT and the US partner trial, we adopt really have anything to report. Because we don't have an IDE approved and we really don't have the substantial discussions that are already complete that allows us to really provide any guidance.

Okay. And just one follow-up if I could, on the sales you lost on the ring side of the valve business this quarter, do you expect to recapture that in the second, and/or second and third quarter? Might there be a [bold] demand in the quarter to come?

Yes, you might recall what happened in the fourth quarter, Mike, so there was about $5 million worth of product products that were withdrawal from the marketplace in the fourth quarter. And then our reported results that was reflected -- but we sort of treated it as pro forma because we believed that would all go back and so we excluded it from our pro forma results. The second quarter, that whole thing should probably reverse. So reported results would show those sales coming back, probably a similar number, $5 million.

Right.

But on a pro forma basis, we'll exclude that top line.

Right, our EPS guidance excludes any impact from that this year.

So that $5 million will be called out in the second quarter.

Right. Absolutely. Absolutely. All the way through the P&L.

Okay.

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

Hi, thanks for taking my call. Tom, I was wondering if you could go over the gross margins on a year to year basis. How much was foreign exchange and to what degree did that flow through to the bottom line?

Sure, let me say that we're very pleased with the step-up this quarter. It's pretty much on track to what we were going to. If you remember, we said 68% to 70%. This quarter came in right on 69%. The mix between foreign exchange and mix and some of the things, the components, are going to change over the course of the year, so foreign exchange right now is at the higher end of what we talked about when we said guidance. I think I said about 150 basis points. Right now it's probably closer to 250 basis points, and that will ramp down over the course of the year. What we do have that is also temporary in nature is the fact that the manufacturing variations that we experienced related to the critical care activities were somewhat of an offset. So those two are pretty much offsetting, and I would say the underlying product mix continues to be if anything slightly favorable to what we expected in the quarter, so the picture gives us more confidence than we even had at the beginning of the year that the range is achievable.

So critical care was a negative 250 basically --

Not the full 250, Kristen, more like 200 basis points going the other way.

Okay. I guess just on the earnings impact, was there anything more on the positive or negative side as it flowed through the P&L?

For the $15 million?

Yes, I guess with your guidance.

Good question, no, we continue to be pretty fortunate with the structure, our hedge agreements and so forth. Therefore the $15 million had put a little pressure but not much on the bottom line, so we continue to be have happy with the hedge agreements that we have in place this year.

And then I guess, Mike, on the number of centers, it is clear you have been ramping up quite quickly. Where do you still expect this year to finish out? I think before you were talking maybe 75 to 100 centers. Is that still something that you're comfortable with, or could we see even more?

I suppose that's a believable number. We're less focused on centers, and although we added them, again, in the first quarter, I'm not sure that's going to be as big of driving factor as what we started to see in the first quarter, which was increased penetration. So I think just keeping score on centers is probably not the only indicator. What we're pleased about is we feel confident at this point that we're in a very good position to double the number of procedures versus 2008.

Okay. Thanks. I'll get back in queue.

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

Hi. Thanks for taking my question, on the continued access program, could you talk a little bit more about how that works? You mentioned it's still randomized. Just the mechanics of that, any revenues that you expect to book? And I'll just pause there.

Yes, what you should think of is that the same randomization scheme and protocol that has been in place in the past is going to continue to be in place in the future. So because we fully enrolled B there is not going to be additional decision making that will take place on the part of clinicians. They'll continue to place patients the way they have in the past. Does that help, Larry? Did you follow that?

It's mainly about keeping, any technology available for patients in the interim, and also keeping the clinical skills up to the highest standards.

How is the data going to be used? Are there limitations to the number of patients you can enroll? And are you going to be able to book revenue from that?

Yes, I believe that what happens, Larry is that we're going to take the data from the first 350 patients, and that's what will be rolled up and used for the clinical analysis. But what it does is it maintains this equilibrium that we have right now. So that as we continue to enroll the cohort A, you have the same dynamics that you had in the first part of the trial.

And the revenue, Larry, is very negligible.

Yes. It continues to be small less maybe $1.25 million kind of a contribution.

Is there a limitation on how many patients you can enroll in the continued access program?

What they have done is limited it to existing sites. So, yes, there -- it's limited from that perspective, and there may be a limitation on the number of patients as well. Do you have anything else, Larry because to be fair --

Thanks, I'll get into queue.

Thanks.

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

Hi, Mike. Thanks for taking the question. First question is on the other 95% of your business. Surgical -- specifically surgical heart valves seem to -- the growth seemed to tick up a bit from what we have been seeing, certainly the revenue ticked up from the fourth quarter. Maybe spend a minute and give us color on what you are seeing, and whether anything has changed in the domestic landscape for surgical heart valves, as well as the international landscape, and anything you are seeing from a competitive standpoint that may be impacting you, or if you are just simply seeing share gain vis-a-vis your new product launches.

Yes. Thanks for your question, Jason. We look forward to talking about that. That is a pretty big please of our business. Yes, as we mentioned surgical heart valves grew 8% in the quarter. And we continue to see really strong growth. So double-digit internationally, and Japan really helps drive that growth. It's still first year of Magna there, and it really contributed. And then the US, we grew over 6%, and really, part of what you are seeing there, is really strong performance in the US on the Mitral side, so the new Magna Mitral valve that was just introduced six months ago now is gaining momentum and gaining share. And so that's driving -- as a matter of fact US would have been even stronger if it wasn't for this repair thing that cost us some sales because mix and IMR were out of the market. Competitively, I can't tell you that we see much different dynamics than we have seen over the past year. I suppose the competitive launches are getting a little older than they were at that time, but we're probably the ones with the newest products in the marketplace at this point, Jason.

Just as an offshoot to your comment about strong Magna Mitral performance, could we possibly, Mike, be seeing degradation in repair growth as we see the actual valve replacement performance metric tick up in Magna Mitral gain traction?

I don't think so, Jason, I don't think that's what is going on. There might be something just on the margin, but I think in general, what we saw in the repair side was just the reflection of the fact that we were out with mix and IMR. As a matter of fact there is a lot of excitement about physio II. We expect -- we had less than $1 million in sales from the quarter from physio II, but we really expect that to pick up and start to drive some repair growth going forward.

Okay. And then two quick follow-ups, back on SAPIEN and I'll get back in the queue. The 850 implants you reported this quarter, does that compare apples to apples, versus the 650 implants you reported last quarter, so it was up about a third? And secondly, the new centers that you added -- while new center adds you say won't be the biggest contributor to your growth going forward. I was wondering if you could give us some color on the profile of those new centers. I think you said last quarter, you are not -- while you may be getting into smaller centers, you don't necessarily expect the mix in terms of utilization to be impacted significantly, implying that you expect to do pretty good volume at the newer centers, albeit smaller ones. And I'll get back in queue. Thanks.

Sure. To your first question, yes, it is apples to apples. So the 850 compares to -- I think we reported the exact same thing last quarter, which was number of valves implanted. So that's an apples-to-apples comparison. In terms of new centers, it's the same profile. It's the same kind of things that we expect out to them. In general, yes, they are smaller sites than the first centers that we put in there, and so -- particularly the ones in Europe, and as we say we're in 20 countries at this point. When we go outside of Europe, those are some pretty big centers that end up getting added. Net-net I would say the profile probably stays similar.

It's also a bit of what we talked about, greater penetration and the overall base of centers. So it's not necessary that these centers are as large, but you also have that contributing to the overall utilization.

Thanks, guys.

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

Good afternoon. Mike, you mentioned the percent of hospitals that have gone independent. Can you give me that percentage this quarter, where you expect that to be by year end? And secondarily, presumably you free up reps as hospitals become independent. Where do we redeploy those reps going forward?

Yes, so right now I guess we would say that probably more than 10% of the cases are done at hospitals that are independent at this point. So we're still at the pretty early stages of that, and it's rolling out. In terms of -- we're going to continue to add new sites, these -- I don't know exactly where it's going to end up to tell you the truth, David. We're going to continue to work on this pretty aggressively. What it does for us is -- these tend to be clinical specialists. So rather than the clinical specialist have to be in every case, it means they can be redeployed to new centers and help the new centers either come up on new technology or start from scratch, so it really allows us to get some leverage and drive some capabilities.

And it's a scheduling advantage for those centers that are independent so that they don't have to wait for a clinical specialist in order to schedule cases.

Yes. I think that's a good point. Just to build on that point that Tom immediate, you can picture, if you are a center, rather than wait for the Edwards's representative to come, which normally we're standing by, but it's helpful if they don't have to factor that in when they want to do a case.

Mike, that number might be 25% by the end of the year, but it's unlikely to be higher than that?

I really don't have an estimate on that, David. We'll put some energy on trying to come up with a number and share with it with you, maybe when we see you at PCR.

Okay, great. And two more questions here first is obviously on pacing. One of your competitors has obviously reported for a couple of years has increased pacing upon implant. But that seems to be an irrelevant issue from a marketing commercialization standpoint in Europe. I wondered if you could comment on that particular issue and whether you think it is clinically relevant and whether you think the FDA would think it is clinically relevant?

We don't think it's an irrelevant factor. We think it's something that people will pay attention to. It will be interesting to see what people report at PCR. I think that should be a good place for people to be able to see the landscape and see what the core valve product is doing and the SAPIEN product is doing. So we're pretty pleased with how it is going on our side right now.

Okay. And just lastly, Mike, I wanted to clarify your comments around nice sugar. At least from our perspective it was not a particularly positive results. So maybe just clarify your comments. Do you think that nice sugar has no impact on the commercialization of your product over the next six to 12 months,,or is likely to have some impact?

To answer at a very high level, it's likely to have some impact, but it's difficult to sort of take it on its surface. What it says is with today's or yesterday's technology, if you start going low with your target, you run the risk here of getting into a dangerous zone, so there's not a lot of upside for doing it. What it [masses] is if you had the ability to continuously control glucose and know where you were from a tight perspective, you could feel more comfortable coming down. So there's the desire we hear in the face of that is very strong for continuous monitoring, and we expect that patients are going to improve more quickly because of it, but we're probably going to have a little bit more explaining to do along the way.

Okay. Thank you very much.

Our next question comes is coming from Keay Nakae with Collins Stewart. Please state your question.

Yes, good afternoon. Mike, with your comments regarding FloTrac and the product improvements in the second half of the year, how married to the hip is the hardware upgrade with the software algorithm? Can you be successful with one without the other, especially if the capital equipment environment remains problematic?

Yes, thanks, Keay. Yes, and really they are not connected. We're able to upgrade the software actually by just using a thumb drive and being able to download the software into existing monitors, and so our plan is to be able to do that. Separate from that, though, we have this new hardware platform, which we think could be a very nice upgrade for both, so they are additive. The other thing that we're going to have later on in the year, obviously, is the new medical ICU parameters, and that will require the hardware increase, and so there's no connection on the third generation FloTrac. There is a connection on the MICU parameters.

Which do you expect to be more impactful, the algorithm of the hardware?

We expect the algorithm to be more impactful.

Okay. Thank you.

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

Hi, guys, good afternoon, and thanks for taking the question. Just in terms of the safety outlook, from 90 days here to today, now you are looking for sales north of $100 million. Is the thinking that -- is the market getting bigger 90 days ago, or do you think you are picking up more share from the competition?

No, it's -- it's -- we clearly believe that the market is getting bigger. It's expanding. We just think that what happens is as this technology is now in its second year, you have more patients and patients that are aware of it. You've got referral patterns are better developed, and you have more people coming in. I would say share gain would be a bonus to that.

And we often tend to think of Europe as one country, but are there any specific areas within your -- any certain geographies that are growing faster than the average?

Boy, I don't know if I can tell you specifically, sometimes the growth is a little deceiving, because when you have one country even though it is small one it can be a big growth number, but you can see we're in 20 countries, so we have some of those smaller countries that have big growth on them at this point. We continue to be anchored by Germany and France, which are the two biggest countries for doing cases and they're still growing nicely.

If I could just slip one more critical care in. You talked about some capital budget constraints impacting hardware sales. Are you still seeing that trend here in Q2, and any sense of when we could see that alleviate? Thank you.

Yes, it's not obvious to us when it will alleviate. One of the things that we have done is to introduce some more flexible options for our customers that will help them overcome some of this sales objection, and our salespeople are optimistic that this will have some impact on this. And so we would hope to start seeing some results of that in the second quarter. But it's not clear exactly the hospitals are changing behavior yet.

Great. Thank you very much.

Sure.

Our next question is coming from Brooks West with Craig-Hallum Capital. Please state your question.

Hi, guys, thank you for taking the question. A quick pricing question, Mike and Tom, specifically on the surgical valves and critical care. Are you seeing greater than normal pricing pressure there? And I guess I would focus that even more on the US market?

For the main business, no, we're not seeing a significant change whatsoever.

Okay. And then with the softness in the critical care business that you've described, I guess following on Tim's question, do you feel like we have seen a bottom in Q1? And then looking at the guidance, how back-end loaded is your guidance for the year there?

Yes, well, the short answer is, yes, we do think that this growth rate is by far the lowest that we would expect for the rest of the year. When we say we expect to put up 6% to 9% growth underlying for the rest of the year, that means it is going to step up, and you'll see it in Q2, but we think it will actually be stronger yet in Q3 and Q4.

Okay. Thanks, guys, and nice performance in this environment.

Thanks very much, Brooks.

Our next question is coming from Spencer Nam with Summer Street Research. Please state your question.

Thanks for taking my questions. Just had a couple of quick questions. With the new outlook on safety in Europe revenues, is that including expectations that there will be some changes in reimbursement environment in Q4 of this year, or how does reimbursement in Europe listed in one of the countries affect your outlook here?

It's probably not a big factor. We had an assumption that one of the major countries would get approval before the end of the year, and we continue to see it that way. But I don't know that that in itself is going to really change the growth curve on this. And so I think it's pretty independent, at least based on what we have seen so far, Spencer, it's pretty independent of what is going to happen there.

Great. And second question is with the [Corvel] being acquired by Medtronic, do you guys see any change or potential slowdown? Was there any sort of positive impact on SAPIEN sales throughout European countries, because as [Corvel] is going through some transition, maybe you had more opportunities to be involved with physicians out there?

Yes, thanks, Spencer. We're obviously looking for opportunities to do anything to be more aggressive, but I can't tell you that we have really seen any change at this point in time.

Great. Thanks very much.

Sure.

Our next question come is coming from Sara Michelmore with Cowen and Company. Please state your question.

Yes. Thank you. Tom, thanks for the detail on the gross margin. I did just want to clarify the manufacturing variances. Does it totally go away in Q2 or does it just moderate over the course of the year?

There will be a piece in Q2, but then we're hoping that it is over ach that.

Okay. So in terms of the gross margin dynamics, on the positive for Q2, we'll have mix a benefit from FX, but probably more moderate from this quarter, and then again, a more moderate dynamic with the manufacturing variances.

Exactly.

Okay. And Mike, just wanted to ask you a product-development question, I know that SAPIEN XT is really optimized for the transfemoral position. Can you just give us an update in terms of next generation transapical products? Are you working on products that are specifically designed for that approach? Thanks.

Yes. Thanks for -- I appreciate that, Sara. The short answer is yes. The SAPIEN XP actually is going to be used in the transapical position, and we're excited about using it there. What it will get is its own unique delivery system. So we have got next generation delivery systems coming for transapical as well as some enabling accessories, so the low profile actually does help the transapical and the accessories we think are going to make that procedure even better than it has been in the past.

Okay. And are there specific enhancements for the delivery for that product in the transapical position?

Yes. I'm not sure that we have really laid those out in detail. We're -- in general, it's around ease of use. There's -- it's still a skill set for people to learn, and what we would like to do is make it accessible for more surgeons.

Understood. Thank you. Question, big picture I know that the new products were really the main growth driver for the traditional surgical valve business, but, Mike, you have talked about previously, that transcatheter valves could have just a beneficial impact on referral volumes and things like that that could be a positive kind of undergrowth for that trans -- sorry, the surgical valve business. Just wondering what your latest thoughts were there? And if that is starting to play out at all? Thanks.

Yes, we continue to believers -- the fact that there is a transcatheter option in place is going to bring patients off the sidelines. And in Europe there are several examples where exactly that is taking place. Where more patients come in, and therefore, surgical volumes go up. I can't tell you that if we look at our overall surgical growth rate in Europe, that we have really seen that step up. It seems as though it's pretty similar to what we were expecting, and what we have been experiencing over the last couple of years, but that might be that we're still at the early stages.

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

Hey, guys. Congratulations on a great quarter here and thanks for taking my question.

Thanks, Josh.

Most of them have been answered, but I just have got a couple of quickies here. Just Magna Ease, I know you commented 3Q approval, you still seem to echo or reiterate that I should say. Launch 3Q or Q4? Do you have any color into that? I think last time you said still hoping for 3Q. Does that seem reasonable still?

We have the -- we can never predict the FDA, so that's my disclaimer right off the top. But we think we really do understand what they are interested in. We think we have fully answered all of their outstanding questions. We think we're able to get a good hard launch in the third quarter, so that's our plan.

Great. And then Tom, just some balance sheet cash flow questions, you paid down some debt here, a lot of debt, obviously, in the second quarter in a row. Just to give us some idea thinking going forward, is this -- do you guys plan to aggressively pay down debt for the rest of the year, or just kind of as the cash comes in?

That's a good question, Josh. No. It's not a major initiative for us, but we were able to successfully get cash by a couple of techniques into the US, where the debt sits. If you remember last quarter, and this quarter, we actually have more cash on hand than debt. So any debt that's remaining at this point in time is just an issue of where the cash is isolated in a different region than where the debt exists. So we look at it as we're already positive in the sense where cash exceeds debt. And it will just be opportunities to move it around.

Great. And then just to follow-up. Receivables went up a lot. I know you made some comments about DSOs, could you just give us a little bit of color there?

Good question, yes. The DSOs were essentially flat. The difference in the receivables was the impact of reversing the securitization of some Japan receivables. The number should be around $39 million. I'm not sure that's exactly what shows up in the balance. But somewhere in the area of $40 million difference is due to the fact that we previously securitized them, and that program was terminated so those receivables are back on our books.

Great. Thanks for answering my questions and congratulations again, guys.

Our next question come is coming from Bruce Nudell with UBS. Please state your question.

Good afternoon, thanks for taking my questions. The first is we scale a US aortic unit, surgical opportunity, around 75,000 valves. What is the equivalent, what is the size of the units opportunity for surgical valves in what you deem to be Europe?

I want to make sure that I understand that. Do you mean, how fast can surgical valves grow in Europe?

No, how many surgical aortic surgical replacements are there in Europe?

I think it's about the same. I want to say it's about the same number.

75,000. And of this -- you have 1,700 percutaneous valve runrate per quarter across all vendors in Europe right now. What percent of those would you guess are targeted towards surgically ineligible patients?

So say -- could you say that one more time, please?

So of the 1,700 -- you had 850 valves in Europe.

Yes.

Your valve had about the same according to what you just said, so it's like 1,700 units. What percent of those are going into surgically ineligible patients?

Yes, I think that what we saw in the first quarter continues to be what we have seen in the past, which is these tend to be parents that I think are averaging around low 80s in terms of their age. The -- I think 82 years old. I think the majority of the case cases are all high-risk and non-operable. So they are not just non-operable, they are also high risk for surgery. So that's the implication we have from a CE mark perspective, and I can't tell you what the mix is between those two, because I just don't know. But maybe there will be some reports at PCR where people break that out.

Thanks so much.

Our next question is coming from Suraj Kalia with SMH Capital. Please state your question.

Michael, congratulations on a nice quarter.

Thanks, Suraj.

I know you guys are worn out with all of the badgering questions, so I'll just keep it simple. Michael, in terms of vascular closure, is that -- just given the size of the SAPIEN, do you all see competitively it affecting you all in Europe? Not the US for now, but competitively in Europe, you'll see the size of the SAPIEN XT core valve and any others affecting you all?

Well, what I expect actually is that the competitive landscape is going to change. So if SAPIEN were to be the valve that was out there on a long-term basis, I would say vascular closure would be an issue, and more broadly vascular access because it's a bigger unit. But with SAPIEN XT what is going to happen is the devices are going to be very similar in size, and I don't expect vascular access and vascular closure to be very much of an issue particularly when you consider people might have an opportunity to access what we believe is a superior valve.

And finally, Michael, if I come to a physician, let's say in Germany, and how is the decision matrix made for -- and let's say I'm deemed high risk inoperable, how it is deemed between transfemoral and transapial? How is that decision matrix algorithm being made?

Yes, the -- what happens is the -- and what our desired approach is, and we think it works pretty well this way across most centers is that the physician get together, and this is both cardiac surgeons and interventional cardiologists. They review the patient, talk about the options, and make a decision based on what they think is the best therapy to offer. And that's the whole idea behind the partner concept. We have tried to help encourage that and tried to teach that and we think that based on the feedback that we get, the physicians really believe in the approach.

There are a lot of patient attributes maybe vascular access is one of the things they look at and try to evaluate what the option is best for that patient giving their comorbidities and so forth. Does that answer your question?

Thank you, gentlemen. Great quarter.

Thanks.

Thanks.

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

Thanks. I didn't know I'd be able to come back in queue. Just one very easy question. FX was only a 3.4% headwind for you guys. And I guess we have struggled about how to model it, because you have about 56% of your sales outside of the US, so when you look at comparable companies, they are coming more in the range of 6%, 7% this quarter. Maybe help us just understand why there isn't a bigger FX than what you saw before.

Mike, the numbers I have I have reported growth, I think at 5.6%, correct? And underlying is 11.5%. So isn't that the way you would measure it.

Yes, but I think what Mike is doing is [up close] discontinued is part of it, he just took the FX. But you have to remember we have both Japan and Europe in this equation, and we have got some pretty substantial Japan sales, maybe more Japan sales than most companies would have in terms of their percentage of their total, and that has probably help to offset it.

And Tom, how do you calculation the FX impact quarter end average over the course of the quarter? How are you doing that?

No, well the impact will be -- as we -- on sales in particular, you set a transaction rate for every month, and then that becomes your average, and that's how you translate into US dollars and compare it to the prior year.

Can you maybe just give us a sense of what you are expecting from the second quarter to this point?

I would say right now the current rates, I think it's about 100 yen to the dollar, and about $1.30 and change, say $1.33 for the Euro or something like that.

No. No. I know the exchange rates. I was wondering if you could tell me what you think the FX impact would be.

What the number is. The remaining of the [60]. I think it's our biggest number. I'm going to say about [20, 25] in the quarter.

Great. Thank you.

Hang on one second. I'm pretty sure that's right. Good.

All right.

Okay. Well, it doesn't appear that there is any other questions, and so thank you very much 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 be found in the investor relations section of our website at edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. And to access this please dial 877-660-6853 or 201-612-7415, and use account number 29995, and the pass code is 318217. Let me repeat those. Dial 877-660-6853 or 201-612-7415, the account number is 2995, and the pass code is 318217. Finally, an audio replay will be archived on the investor relations section of our website. Thank you very much.

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