愛德華生命科學 (EW) 2009 Q2 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Edwards Lifesciences second quarter 2009 earnings conference call. (Operator Instructions). 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 second quarter 2009 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 Mike Mussallem, Chairman and CEO and Tom Abate, CFO and Treasurer.

Before I turn the call over to Mike, I would like to remind you during today's call we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include but aren't limited to sales, gross profit margin, 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 value 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 for the FloTrac system and the development of continuous blood glucose monitoring technology. These statements speak only as of the date on which they're made and we do not undertake any obligation to update them after the date they're 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 concerning 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 10-K, for the year ended December 31, 2008, and our other SEC filings which are available on our website at Edwards.com.

With that I will turn the call over to Mike Mussallem. Mike?

Thank you, David. We're proud to report strong second quarter results. Total underlying sales growth was 9.8% with our heart valve therapy franchise once again making a significant contribution. In addition, we continue to make important progress on the transcatheter heart valve technologies. This quarter's results were also highlighted by a continued step up in gross profit margin, driven by the strong performance of new products and divestiture of lower margin product lines. Our product mix represents a new baseline of profitability from which we can continue to expand.

Now I will shift to a more detailed review of our product line sales and progress on new products and Tom will discuss the financial results and outlook. For the second quarter, we reported heart valve therapy sales of $182 million, which includes a negative impact from foreign exchange of $10 million and a $4.1 million benefit from IMR in [dETlogix] repair products return. Remember in the fourth quarter of 2008, we excluded $4.5 million from our underlying sales for the retrieval of these products from customers because we expected to return them. As the returns occurred this quarter, we excluded the benefit from our underlying sales growth rate. On an underlying basis, heart valve therapy sales increased 16.7% for the quarter, led by continued adoption of transcatheter valves and 10% global tissue valve growth.

Turning to our surgical valve products, on a global basis tissue and repair sales growth was 7.5% for the quarter. In the US, growth stepped up to 7.6% as we gained share in both the mitral and aortic positions. Outside the US, the growth rate was similar as we also continued to gain share abroad. Magna Mitral sales in the US continued to ramp up, driving double digit mitral valve growth in the second quarter. In May, we received FDA approval for Our Magna Ease Aortic Valve. This valve is designed for easier implantation and has the potential for leadership in the largest segment of valve replace. Although its contribution in the quarter was minimal, initial acceptance has been encouraging and we expect strong adoption. We gained share in Japan as double-digit growth of heart valves continued led by our Magna Aortic Valve, which has become the number one selling valve in just over a year. Now that we have reached the anniversary of its introduction in Japan, Magna Aortic's contribution to growth will begin to diminish.

During the quarter, we received US approval for our newest magna mitral valve the Magna Mitral Ease. We're excited about this new valve and continue to believe it will extend the Magna platform by providing improved MIS capability and ease of implantation. We're planning to do a limited launch in the fourth quarter.

Turning to repair, underlying growth in the quarter was approximately 2% which was again negatively impacted by the temporary absence of some of our specialty rings in the US. Our Physio II ring, which has been rolled out in both the US and Europe and has been rolled out in both US and Europe and adoption has been brisk as a number of customers upgraded from Physio I. In Japan our IMR ring is currently approved for commercial use, and we now plan a launch later this year as we await reimbursement approval. With our full complement of rings now available in the US, and the acceleration of Physio II, we expect our repair growth to increase in the second half of the year. To summarize, for 2009 we now expect our surgical heart valve therapy products to achieve underlying growth at the high-end of our prior 7% to 9% range driven by share gains and new product launches in the US.

Turning to transcatheter heart valves. For the second quarter SAPIEN sales were $26.5 million driven primarily by continued adoption in Europe with modest contributions from new markets and our US clinical trial. Second quarter sales exclude transcatheter valves that were used in the SAPIEN XT Prevail trial which were provided at no charge. In Europe more than 1,000 SAPIEN valves were implanted in over 145 centers during the quarter with an acute procedural success rate that remained high and selling prices that remained stable. Sales continue to be driven primarily by implants with over 95% of the valves sold being implanted. Globally the number of implanted valves was more than 1,200 as we continued to expand. As more centers perform cases independently, we'll have less visibility into the number of valves implanted. As a result, beginning next year, we'll no longer provide this type of implant data on these calls although clinical data will certainly continue to be presented at major medical meetings. Based our momentum we remain on track to exceed our goal of doubling the number of transcatheter heart valve procedures compared to 2008. We expect third quarter sales to be impacted by the normal seasonality of procedures in Europe with a rebound expected in the fourth quarter. We remain confident that full year 2009 transcatheter valve sales will exceed $100 million.

Turning to our US PARTNER trial, as we announced last quarter, we completed enrollment of Cohort B, the 350-patient nonsurgical arm of the trial. With regard to Cohort A, the surgical arm, at the end of the quarter we had enrolled approximately 600 of the 690 patients required and at our current pace we still expect to complete enrollment by the end of August. Once Cohort A enrollment is complete we'll request FDA approval for continued access for all of our existing partner sites to ensure this technology remains available for patients.

Our RetroFlex 3 transfemoral delivery system is being rolled out across commercial sites in Europe and clinician feedback and experience has been very positive. During Euro PCR, this new delivery system was featured in a number of live cases, which highlighted its ease of use benefits and greater stability of valve delivery. In the US a number of sites have gained IRB approval to convert to RetroFlex 3 in our PARTNER trial.

In May at the Euro PCR meeting we featured the first human implants of our new smaller 18 French system comprised of SAPIEN XT and NovaFlex, our next generation valve and transfemoral delivery system. In Europe, we believe the patients enrolled in our Prevail transfemoral study will fulfill the requirements for a CE mark approval and support a first quarter 2010 launch. We believe our SAPIEN XT with a NovaFlex delivery system better addresses the requirements of transfemoral delivery. In the US, we continue to make good progress on our preclinical testing of SAPIEN XT and expect to submit an IDE in the third quarter, which could result in an approval before year end.

In our 30-patient US feasibility trial of the SAPIEN valve in the pulmonic position we've added sites, and enrollment is over halfway complete. At our current pace, we now expect to complete enrollment in the third quarter and then transition to a larger humanitarian device exemption trial.

In June the UK court found Cook's transcatheter valve patent to be invalid and agreed with an earlier German court decision that Edwards' does not infringe. In addition, during the quarter we received a positive set of rulings in the US core valve patent litigation. In the Markmen hearing, which determined the scope of the claims of the Anderson patents, the judge ruled in Edwards' favor on many of the critical issues. We think this improves our overall position as we approach the jury trial, which is scheduled for the first quarter of 2010.

During the next few months, our transcatheter technology will be featured at several conferences including the EFC meeting in late August, TCT in September, the EACTS and European Society meeting in October. That's the European Surgery meeting.

Now turning to critical care. For the second quarter critical care reported $113 million in sales, which included a $6.2 million negative impact from foreign exchange. Underlying sales growth was 2.3%. Sales of our newer products, which included FloTrac, PreSep and PediaSat once again achieved strong growth for the quarter, while constraints on hospital capital spending continued to impact hardware sales. In hemofiltration during the quarter, our solutions provider continued to struggle which again detracted from critical care sales growth. In June, we announced an agreement to sell our hemofiltration product which will allow us to better focus on our global strategic priorities. We expect this transaction to close in the third quarter. This product line represents approximately $50 million or represented approximately $50 million of sales in 2008.

Turning to new products, to date FloTrac's success has been primarily focused on the high risk surgical environment. Last quarter, we launched a third generational algorithm for FloTrac that enhances its accuracy when used in patients with sepsis and other critical illnesses. Feedback has been very positive. At the end of the third quarter we still expect to launch a substantial upgrade that will strengthen FloTrac's applicability in the medical ICU, enabling more patients to receive enhanced monitoring with the addition of new parameters. In addition, we remain on track to launch a new hardware platform at the end of the third quarter. This new platform will provide a simpler, more intuitive informational display and ultimately consolidate all of our parameters into one platform.

With regard to our continuous glucose monitoring program, during the quarter we initiated clinical studies to validate performance. Positive data would support a regulatory approval and launch of 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, we expect our new critical care product introductions to drive higher growth rates in the second half of the year. However, in light of the divesture of our hemofiltration business, and continued weakness in hardware sales, we're now lowering our prior critical care sales guidance for 2009 by $20 million and now expect annual underlying growth of 3% to 6%.

Turning to cardiac surgery systems, reported sales for the quarter increased to $24 million, which grew approximately 8.5% on an underlying basis. MIS grew more than 20% and our base cannula products showed modest growth. In June, new research on our port access system was present at the Society of Heart Valve Disease meeting in Berlin. The results of the study demonstrated that using our minimally invasive system in mitral valve surgery significantly decreased the length of stay in hospitals and ICUs and improved the outcomes when compared to conventional sternotomy. Due to the strong interest in MIS procedures, we'll continue to invest in professional education and remain confident in achieving our full year underlying growth goal of 9% to 11%.

Total reported sales of vascular products was $16.3 million this quarter and declined due to lower sales of the divested life stent products. Sales of our Fogarty vascular products were relatively constant versus the prior year at approximately $13 million.

Turning to transcatheter mitral repair, enrollment in Evolution II for our Monarch system has been slower than originally anticipated. We recently expanded our trial to include specialty heart failure centers in order to increase the rate of enrollment.

Now I will turn the call over to Tom.

Thank you, Mike. In addition to the solid sales performance that Mike has discussed, we reported non-GAAP diluted EPS of $0.79, a 20% increase versus prior year driven primarily by continued expansion of our gross profit margin. This EPS improvement was achieved at the same time that we increased R&D investments by 20%.

Before I go through the P&L, I would like to remind you of the accounting treatment for the relaunch of our IMR & dETlogix rings. Our GAAP results included approximately $4 million of sales, gross profit, and pretax income from units that were returned to customers in the second quarter. We have excluded the favorable financial impact of these sales from our non-GAAP earnings.

For the quarter, our gross profit margin was 69.6% compared to 65.5% in the same period last year. This 410 basis points improvement was due primarily to product mix and favorable FX hedge outcomes. Based on our strong performance to date, we expect our full year gross profit margin to be consistent with this quarter's rates, which is at the high-end of our previous guidance. Second quarter SG&A expenses were $128 million or 38.3% of sales, an increase of $2 million over the prior year. This increase of driven by higher spending for the SAPIEN valve program in Europe and sales and marketing expenses at heart valve therapy partially offset by foreign exchange. For the full year 2009, we now expect SG&A as a percentage of sales to be between 38% and 39%.

R&D investments in the quarter were $43 million or 12.7% of sales compared to $35 million in the prior year. This increase was primarily the result of additional investments in our transcatheter heart valve and FloTrac programs. For the second half of the year, we expect R&D as a percentage of sales to be approximately 13.5%.

We recorded a special charge of $1.5 million during the quarter in connection with our pending hemofiltration divestiture. This previously announced transaction is anticipated to close in the third quarter at which time we expect to record a gain of approximately $45 million. Additionally, we will receive payments based upon the buyer's achievement of future revenue objectives. These payments will be recorded as other income and are estimated to be $1.5 million per quarter through the end of 2010.

Other income of $2 million in the second quarter consisted primarily of balance sheet related foreign exchange gain. Our reported tax rate for the second quarter was 24.4%, excluding special items this rate was 22.9%, benefiting from the favorable results of our 2008 tax filing. 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 second quarter sales by approximately $18 million. At current exchange rates, we now anticipate approximately $30 million of negative impact on our full year 2009 sales. This $30 million is better than last quarter's -- this is $30 million better than last quarter's guidance, primarily as a result of our hedging strategies, this quarter we realized $0.02 of benefit to our EPS.

Free cash flow generated during the second quarter was $66 million. We defined this as cash flow from operating activities of $64 million less capital spending of $17 million plus $19 million in tax payments related to previous life stent transaction milestones. These milestones were classified as special items in prior period earnings. For 2009, we continue to expect free cash flow it be $160 million to $170 million excluding the impact of special items. During the first quarter we repurchased 445,000 shares of common stock for approximately $28 million. During the first six months of the year, we repurchased 908,000 shares for just over $54 million.

Turning to our balance sheet, we ended the quarter with a net cash position of $69 million. Total cash of $183 million, exceeded our total debt of $114 million. Our DSO at the end of the quarter was 69 days, an increase of one day from the prior quarter. Inventory turns were 2.5, a slight decrease from the prior quarter.

Turning to our 2009 sales guidance, we continue to project total sales to be at the upper end of our full year guidance of $1.24 billion to $1.3 billion. As the positive benefit from foreign exchange fluctuations off sets the negative impact from the hemofiltration sale. For heart valve therapy, we're increasing the midpoint of our sales guidance by $25 million to $690 million to $710 million. This excludes the $4 million favorable impact from the relaunch of repair rings. In critical care, we're now lowering our sales guidance by $20 million to $435 million to $455 million. In cardiac surgery systems, we continue to expect sales of $90 million to $100 million and in vascular we now expect sales to be at the upper end of our previous guidance of $50 million to $60 million. For the third quarter 2009 we project total sales of $305 million to $325 million, and we estimate that third quarter diluted EPS excluding special items will be between $0.66 and $0.70. For full year 2009, we are raising our guidance for diluted EPS, excluding special items to $3.00 to $3.06. We now expect to be at the upper end of our goal to grow diluted EPS by 15% to 19%.

With that I will turn it back over to Mike.

Everybody, thanks for your patience. We're having technical difficulties here so we're having to share a microphone, but I think we can continue. Thanks very much, Tom. Overall we had a very successful first six months and are expecting a strong second half of the year. Our underlying sales growth estimate of 10% to 12% for 2009 remains unchanged and we expect to meet or exceed all of our previously stated financial goals. With that, I will turn it back over to David.

Before we open it up for questions I would like to encourage you to take note of several upcoming events. In September, the TCT meeting will be held in San Francisco. At this meeting, several clinicians will present their experiences with our transcatheter valve technologies and there will likely be updates on PARTNER EU. In addition we plan to host an informal analyst meeting at this event, so stay tuned for more details. Also, in early December we will host our 2009 investor conference at our corporate headquarters in Irvine. At this event we'll provide an update on our new technologies as well as our outlook for 2010. Watch for more information about this event later in the year.

We intend to end today's call by 5 p.m. Eastern, in order to allow broad participation in the Q&A we ask that you please limit the number of questions. If you have additional questions, please reenter the queue and we'll answer as many as we can during the remainder of the hour. Operator, we're ready to take questions.

Thank you. (Operator Instructions). Our first question is coming from David Lewis with Morgan Stanley. Please state your question.

Good morning. I am sorry, good afternoon.

Thanks, David.

Tom, just quickly here on EPS guidance, trying to understand the different variables here. Can you quantify for us presumably critical care would have been a drag on earnings this year and certainly you had that information last quarter. Can you help us understand in terms of earnings what was that drag or quantify the amount of that drag and secondarily if you think about your guidance or how your business is progressing throughout the year, it appears that GMs are coming in better but you're incrementally inching up the SG&A. Can you talk to us about how long you think that trend is going to continue and where those incremental dollars are being spent?

Let me -- point of clarification, David. When you said critical care was driving the growth rates, did you mean the hemofiltration business?

Sorry, hemo depressing the growth rate.

Hemo is dragging down the growth line, yes. What actually happened in the first half as we struggled with supply, we actually were paying a penalty to our growth rate. That's one of the reasons the rates were what they were. However, in the second half we did expect to remedy that situation. It would have been a contributor to growth. Overall net net it is pretty negligible, a few tenths of a percentage on the total Company's growth. Not a big story there.

GM, I am very happy with the gross profit margin. We're at the upper end of what we were looking for this year, 68 to 70. We're now confirming we think we're at 69.5, in that range very close. Very happy with that, and I thought the rate was 38.9 this quarter if I am not mistaken. Not thinking that is very much out of line. I think that's consistent. We're checking real quick here. 38.8 was the quarter and I think the guidance is about the same.

You went to the higher end of GM and the higher end of SG&A, so the question is is that a trend we should expect to continue here over the next three to four quarters?

I think the higher end, yes, we definitely gave guidance for the rest of the year for that, and probably 38 plus staying within the range that I gave, 38 to 39, but more towards 39 is a fair observation.

And then, Mike, just two quick comments on valves. The first is on transapical. Given recent data we've seen both at Europe PCR as well as recent valve conferences with the kind of rise of the [subclavian] approach as well as some of the consistent mortality issues with TA which largely are cohort driven, is your view of the market opportunity for TA, has that shifted for you in the last six months or has it stayed relatively the same? And the second question on valves. You talked about going independent in Europe last quarter and again this quarter. I wonder if you could simply quantify for us what percent of valves are now being sort of independently proctored or not being proctored in Europe?

Let me take them in reverse order, David. To the second question, right, I think in the second quarter around 20% of the valves were conducted or were implanted by centers that were operating independently without any Edwards representative at the case. That will continue to step up over time. In terms of transapical call, I would say our view is relatively unchanged although there continues to be a difference between transfemoral and transapical, much of this can be explained by the fact that you have different patient groups being evaluated and also transapical is on a learning curve. If you listen to the surgeons, I was just recently at a surgeon's meeting, their optimism is actually rising on transapical as they like that procedure better and better. Much of what they're doing is to contrast that to the open sternotomy and I think compared to open sternotomy, transapical potentially has some real advantages. And so that's why we look at that as an upside and one that will continue to be popular with surgeons over time.

Okay, thank you very much.

Our next question is with Larry Biegelsen with Wells Fargo. Please state your question.

Thanks for taking my call and good afternoon. First question, on the recent report from the Journal of Cardiac Thoracic Surgery, I may have mispronounced that, but on the Medtronic's mosaic valve, which got picked up on the heart.org on the early aortic stenosis, what are you hearing from surgeons that and how does that factor into your guidance? And I have one on SAPIEN.

Larry, that's a relatively recent development, so I would say at this point it really hasn't changed how we look at our valve business and our growth rates. What we have anticipated in the past continues to be the case right now, so it is really not a new one from our perspective. It is something that we had heard about anecdotally and really it is a single center experience, and so that doesn't get fully adopted by all surgeons in terms of their thinking.

Okay. And then on SAPIEN last year, the implant number increased sequentially from the second to third quarter, but obvious that was early in the launch. What would you expect the third quarter to look like this year compared to the second quarter? Would it be more normal seasonality or are we still on a ramp where we could have sequential increase in implants? Thanks.

Yes. We always have seasonality at Edwards, and seasonality in Europe is more pronounced than any other place around the world. It is not unusual in our valve business and I think last year and typically maybe a 15% drop from Q2 to Q3, but given the trajectory of SAPIEN and the way it has been growing, we would hope to overcome most of that during Q3, but I would say that's about as good an estimate that we have at this point. I certainly expect a strong rebound in the fourth quarter and feel very confident about the more than $100 million for full year.

Thank you.

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

Thanks for taking the questions, just a couple transcatheter valve modeling questions, a couple of them, I guess. First one would be it looks like on the space on the back of the envelope math that the implants per center might have been down slightly sequentially, so if you have any thoughts on that, that would be appreciated and really the same question on pricing. Seems like it varies a lot quarter to quarter, and I am sure that is based on your mix of geographies, obviously we're trying to adjust for currency as well which makes it messy, too, but do you have any thought on pricing? I know you made the comment prices were relatively stable sequentially, but does the dollar basis as well as if we adjusted for the currency effect would seem like it was down meaningfully sequentially, so any thoughts would help. Thanks.

Yes. So on pricing, Mike, I would say that we watch this very carefully. It is very stable within an existing center, and that's consistently been the case, so we really haven't seen changes. Where you will see changes driven is the mix, so if the country mix or the center mix changes, that would change it a small amount. You would see some from currency. Overall we're just not seeing a lot of volatility, Mike, in pricing. There was a second question?

Implants per center, looked like the implants per center were down a little bit sequentially. Any thoughts there?

I don't think it is down very much, Mike. It might be tight -- it maybe isn't growing at the rate it was, but there is not a big change there.

Okay. And then the transapical percentage that around 70% of your mix?

Yes, transapical continues to be probably twice the rate of implant of transfemoral.

And one last question relative to PARTNER as we think about the tracking of the data into 2010. Is the street thinking about it correctly that it is most likely that you will analyze and announce the Cohort B data and submit that data before we get to the Cohort A completion?

Well, that's sort of a two-part question. Mike, I will answer this and then ask you to get back in line.

Sure.

I think overall your assumption I think the way I hear your question is correct, which is that Cohort B we would anniversary a year from March, need some time to have those last patients come in, analyze the data. So we would think by next summer we would be in a position that we would have data that could be shared and we would hope that there would be some kind of a substantial medical meeting at that time that we could make it public.

Perfect. Thank you, Mike.

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

Thanks for taking my question. Just on the continued access, is there any discussion to perhaps change that from a randomized approach to maybe a single ARM registry in either the medical management ARM or surgical or will it remain randomized?

Good question. We're in talks right now with FDA on this, and I really don't have anything to report in that regard. What's most important for us is that those patients continue to have the ability to receive treatment and we're going to be lobbying hard for that one. But I really don't know where they're going to come out in terms of randomization or not.

So it would be your goal to perhaps get a non-randomized continued access?

Yes. We would love this technology to be available as many patients as possible, but again FDA has to judge that.

When do you think the timing of a decision, I know it is the FDA, and who usually knows with the FDA, but is that something we could hear perhaps later this fall?

I would think so, Kristen. Our expectation is that we will complete enrollment of Cohort A by the end of August. At that point it becomes a relatively urgent matter so that's why we started now and we're hopeful that FDA would make a decision such that our centers would have something to do in September because we know this is a very sick group of people without many options, and so that would be my expectation, but again I am hesitant to predict what regulators might do.

Okay. And, Tom, have you guys quantified what the FX impact was on the SAPIEN business year to year? I imagine it is not too big, but has to be at least a decent number.

Kristen, I think year to year is probably not the best way to look at it. We had already known the rate changes occurred in the second half of last year. More importantly, the change from Q1 until now or even guidance primarily the Euro back even in December was at 135 which is pretty much the average rate we had this quarter, so not a big impact at all there on expectations.

This year is -- yes, I guess I am trying to figure out what the kind of underlying growth would have been in SAPIEN if we held last year's rates current.

You would look primarily at the Euro as we said all along. It is vastly Euro based, and I think the Euro year-over-year was about 18%.

Okay. Perfect. I will get back in queue. Thank you.

Thanks.

We're in a good position for -- we're going to be in a good position for doubling for the year. We're well ahead obviously as you might expect at this stage.

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

Good afternoon and thanks for taking the question. Two questions. One on the SAPIEN side. With core valve having been in Medtronic's hands for a couple months now, has the dynamics with the European market changed if it has changed at all?

Tim, we really have not seen much change there. It has been very similar, we feel like, to what we have seen before. We know there is activity, and obviously Medtronic is getting organized and may do different things, but at the customer level we really haven't seen much of a change.

From a switching to the balance sheet here, if you just talk about your cash position. With the sale of the hemofiltration business you're going to see a big step in the cash balance, and I guess what do you expect to do with these moneys, once you step up in your share buyback or any other plans in general? Thank you.

Tim, our cash position has been in a positive net cash position for a couple quarters now. It has not been a constraint on any of our plans, and our priorities remain pretty much unchanged. We did three deals in the fourth quarter, not large, but a number of small things that had good valuations, and we think that market continues to have opportunities for us, and we'll keep true to our strategy of looking at that first and then share repurchases probably second priority.

And just on that share purchase, is there like a quarterly run rate we should think of or are you just more opportunistic from quarter to quarter?

If you look at the rate so far this year, it is very consistent what our goal was. We said about 100 million keeping shares pretty close to even. It sort of depends on the second half on share price, but right now our intention is to more than offset option exercise and hold our rate there.

Great. Thank you.

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

Thanks for taking the question. First on SAPIEN, in the press release the guidance for SAPIEN seems to have a bit of an intricacy change to it in that you're modeling for greater than $100 million in sales outside of the US just wondering on the margin in the back half of the year with continued access protocol and the PARTNER finishing up, what should we expect out of the United States in terms of SAPIEN sales?

Yes, Jason, that's a subtlety that I am impressed that you picked up on. We weren't trying to send any extraordinary signal there. We don't really expect the US PARTNER trial contribution to change much between now and the rest of the year. It has been contributing maybe a million dollars a quarter so far, and we expect it to contribute at a similar rate for the rest of the year if that's your question.

That's helpful. Sticking with SAPIEN for a second, as you get towards the SAPIEN XT launch or hopeful launch in the beginning of 2010, Mike, what will be the composition of the expected build in inventory to get ready for that launch? The bottom line there in that question is will you be prepared for a full launch and to meet whatever demand you may see in your case I am guessing hopefully strong demand as you launch that product?

So again, what you're talking about is our launch in Europe in 2010, Jason?

Yes, as you get closer, though, I am guessing you're going to be building inventory and preparing for that, so I am wondering the composition of that build.

We'll clearly be building inventory, and we anticipate doing well with SAPIEN XT. We think it is going to be a very popular valve, and so we're already building SAPIEN XT, we're already building NovaFlex delivery systems to prepare for that.

Great. Two final ones for me. Any change or update in reimbursement in Europe on the SAPIEN side and then last question just moving to a more macro level, US sales growth while you have been producing good results has not contributed, Mike. I am wondering sort of as you launch these new products in heart valve therapy and critical care turns around a bit, what are your expectations or hopes with respect to your US growth which I think was about 3% this quarter and is obviously less than what you were producing outside of the US. Perhaps you can give us some color on your plans in the US and how that might contribute as we move forward?

Okay. And, again, Jason, we'll take these questions and then we'll go back into queue.

Thank you.

First of all in terms of the SAPIEN XT launch, or I think we did that one.

Reimbursement?

I am sorry, the reimbursement. No major changes in reimbursement. We continue to expect to have a major country reimbursement approved yet this year. We would expect the other major countries and maybe the bulk of countries to come on in 2010, but maybe another one in 2011, so really very consistent with our past plans.

In terms of the broad question about the US, I am not sure that I was tracking exactly with it. Remember US surgical valves this quarter grew at 7.6% or that's valves and repair, that total component, and actually valves have been growing even higher than that, more like 10%. And so the repair has been holding us back to some extent in the US, and we expect that to rebound here in the second quarter and for us to see a higher level.

Also, in critical care we have felt the hardware probably in the US as much as any region anywhere, and we would expect that just because of the introductions of FloTrac and our other new products with the critical care growth rate will probably step up more in the 4 to 6% range in the back half of the year, so maybe that helps give you a sense for what the US will look like going forward, at least in

Thank you.

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

Good afternoon. Thanks for taking the question, Mike. Last quarter you reported 850 units implanted in Europe, I believe. What's the comparable number this quarter, and could you just go over the total number of implants this quarter? Thank you.

Yes. I know we can confuse things by giving a couple of numbers this quarter, Bruce. The comparable number this quarter is more than 1,000 valves compared to the 858 last quarter. Because there are valves used outside of Europe, and also used in the PARTNER trial, we felt it was helpful to share generally the number of valves that were implanted around the globe, and in the last quarter there were more than 1,200 valves implanted around the globe. Does that help clarify that point?

Yes. Thanks so much. I had a question about PARTNER B in the sense that is it a firm stop date like at one year or can the follow-up and the reporting of the results kind of be protracted if in fact the event rate is not sufficiently high?

I am not the expert in this, but I believe that follow-up does continue, Bruce, on these patients. The trial is specifically designed to analyze the one-year follow-up, and that will be the basis for approval. Are there scenarios in which you continue to collect data or follow patients longer? I am sure those scenarios would exist, but that's sort of not plan A.

And just because I am slow, if there are more than 1,000 units and you had 850 in Europe last quarter, what's the difference? Why was the step up in revenue relatively small?

Well, you know, you mean -- well, a couple of things. One is remember this quarter we mentioned that there were also some Prevail valves. This is the XT valves that were implanted at no charge, and maybe that goes and speaks to the earlier question about ASP as well because there were valves there in the second quarter at a much higher level than in the past, that might have been more than a half million dollars worth of sales that typically would have been implants that in this particular quarter was zero.

And so Prevail units were approximately and then I will get off?

I don't know. My guess is it is probably in the 30 to 50 range.

Thanks so much.

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

Thanks. Just wanted to drill down a little bit more on what's happening in your base valve business because it appears that the Ease family is going to be a bigger contributor into this year in 2010 and yet you mentioned several times you're taking market share, so is the market share gains that you saw in the base business in 2Q, is it just better blocking and tackling? Is one of the competitors just spending less money in the space? I am just wondering if you can provide a little bit more commentary as to why you're gaining share when a lot of the new product flow is more back end weighted this year? Thanks.

It is a good question, Glenn. Thanks. There is a couple of things going on there. You know because of [Mitral Magna] we're just having share gain in that position. But something else seems to happen when we have a new valve like that or we get almost a halo effect in the aortic position. Maybe it is because our people are in there and spending a lot of time with their clinician, but we also saw aortic volumes step up even in the absence of Magna Ease. That just came at the end of quarter and really had negligible impact on this quarter, although we think it is going to be substantial in the future. I am sure our own team would say they're executing at a higher level in the field as well, but I think those are the key factors. I end up being very optimistic about growth rate for surgical heart valves in the US going forward.

Okay. Thank you.

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

Good afternoon. I wanted to ask you a quick question on SAPIEN. You are moving to smaller centers that are implanting valves now. Can you give us a sense of how long it is taking for these centers to ramp up versus the centers you had last year? And I know you answered the question earlier about the competitive change with Medtronic by saying there hasn't been much of a competitive change. Is that also the case at these smaller centers?

You know, I am not sure exactly if I can be as precise as you would like, but let me take a shot. I think we continue to add centers probably at a similar rate than we have been, maybe in the 20 to 25 a quarter. My sense, I don't know that there has been any change in terms of the way a center ramps up. The training process is very similar to what we had last year, and we think it is quite effective and think people come up nicely, and I am still not convinced that it is an intense competitive battle for share at this point. Most of the centers that are added are truly new centers that have not been involved in transcatheter valves.

Okay. And on SAPIEN XT, you said you were going to file an IDE in the third quarter. So can you tell us in terms of primary end point are you going with is there a base primarily end point or is mortality the primary end point? And my additional question is litigation. Can you give us an update in Germany on the core valve patent validity case there? Thanks.

Okay. Let me see. Amit, you got a few in there and I will answer these and again ask you to get back in the queue and happy to come back around. So the question as it relates to XT, were you asking about Europe or the US?

The US IDE.

Yes. The US IDE is one that it still remains to be seen exactly what that trial is going to look like. We're making a submission here in the third quarter. We continue to make good progress, and we're hoping, and again this one we're not certain of, but we're hoping we can get an approved trial before year end, but we still don't know what that trial design is going to look like. That's an unknown. On the litigation front, this is I assume what you're talking about is the Anderson patent validity in Germany. This is the appeal of the -- this is the first time the validity will be heard. I don't know that there is any date set at this point. We think it is going to be sometime in 2010.

Oh, wasn't that supposed to be -- there was supposed to be a decision the second half of this year, so is it moving out to 2010?

No. I am sorry if we misled you on that one. My belief is that it has always been 2010.

Okay. Thanks.

Our next question is coming from Sara Michelmore with Cowen & Co. Please state your question.

Thanks for taking the question, Mike. I was hoping you could talk a little about divestiture activity and with the hemofiltration divestiture almost behind you here. What's the outlook going forward for that type of activity? Do you feel like you pruned away most of the low margin businesses at this point or should we be expecting anything else in the future? Thanks.

Thanks, Sara. Yes, we feel like we by and large are very happy with our portfolio. We really have pruned way those things that are less strategic for Edwards, the things that we're engaged in today like all of our heart valve businesses, all of our critical care business, the way cardiac surgery is related to our valve business. This is all highly strategic for the Company, so we don't have any current plans for divestiture.

And I am sorry if someone else asked this, but in terms of acquisitions, Mike, are you guys actively looking for tuck-ins or is that an opportunity for you to take advantage of some of the things that have come up in terms of properties that may be out there?

Yes, thanks, Sara. We're fortunate enough to have a strong balance sheet and be in a position to be able to add things to the portfolio that make sense. I am not trying to signal anything that's very large in size or scope. We continue to be very interested in things that complement our strategy, things related to structural heart disease, particularly valves, things related to critical care monitoring that can be really [growthy]. Most of what we look at are the really the new opportunities, the exciting technologies that change the way the patients are monitored or the way that patients are actually treated, and so they tend to be more technology related things we look at, and we do that very aggressively. As you know, we're disciplined, and so we only pull the trigger on those things that we really care about.

Okay. And ask you a question on the Hospital Glucose Monitoring Product. I was under the impression that the first version of that product anyway would be a stand alone. I am wondering if you can talk a little bit about that product and what's the timeline on an integrated product or version of that product?

Yes. It is a good question, Sara, and again we'll take this one and then ask that you get back in the queue. The product that we would introduce first clearly is stand alone, as a matter of fact that will be a first generation product. And again this is all dependent on us having some very successful clinical trials here over the next quarter or so. We'd have a next generation stand alone and that's probably behind it, but then move to a more integrated system, and that's going to come later on. That's probably 12 to 18 months down the road where we would start integrating into our current package.

Great. Thanks, Mike.

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

Congrats and thanks for taking my questions.

Thanks, Josh.

A couple quick ones because I know most of them have been answered but first for Tom, I know there is a lot of moving parts and I know you went over this, you took the bottom line guidance up. Is it effectively a positive mix shift here on the gross margin that's benefiting the bottom line with all the stuff moving around?

I would say if you tried to single out the major contributor that that would be the case, as you saw in the second quarter, and for the year it is pretty much by the bead in the quarter that's moving the year mostly.

Okay. Great. And then just in terms of RetroFlex 3, I know obviously you launched that and you said you have some early sort of positive feedback. I know the kind of two issues if you want to call them that with the delivery system has been really to the nose cone and the size RetroFlex 3 seems to have solved that tape or nose cone issue. I am just kind of wondering if you can kind of comment on your market share in transfemoral right now as you view it sort of obviously XT is going to be a big step to sort of getting real, real competitive in that arena, but maybe you can talk us through where RetroFlex 3 puts you, where you think you can get to until XT or if it is just sort of whether that is going to get you new accounts, so it is really just a better device for the people that are already using yours and the real competitive push comes when XT comes? Thanks.

Sure. First of all, we're very pleased with RetroFlex 3. What it does is simplify delivery, and it gives us greater stability as well when we actually deliver that valve. What we can say is when we give our projection of more than $100 million for this year, Josh, that's based on that we have today, meaning the SAPIEN valve and the RetroFlex 3 delivery system. We think it is a step up with SAPIEN XT obviously and gives us the opportunity to start assessing these transfemoral patients that we haven't had the French size that's most popular with cardiologists. Does that get at the question?

Yes. I mean, I guess I am just trying to gauge a little bit more expectations. Obviously RetroFlex 3 is a step up, but if -- how close that moves you or like the XT is really the big step up? I guess I am just trying to figure out, I know your expect expectations with if there is any --

I think if you were to -- just to answer it more directly, Josh, I think if you were to ask cardiologists, they'd be -- although they would be pleased with RetroFlex 3, they would be very excited about XT. The XT gets them when you take four to five [French] sizes out, that's a bigger deal.

Okay. Great. That's what I figured. Thanks. Congrats again.

Thank you.

Our next question is coming from Spencer Nam with Summer Street Research Partners.

Thank you for taking my question. I have one question for Mike. I had been hearing that you were planning to split the FDA approval process based on Cohort A and Cohort B. Is that going to happen here or kind of where are you in terms of planning stage of that?

Yes, Spencer, thanks for the question. Indeed that is our strategy. There might have been a question at one time, but since Cohort B completed enrollment in March and Cohort A we don't expect until the end of August, there is a clear difference in timing, and it incents us to move forward with Cohort B, and we're fortunate because it is powered to be statistically significant as a standalone cohort, we have every incentive to try to do that and bring this technology to patients earlier than we would have if we wait for the full trial.

You know, if I could make a quick follow-up, that sounds to me like you guys are feeling pretty confident about the overall trial and the expected outcome. Can we make that kind of inference at this point?

Yes, we are feeling good about the trial, Spencer. Because it is ground breaking and there hasn't been a trial done exactly like this in the past, it is tough to always predict the outcome and we know that this group of patients is a group of patients that hasn't been studied in the past. But one of the things we're pleased at is the SAPIEN results themselves, as you can see in Europe, have been even better than we might have thought in the beginning. But having said that we like you have no visibility to the data and so we're operating based on the kind of things we see in Europe.

Thanks very much.

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

Thank you. Mike, with respect to your IDE filing for SAPIEN XT, given the timing of that and not knowing the answer to PARTNER, does this relegate you to performing a similar type of two patient cohort studies, surgical and nonsurgical patients are you hopeful for something simpler?

Yes, I think maybe both is true. Are we hopeful for something similar? Simpler, yes, Keay, we would be hopeful for something simpler, and obviously randomization is not something that is attractive to physicians or patients. But having said that, with all of the unknowns, if I were modeling, I would say the conservative thing to do is assume you have something that looks like the PARTNER trial.

Thank you very much.

Our next question is coming from Joanne Wuensch with BMO Capital Markets. Please state your question.

Thank you very much for taking my question. A big picture one. If you can comment on anything you are seeing in Washington, D.C. and how it may affect the medical device industry and/or Edwards?

Yes. Good question. There is a lot going on there, isn't there, Joanne? Obviously because of my role as Chairman of AdvaMed I stay pretty close to this. We're concerned about it. When you hear about substantial changes to the delivery system, it is one that we watch carefully because we're hopeful that there is going to be informed policy. We know that medical technology does a lot of positive things for the overall industry, but being able to fund this expansion of healthcare is calling for a lot of savings to come out of the system, and when hospitals have to save the kind of money that is being projected, it is the kind of thing that somewhat worrisome for our industry. So we're staying very close, we're highly engaged. I don't expect any sort of policy changes to affect the world over night, Joanne, anything that would happen would be relatively gradual, but it is one that very much can have impact on the long range future for our industry.

And one question that is slightly closer to home, sales presence in Europe particularly with transcatheter heart valves, how has that changed in the last six months as the adoption of the product has increased? Thank you.

Good question. I might finish the earlier question as well. I think you also asked about impact on Edwards. I feel even a little better about the impact on Edwards. Unfortunately Edwards is in a position where it makes products that are vital for patients, and we expect those -- that that to continue to be the case in the long run, and maybe to have less -- be less impacted by those than those products that are more discretionary in nature.

In terms of sales, resources in Europe, those have increased. If you go back to 2008, we had almost exclusively clinical resources in Europe, clinical specialists that supported the cases, and we began adding true business and sales leaders late last year and early this year, and we have been gradually adding, and we've been adding each quarter. So it is substantially larger today than it was in 2008. It will probably continue to add a little more until we reach 2010.

Okay. Thanks very much for your continued interest in Edwards. Tom and David and I welcome any additional questions by telephone, and with that I will turn it back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call which include underlying growth rates and amounts adjusted for special items are included in today's press release and can also be found in the investor relations section of our website at Edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this please dial 877-660-6853 or 201-612-7415 and use account number 2995 and pass code 326352. I will repeat those numbers. 877-660-6853 or 201-612-7415, the account number is 2995, and the pass code is 326352. Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you.

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