愛德華生命科學 (EW) 2009 Q3 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation third quarter 2009 conference call. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr David Erickson, Vice President, Investor Relations, for Edwards Lifesciences Corporation. Thank you Mr Erickson, you may begin.

Welcome and thank you for joining us today. Just after the close of regular trading we released our third quarter 2009 financial results. During today's call we'll discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q and A. Our presenters on today's call are Mike Mussallem, Chairman and CEO, and Tom Abate, CFO and Treasurer.

Before I turn the call over to Mike I 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 aren't limited to our sales, gross profit margin, earnings per share and free cash flow goals and other financial expectations for 2009, the regulatory approval and sales of Heart Valve Therapy products, including Magna Ease, Magna Mitral Ease, and Physio II, the competitive dynamics of the heart valve market, the continued adoption and expected 2009 sales of the Edwards SAPIEN valve, the receipt of formal reimbursement for SAPIEN, the timing, progress, and results of clinical studies including the partner trial and the US approval of SAPIEN. Expected sales and enhancements for the flow track system and the development of continuous blood glucose monitoring technology.

These statements speak only as of the date which they are made and we do not undertake any obligation to update them after today. 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 these differences may be found in our press release. Our annual report on Form 10-K for the year end of December 31st, 2008 and our other SEC files which are available on our website at Edwards.com. With that, I will turn the call over to Mike Mussallem.

Thanks, David. We're proud to report strong third quarter sales and earnings growth led by our Heart Valve Therapy portfolio. Sales growth of our Critical Care franchise was also a strong contributor as we expected. Additionally, this quarter's results were highlighted by continued improvement in profitability resulting from our strategy of divesting nonstrategic products to focus on new product introduction. On a reported basis, total sales grew 7.3% to $326 million. Our total underlying sales growth was 13.1% for the quarter. Now a shift to a more detailed review of our product line sales and progress on our new products and then Tom will discuss the financial results and the outlook.

For the third quarter, reported Heart Valve Therapy sales were $174 million which includes a negative impact from foreign exchange of $2 million. On an underlying basis, Heart Valve Therapy sales increased 19.2% for the quarter led by continued adoption of Transcatheter Valves and strong double-digit performance from our new US Surgical Valves. Looking more specifically at Surgical Valve products, on a global basis, surgical heart valve sales grew 10.4% for the quarter representing the highest growth rate in several years. The US played a significant role in driving global sales growth this quarter. In the US, growth stepped up to approximately 11% driven by strong adoption of our premium Magna Ease Aortic Valve and continued growth of our Magna Mitral Valve. Outside the US, growth continued to be strong as we gained share.

Turning to repair, underlying growth in the quarter was approximately 6%. We're continuing to see growing acceptance of our Physio II ring, in both the US and Europe, as a number of customers upgrade from Physio I. In addition we received formal reimbursement and launched our IMR Ring in Japan. Although it's contribution in the quarter was minimal, initial acceptance has been encouraging and we expect strong adoption. We also recently received approval for our Physio II ring Japan and expect formal reimbursement in the fourth quarter. To summarize, for 2009 we continue to expect our surgical Heart Valve Therapy products to achieve underlying growth at the high end of our prior 7% to 9% range as our Magna products continue to drive share gains.

Turning to Transcatheter Heart Valves, we're pleased that sales momentum outside the US was robust as both sales and implants were double last year's levels. For the third quarter we achieved SAPIEN sales of $26.4 million and globally we estimate that nearly 1100 valves were implanted despite what is typically our lowest quarter due to summer vacations particularly in Europe. As compared to last quarter, implants as a percent of sales declined as accounts restored their inventory levels. On a country basis, prices remained consistent with previous quarters. This quarter approximately one-third of the SAPIEN cases were performed independently without a representative from Edwards present during the procedure. As previously mentioned, the increasing level of hospital independence gives us less visibility into the actual number of valves implanted so we'll no longer provide actual implant data beginning next year. We do expect a steady stream of clinical data will be presented at future medical meetings. The quarter also included a limited number of Transcatheter Valves that were used in the SAPIEN XT prevailed trial. Those were provided at no charge. Based on our momentum, we are confident that we'll exceed our goal of doubling the number of transcatheter heart valve procedures compared to 2008 and expect full-year 2009 Transcatheter Valve sales of approximately $110 million significantly exceeding our early estimates.

Regarding reimbursement, during the quarter, Germany granted formal DRG reimbursement of approximately 35,000 euro for transcatheter aortic valve procedures beginning in January 1st, 2010. Both the transapical and transfemoral approaches are covered. This is important positive news as Germany is our largest implanting country. It's encouraging to see them recognize the clinical and economic value of this new therapy. We expect formal reimbursement in other European countries in 2010. In the meantime, the same dynamics surrounding transitional funding continue to exist and we remain pleased that hospitals are currently able to support these procedures.

At last month's TCT meeting in San Francisco our transcathater valve technology was featured in a large number of clinical presentations, including four successful live cases showcasing SAPIEN with the RetroFlex 3 delivery system and our new lower profile SAPIEN XT valve with the NovaFlex delivery system. Two of the cases, a transapical valve and valve micro replacement and an aortic replacement using the subclavian approach were particularly noteworthy as they highlight the versatility of our SAPIEN technology.

Turning to our US partner trial, in August we completed enrollment of cohort A for our IDE for SAPIEN right on schedule. In addition to enrolling both the surgical and nonsurgical arms of the partner trial, we are delighted to receive FDA approval for non randomized continued access for our existing partner sites to ensure this technology remains available for patients. We expect to continue enrolling patients at our existing implant rate of approximately 40 cases a month. We remain confident in our partner trial design and continue to anticipate US approval of SAPIEN in 2011. We'd like to thank our participating clinicians and their teams for the remarkable job they did enrolling this trial. We look forward to the timely completion of the clinical follow-up on these patients and applaud our trial investigators for their rigor in ensuring that trial data is of the highest quality and integrity.

SAPIEN X T is generating considerable interest amongst clinicians. We continue to anticipate European approval and launch of SAPIEN XT with our innovative NovaFlex system in the first quarter of 2010 and expect increasing adoption throughout the year. We're developing in-hospital training programs in order to facilitate the successful launch of SAPIEN XT and its new delivery system. The first implants of our SAPIEN XT valve with our new low-profile Ascendra 2 transapical delivery system were recently performed in [LifeStent] as part of our prevailed TA study which has started enrolling. We anticipate a limited launch of the SAPIEN XT with Ascendra 2 in the second quarter of 20 10.

This week, we plan to submit our IDE for SAPIEN XT. This trial will be called PARTNER 2 and will include both our NovaFlex and Ascendra 2 delivery systems. The mission -- submission targets the same hey-risk patients studied in the PARTNER trial. We anticipate receiving questions from the FDA during the quarter and plan to work closely with them to further the approval process based on our assumptions we continue to expect to begin enrollment in the first quarter of 2010. We're excited to be this close to introducing this novel technology which has the potential to help many more patients both inside and outside the US. We've not yet completed enrollment in our 30-patient three-site US feasibility trial of SAPIEN in the pulmonic position. Upon completion of enrollment we intend to transition into a larger humanitarian devise exemption trial. With regard to the US core valve litigation we're continuing to prepare for a jury trial which is scheduled for first quarter of 2010. We believe Edwards has the strongest Transcatheter Valve patent portfolio and are committed to leadership, enforcing our intellectual property as an important element of our broad strategy.

Now turning to critical care, for the third quarter, critical care reported $114 million in sales. Underlying sales growth increased to 8.4% from a first half rate of 2% driven by strong sales of FloTrac and pressure monitoring technology. Our discontinued Hemofilitration business 2.1% to the underlying growth rate in the third quarter. On September 1st, we completed the sale of our Hemofiltration product line which allows us to better focus on our global strategic priorities. For perspective, this product line represented approximately $32 million of 2009 sales through the close of the transaction.

Turning to new product introductions, our results were boosted by the earlier launch of a third generation algorithm for FloTrac that enhances its accuracy when used in patients with sepsis and other critical illnesses. This product enhancement enables FloTrac to address an even wider range of patients and has been very well received by clinicians. In the fourth quarter we're planning a limited launch of a substantial upgrade to our FloTrac system that strengthens its applicability in the medical ICU. At the same time we'll also roll out a new hardware platform to selected sites which provides users with a simpler more intuitive informational display. We plan to consolidate all of our parameters into this new hardware platform and move forward with a broad launch in March of next year. The fourth quarter launches represent about a one quarter delay as we refined our product offerings.

With regard to our continuous glucose monitoring program, during the third quarter the first of two clinical studies to validate performance was successfully completed and we're continuing to study the product in the clinical setting. We remain on-track to achieve European regulatory approval and begin clinical evaluation of our first generation product before year-end in a limited number of European sites. Glycemic control represents an exciting new opportunity to fill an unmet need and accelerate our longer term critical care growth rate. In summary, we stepped up our growth rate, made good progress in the area of new product development, including glucose and completed the sale of our Hemofiltration product line. We expect a strong fourth quarter and an annual underlying growth rate in critical care of 3% to 6%.

Turning to Cardiac Surgery Systems, reported sales for the quarter increased to $22 million, which grew approximately 6% on an underlying basis. In September, we initiated a voluntary recall of our EndoClamp Balloon Catheter due to supplier quality issue with one of the components. As a result, third quarter MIS sales were impacted by nearly $1 million, and we expect the slightly larger impact in the fourth quarter while we resolve this issue. Due to the strong interest in minimally invasive surgery we continue to invest in professional education. During the quarter we conducted the first in a series of interactive webinars on port access procedures with over 200 clinicians participating. In the fourth quarter, we expect CSS sales to be $23 million to $24 million, and for the full year 2009, we're lowering our underlying growth expectation to between 5% and 7% due primarily to the voluntary recall. For reported -- total reported sales of vascular products were $15.1 million, declined due to lower sales of the divested LifeStent products. Sales of our Fogarty vascular products were relatively constant versus prior year at approximately $13 million. In the third quarter we achieved our final milestone associated with the LifeStent product divestiture and recorded a gain of $15 million.

Before I turn the call over to Tom, I would like to mention a couple of things. Earlier this month, we announced that we'll be moving into a new facility in Utah that will enable us to significantly expand our manufacturing and R&D capability to support future growth. We're pleased that we're able to partner with both state and local authorities and receive financial incentives to encourage our investment. Additionally, we contributed $15 million to our charitable fund during the quarter. The Edwards Lifesciences fund was established in 2004 to provide philanthropic support for cardiovascular and community related charitable causes. We're fortunate to be able to make this contribution based on the Company's continued strong operating performance and cash flow and our commitment to the fund's mission. Lastly, as a strong supporter of transparency in industry-clinician financial relationships we previously announced our intent to begin voluntarily disclosing information about our payments to US physicians. I'm pleased to say that on October 1st we took our first step in this process by posting information on our website covering the first six months of 2009. We intend to post this information annually. So with that I will turn the call over to Tom.

Thank you, Mike. We achieved third quarter non-GAAP diluted EPS of $0.71, a 27% increase versus prior year. This ESP improvement was driven primarily by stronger sales growth and continued expansion of our gross profit margin. We're particularly pleased with our results considering we also increased our R&D investments by 27%. Free cash flow generated this quarter of $74 million was also a highlight. For the quarter, our gross profit margin was 69.8% compared to 65.4% in the same period last year. This 440 basis point improvement was due primarily to product mix. With favorable FX representing approximately 100 basis points. In the fourth quarter we expect gross profit margin to be similar to this quarter.

Third quarter SG&A expenses were $126 million, or a 38.7% of sales, an increase of $7 million over the prior year. This increase was driven by higher sales and marketing expenses primarily for the SAPIEN valve program in Europe, partially offset by foreign exchange. And for the fourth quarter we expect SG&A as a percentage of sales to be approximately 38%. R&D investment in the quarter, were $45 million, or 13.7% of sales compared to $35 million in the prior year. This increase was primarily the result of additional investments in transcatheter technology and glucose monitoring. For the fourth quarter we expect R&D as a percentage of sales to be approximately 13.5%.

During the quarter we recorded a number of special items that resulted in a net $38 million pretax gain. The main components were a $44 million gain associated with the sale of our Hemofiltration product line, a $15 million gain from the achievement of our final LifeStent milestone, and a $15 million charge for the contribution to our charitable fund. A reconciliation table of all components of our net special gain accompanies the press release. Our reported tax rate for the third quarter was 22%, excluding special items this rate was 25.4%. 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 third quarter sales by approximately $3 million. As a result of our hedging strategy we limited the negative impact to our bottom line to approximately $0.01 this quarter. At current exchange rates, the negative impact on our full-year 2009 sales is reduced to the $15 million to $20 million range.

Free cash flow generated in the third quarter was $74 million. Excluding the charitable fund contribution. We define free cash flow as cash flow from operating activities of $71 million, less capital spending of $12 million, plus the $15 contribution. For 2009, excluding the impact of special items, we now expect free cash flow to exceed $170 million, which was the top end of our original goal.

During the quarter, we repurchased 385,000 shares of common stock for approximately $25 million. During the first nine months of the year, we repurchased 1.3 million shares for approximately $80 million. Turning to our balance sheet, we ended the quarter with net cash position of $185 million. Total cash of $287 million exceeded our total debt of $102 million. Our DSO at the end of the quarter was 71 days, an increase of two days from the prior quarter. Inventory turns were 2.3, a small decrease from the prior quarter.

Turning to our 2009 sales guidance, we are now raising our full year total sales guidance to between $1.305 billion and $1.325 billion, based on strong year-to-date sales results and the positive trend in foreign exchange rates. For heart fail therapy we're raising our full-year sales guidance to the high end of our previously stated $690 to $710 million range. This excludes the $4 million from the relaunch of repair rings last quarter. In critical care, we are now raising our midpoint by $5 million to between $445 million and $455 million. In cardiac surgery systems, we now expect to be at the lower end of our previously stated range of $90 million to $100 million, and in vascular we continue to expect sales to be at the upper end of our previous guidance of $50 million to $60 million. For fourth quarter 2009, we project total sales of $335 million to $355 million.

We estimate that fourth quarter diluted EPS, excluding special items, will be between $0.82 and $0.86 cents. For the full year 2009, excluding special items, we are increasing the midpoint of our guidance for diluted EPS, and our new range is $3.02 to $3.06. Representing an annual growth rate of 18% to 20%. With that, I will turn it back over to Mike.

Thanks, Tom. Based on our strong year-to-date performance we continue to expect to meet or exceed all of our original financial goals that we presented last December. These goals were generating total sales between $1.24 billion and $1.3 billion, increasing our gross profit margin to between 68% and 70%, delivering non-GAAP net income growth of 15% to 19%, and generating free cash flow of $160 million to $170 million. We're generating robust sales growth across our core franchises which demonstrates the underlying strength of these businesses. And at the same time we're making good progress on US approval of our SAPIEN valves. Adoption outside the US continues to grow rapidly. This further reinforces the growing belief that the transcathater heart valves represents a truly transformational growth opportunity. With that I will turn it back over to David.

Before we open it up for questions, I would like to remind you about our 2009 investor conference which will be held at our corporate headquarters in Irvine on December 9th and 10th. At this event we will provide an update on our new technologies as well as our outlook for 2010. For more information and to RSVP, please visit our website. We intend to end today's call at 6:00 pm eastern, and in order to allow broad participation in the Q and 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, please.

Thank you. (Operator Instructions). Our first question is coming from Eric Schneider with UBS.

It's actually Mike for Eric. On the German reimbursement is there any restriction for patients that can get the device or is it also open for low-risk patience?

You know what, I don't know the specifics of what's written there. I would guess that it's consistent with what the CE Mark indication is.

Okay. And then sizing on SAPIEN XT, obviously it's a smaller profile. How much potential do you think is there for reducing the size further going forward given that you have balloon expansion versus core valve that does not?

Well, you know, we think that we clear a major hurdle to be able to get this system to this 18 French size, and we think it becomes applicable to most patients. That's the gigantic step. Is it possible to go further? It's always possible to go further, and we'll work on that. But we think this step is a huge one for patient care.

Great, thanks so much.

The next question is coming from Kristen Stewart with Credit Suisse.

Thanks for taking the question. Just in terms of submitting for the PARTNER 2 trial, are you still thinking that it's going to be a non randomized trial, and will it just be more surgical candidates rather than non-operable? Any specific --

Here's what we can say, Kristin, on that. One is what we ask for, and, of course, it's what FDA approves that really matters, and we don't have any feedback from FDA yet. I can tell you that what we're interested in is bringing the SAPIEN XT to US patients as quickly as we can. And we believe that says let's study the same group of patients, and we believe that would argue for a non randomized trial, but again, we're still waiting for feedback from FDA so we really don't know.

Just in terms of kind of the building cash on the balance sheet can you remind us in terms of your preference? You obviously do a lot of share repurchases year to year, but just how are you thinking about acquisitions at this stage?

Sure, you know, that remains unchanged, as hat for a long time now. We're always looking for technologies early on that fit neatly into the portfolio. If you remember, back to Q4 last year, we were very successful in picking up a number of them so we continue to look, and that's the number one priority. Until this point, it hasn't represented significant cash requirements, and I wouldn't predict anything that different going forward. So cash share repurchases has been actually the number one use of cash for awhile.

Thanks very much.

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

Hey, thanks, guys. Two questions on percutaneous valves. One, you're taking your full-year guidance for the percutaneous valves up to $110 million. How much of that is currency, is question one. Then question two is what do you think -- what will be the next country to come on board next year in terms of reimbursement? How big are the markets, and how meaningful can it be? Thanks.

Glenn, let me take the currency. I think you can do your calculation. Between the last guidance and the last range we gave, and today, you are only seeing about a 3%, 3.5% move. So if you think about a number in the neighborhood of 25, 26 per quarter, you're talking maybe a $1 million or $2 million.

Maybe another way to think about that --

At most.

it's full-year guidance, but we already have three-quarters done. So when we say approximately 110, that sort of says something in the neighborhood of 33 for the last quarter, and currencies haven't moved very much right now, versus the last -- so you can sort of sort it out from that perspective.

Just as a follow-up to that before you answer the reimbursement question, that's a nice jump-up from the third quarter. So any color behind what's driving the nice jump-up in the fourth quarter? Thanks

We just think we've got a real nice growth ramp going, Glenn. Even though we try and express how much seasonality there is, because this business is primarily Europe, we just see a lot of seasonality in the third quarter, more than you'd typically see in global numbers. So even though that looks like a big step up, I think it's more consistent with the kind of ramp we might have expected. Things are getting a little brighter, but overall it's part of this ramp.

Okay, and just any color on what would be next on the reimbursement front in Europe in 2010 beyond Germany.

You know, we -- we're working on reimbursement pretty much in all the countries, Glenn, and it's tough for us to predict exactly who will be next. We know that there is a number of countries in the queue, and including large countries like France, but it's tough to predict who is next.

Okay, great, I'll get back into queue, thank you.

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

Thanks. Mike, I'm going to cheat and make you wear your other hat for a minute what seems to be your full-time hat these days (inaudible). Was hoping you could give us your latest thoughts on the discussions between act in the Senate finances and the members of the Congress and administration.

Broadly, you know that the industry really thinks that this tax that's in the Baucus proposal right now is just too high. We've done everything in our power to make sure that people understand that. Try and present some really detailed discussions of why it's too high and it's out of line. And the devastating impact it can have particularly on small and emerging companies in this state. It's yet to be seen exactly where this comes out. We're hopeful there will be some give on this before it's all done. I think the most optimistic of us hope that it goes away completely. It might be something in between. It's impossible to predict.

And what do you think the timing is on that visibility?

It's tough to tell, Mike. We all believe they will be done putting the bills together in the Senate before Thanksgiving, and then probably have something on the way to the president's desk before Christmas, but it's tough for us to tell exactly where this might be addressed.

Okay. Let me ask you one partner question. I guess this is a follow-up to TCT. It's been our expectation, since the original trial design and your announcement of the study, that the patients in the medical management arm would be fairly actively managed, more than your normal patient because of their inclusion in the trial and the care that they are getting, and that a number of those patients would be getting repeat balloon valvioplasties, which is atypical. You wouldn't expect (inaudible) to undergo that type of intensive care. When that happens in the trial, with this second primary endpoint that you now have, would those events be count as hospitalization when the doctors call them back and say, let's go ahead and try a balloon valvioplasty on this patient?

Yes, it would.

So what does that -- my question then, last follow-up, I'm trying to understand the value, then, of the endpoint.

Your question -- I'm sorry, Mike. So if these patients did come back for a balloon valvioplasty that would be considered a hospitalization, or if the patients came back -- and lets say they flew to Europe and decided to get a valve, that would be considered a hospitalization. So that gets considered as part of the data. Exactly what people do with that, I don't know. But if it's certainly is a -- is favorable that it is count that way.

Certainly favorable from trials. I'm just trying to figure the value in counting balloon valvioplasties. Does that tell us about the therapy?

What was the last part of the question?

Is it really telling us about the value of the therapy? What is it really tell us if patients are having to get repeat valvioplasties because of the trial design?

We'd be happy to take a look at the economics of this, Mike, and I probably should ask you to get back in the queue after this.

Yes, sir.

But I think it speaks well of this new technology. If the alternative is that you keep going back to the hospital to get balloon valvioplasties it's hard to believe that that's a better therapy option.

I appreciate it.

Our next question is coming from Larry Biegelsen with Wells Fargo.

Hi, everybody. Thanks for taking my call.

Hey, Larry.

The 1100 implants in the quarter, does that compare to the 1200 last quarter?

Yes it does.

And how many trial implants were there in Europe this quarter?

I think it was in the 20 to 30 range. You're talking about in the prevail trial?

Yes. And just two other things here. Centers exiting the quarter implanting, Mike, and the implant as a percentage total valves sold, you said it went down this quarter. Just those two data points that you usually give us, and just my last one is the limitation on implants in Germany for reimbursement? Is there a limitation on annual implants? Thanks.

Let me start with the last one. I'm not aware of any limitation on annual implants. So this doesn't have that sort of a factor in it. And we're really trying, Larry, to move away from giving all these other factors like number of accounts and exact percentages, because as this business gets larger and more mature, we think it would be less important to be able to provide that kind of data. Broadly, I think we probably added another, between 10 and 20 accounts in the quarter, compared to what we had before. And the sales to implant rate, again, we're estimating because we don't have the actuals, but it's probably in the mid-80s.

Thank you.

Next question is coming from David Lewis with Morgan Stanley.

Good afternoon.

Hi, David.

Good afternoon, David.

Three quick ones here, Mike. You mentioned, I may have misheard you, but in terms of unassisted procedures in Europe, was that one-third at the end of the third quarter?

That's correct.

Is that one-third number higher or lower in Germany?

You know, I would guess it would be similar. Germany is by far the largest company and they probably got started earlier because they have large accounts that number might be a little higher but I would to have check on that.

As we think about sales infrastructure in Germany heading into next year, do you think this -- obviously increased reimbursement is going to drive increased utilization, do you think you have to increase support for that utilization, or are you comfortable with your fixed infrastructure in Germany?

You know what, I think we're pretty comfortable, although we'd be delighted to add more. There's a great return here. Sort of the differences between any kind of resource we had and the number of implants that they support makes that a really favorable economics for the company, so not really much of a factor. I don't expect anything substantial that you would see in our results.

You'll probably see a shift from clinicians supporting cases where that's diminishing, to maybe -- requirements and things like that. Work and referral.

Okay. Mike, just a disclosure on the ongoing enrollment, obviously post the closure of the partner trials. What is your specific plans for that registry data and any specific timing?

We'll continue to collect that data. I'm sure it will be rolled out at some medical meetings in the future. The trial itself is going to be evaluated on the trial results before the continue access started. So that's the end of the trial, if that's what you're getting at.

No, actually, is it possible that we see registry data from the US coming off of that trial, potentially as early as May of next year?

You know, I don't know that for a fact. But that's one that we can do some homework on and make sure that we address when we have our investor conference in December.

One last one for Tom. Just looking at gross margins you mentioned flattish sequential hitting of the fourth quarter, just considering the ramp in per fouls as well as currency, why would gross margins be flat into the fourth?

One of the things, If you remember, we've getting benefits, and GP from FX and that situation totally reverses in the fourth quarter.

Okay, so it's --

The underlying product mix looks very consistent, and I'm comfortable that's what's going on. Okay, David, I think you even beat your three number, so we'll have to ask you to get back in line.

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

Good afternoon, thanks for taking the question. In regards to the German reimbursement, how should we think about the impact of reimbursement in regards to your sales ramp? How much of a gating factor has been the lack of reimbursement been in Germany, or any other country for that matter?

I'm not sure it's been a big gating factor in past, but we've been concerned, overall, that without formal reimbursement it could ultimately limit our ability to grow. One of the reasons we are really pleased with this -- we think they've put a reasonable number out there, that the hospitals going to be reimbursed and it really gives us the ability to have this procedure adopted without this financial constraints is an issue. Hospitals are still going to judge whether they think this is a good therapy and whether the patients are there, and we're delighted this is working out this way.

Then just one on the competitive front. At TCT there seemed to be a heightened interest in the (inaudible). They used a pacemaker implants on one of your competitive -- one of your competitor's products, are you seeing that as a concern in the market place and are you seeing any of your competitors' account looking at your device, just given some of the data that you have on pacemaker implant rate?

I think all things equal, people would probably rather not put in a pacemaker when they are doing a transcathater valve implantation. Having said that, I would say that the big difference in sizes have been a more prominent issue for clinicians. Now once that -- when XT comes on and we think that sort of levels the playing field, I think pacemakers start becoming a bigger issue, but right now the bigger issue is really implant size.

Got it, thank you.

Next question is coming from David Roman with Goldman Sachs.

Good afternoon, everyone, thank you for taking the question. Maybe just one specific question and then maybe one broad question thematically from what we have seen so far in other Medtech company earnings. First, Tom, your comments on FX for gross margin the fourth quarter, I assume that also reverses itself in the first three quarters of next year as well?

Assuming the rates stay where they are today, yes, you're probably right.

So the way to look at gross margins, without giving guidance, for 2010, you disclose what the impact was the first three-quarters of the year, where we just take that out and use that as the base gross margin to come up with 2010.

Let me help you with that a little bit. What I said is that if you'd look at the full year we'd probably -- now I would adjust the head wind we're facing due to FX to being probably in the neighborhood of 100 to 120 basis points.

So really just reported by that to get your bay quote base margin?

Yes. The thought would be that you've got that as head wind, we also have a couple things we just divested the Hemofiltration business. The Stents are finally gone. I'd probably have a hundred of mix already in our pockets. So it's looking better as the rates -- as we rely less on the rates to get to the targets than we originally thought and we're doing more with product mix. It makes next year head wind that much less.

Got it.

Does that help you?

Very much so. Mike, if you listen to some of the other commentary, maybe not your direct competitors, but other similar companies -- pricing, inventory, units demand have all been issues but it doesn't -- you don't seem to be seeing it in any of your businesses. Can we talk about your ability to get mix, particularly in heart valve therapies and what the reception is and maybe what's happening on the pricing front?

Yes, we're continuing to see good up-take of our premium products. This has been pretty consistent, David, and it was again true this quarter. For example we have new products launched in the US and some of the list actually is related to price and not units, maybe 20%, or two out of those 10 points of growth are probably related to price as opposed to unit growth. So we're still seeing very solid pricing on the valve side. I think we would say the same is true in critical care, so it just maybe a byproduct of the product lines we are in. Was there another component?

No, that was very helpful. Thank you.

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

Hi, thanks for taking the question, Mike. Sorry about the background noise, I'm in a conference. First wanted to start with something we haven't talked about. Great performance in the quarter, US surgical heart valves. Could you help us understand what underlying unit growth was for you relative to the market? It certainly seems beyond the mix, that from a unit perspective you gained some share this quarter.

I tried to indicate that overall here, units were clearly up in the US. So we think we had something in the neighborhood of 8% unit growth probably that happened in the big aortic side which is the big driver of the growth. We also saw unit growth on the mitral side, more modest but still solid, probably at or above the market.

Great. Do you still -- where do you see the market at in terms of surgical heart valve therapy unit growth as you entire 2010 and do you still expect to see, especially if you get an IDE for and XT trial, to enjoy some (inaudible) as relates to your surgical heart valve business?

Yes, overall we think that the heart valve market has probably grown and it's a little higher than it's typical 3% to 5% growth rate, and that maybe because we're out there with premium products so we're causing that to happen. We may also see units operating at the higher end of that range as well. It's possible that the attraction of additional patients actually really does stimulate the surgical growth rate. It's not clear at this point. Frankly, if we go back to what's been going on in Europe, it seems as though the surgical growth rates have been relatively constant compared to what they were before our transcatheter heart valve. So the good news about that is, all in, all the market growth from THV has been up side. But there may be a little bit of cannibalization in Europe too and those factors-- the up side that comes into surgery gets offset. I don't know how that plays out in the US yet.

Great. And then one for PARTNER, and one for Tom. PARTNER 2, do you expect to have a co-primary endpoint similar to PARTNER 1? Then for Tom, most of the operating margin expansion you have shown thus far in 2009, well over 100 basis points has come from the top line and gross margins. I'm wondering what we can expect over the next couple of years from SG&A leverage, if anything, to drive you over that 20% level, perhaps as you look at 2010 and 2011. Should we look at SG&A perhaps more than we have in the past as a leverage point in the model? Thanks, guys.

Okay, you're probably not going to be surprised but we really don't have any details on PARTNER 2 at this point. It would be foolish to speculate. We're looking forward to hearing back from the FDA in the fourth quarter, and we're hopeful here that we can get some pretty quick resolution on this so that we'll start our IDE trial in the first quarter, but we just don't know what it's going to look like right now. As I said, we're trying to design a trial that gets it into the marketplace quickly, but it remains to be seen. So let me kick it over to Tom.

In regards to operating margins, we're very happy where we are. Year to date we're up about 200 basis points in operating income, 200 at the net income. The quarter was up 280 at operating. So very, very good results, but you're right to say that a lot of that has been on GP, but of course, we look at the whole picture when we look at what we're going to invest in the other areas of the P&L. I think it's logical, we haven't given a lot of guidance, but we have we have said is that we feel that we're at the high end, at the high watermark for both, particularly SG&A, and as you see sales and in safety and CHP and some of the new products in critical care, we will expect to see additional leverage from the infrastructure we've got in place all over the world. So it's logical. We'll get more specific when we get to the December.

Thanks, guys. Good quarter.

Sounds like you're enjoying the call as much as we are.

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

Good afternoon. Question, want to start on SAPIEN XT. In terms of the procedure itself, are there any additional steps required in the procedure that would warrant any additional training for a physician, or is it strictly just the change in size of the valve?

I don't know, Amit, how familiar you are with the NovaFlex delivery system but there is an additional step when we actually bring the balloon back into the stint. We think it's a pretty straightforward step, but it is different, and does it require training on behalf of the accounts, we think that somebody that has experience with transcatheter heart valves will pick up this additional step pretty easily, and it's worth it in terms of what you pick up and profile.

Okay, so at this point in terms of the procedures that have been done so far that additional step itself hasn't caused any issues?

That's correct. This is the reason that we do this. What we expect, Amit, if this gives you any clue, we expect any training for these sites will happen in hospitals. So we'll be able to bring our clinical specialist in there and without proctoring go through and show them the steps that are necessary.

Okay. Just a follow-up. Can you quantify the impact of any third quarter seasonality on the SAPIEN results and then just additionally, in terms of the continued access program, are any sites essentially butting up against their upper limits of how many procedures they can actually do since there are some limits in place for that program? Thanks.

Yes, in terms of seasonality, and maybe Tom will have something to add to that, but when you have Q3 essentially at the same level of Q2, that speaks to a lot of growth. If you look at the normal seasonality for Edwards, sales are down pretty substantially in the third quarter, and that's from a global point of view. We see the most pronounced seasonality in Europe. And given that almost all of our SAPIEN sales in Europe, I think it's a pretty encouraging sign from our perspective to see where sales came out in the quarter. In terms of our accounts running out of gas, I think it's more -- there's a lot of different stories out there. Some places where reimbursement unconstrained, it's going to be more a function of the referral patterns and the competence of physicians. There may be places in Europe where there actually are constraints.

Was the question regarding continued access?

Yes, it was regarding continued access in Europe.

Those numbers were set in proportion to the activity that the centers had in the trial. So while it's not exactly the number of cases they were doing, it was sort of the balance that they achieved, probably in the last several months.

Okay. But you're not -- none of those sites are saying this is the limiting factor, we've got more patients coming in, we need --

Sure. As a matter of fact, almost every site is upset with this. Like to have more patients.

We're looking at glass half full.

Mike, you didn't quantify that seasonality. Any way you can give a range there? Thanks.

Not really anything to point to where we had had a business that was exclusively in Europe and a new technology like this. I think I'd just be -- you'd just be picking a number out of the wind to say, but we clearly -- we talked about and expected that we would see something that could potentially be less than the second quarter, and what it measured up to the second quarter, that was -- that's about the extent of what we could tell you.

Thanks.

Our next question is coming from Sara Michelmore with Cowen and Company.

Thanks for taking my question. I was wondering if you could just talk about the cost position of the SAPIEN XT and the NovaFlex catheter, and as we look to our models next year is there anything we should keep in mind in terms of either start-up costs associated with that launch in Europe or any differences in the cost position of that product versus the current one you have on the market?

Let me start it, Sara, then Tom can add to it. Overall I would expect the cost to be higher for the XT with the NovaFlex delivery system. Not substantially higher, but some higher, certainly for start-up reasons, and also there's also some nuances here that make it look a little more expensive to make. At the same time I would expect that we would get a higher price in the marketplace. Net-net, I would expect margins to be somewhat similar to what we're experiencing right now.

And should be a lift in comparison to the company overall. Not where we want to be, we're moving quickly from generation to the next generation. It's more important about learning and getting it right. I think it represents a lot of potential going down the line to potentially take costs out of systems. But it's not currently the priority.

Okay. And just as a follow-up to that, this is really in addition to the product line as opposed to a replacement for the SAPIEN. Is that the correct way to think about it?

It's true that the SAPIEN is still there. Our expectations are that people would clearly choose the SAPIEN XT versus the SAPIEN if given a choice. The one place where this gets more interesting, Sara, is the trial in the US, the PARTNER trial is for SAPIEN, and so even though we may have all of our o-US volume over time, and it may take a year for this to happen that switches over to XT, once we get approved in the US, we'll be make SAPIEN for the US market.

Okay. Understood. And, Mike, is there any update on the Transcatheter Mitral program, I know you gave us a little update on the enrollment last quarter. Just curious if there's any update there.

On the monarch program, as we indicated, that enrollment has gone slower than we originally anticipated, so I don't expect us to complete enrollment of that trial until 2010.

Thanks so much.

Sure.

Our next question is coming from Douglas Tsao with Barclays. Please state your question.

Hi, thank you for taking the questions. With the introduction of SAPIEN XT eminent in Europe, will you have a change in terms of the centers that you try to go after in terms of adding accounts, vis-a-vis potentially trying to go after some more centers that are perhaps using the competitive transcatheter valve right now?

Yes, Doug, there's a couple dimensions there. Obviously our good customers today are going to be very interested in getting that XT product, and so we're going to want to take good care of them. At the same time, we would hope that some of the customers that are maybe using competitive products might want to try out SAPIEN XT, so I expect there to be new accounts as well but the priority for us, is to first, to take care of our customers that have been loyal right along.

Okay, and then sort of following on Sara's question on the Mitral Valve program, it was talked a little bit about as TCT in terms of the [movius] program being put on hold. Are your -- most of your efforts now being focused on the monarch program, or are you perhaps pursuing other things behind the scenes in terms of sort of iterations of perhaps attacking that -- going after that condition?

We have a high level of interest in the mitral position broadly, Doug. And so this is one that we're on -- we haven't said anything public about what we're working on beyond the monarch program, but this is a large opportunity, and you can imagine that this has our attention.

Okay, great. I'll hop out for now, thanks.

Our next question is coming from Suraj Kalia with SMH Capital. Please state your question. Okay, it looks like we lost him. Our next question is coming from Spencer Nam with Summer Street Research Partners.

Thanks for taking my questions. I just have a couple of short follow-up questions. I was wondering if you guys could maybe address roughly how many countries in Europe do you expect to hear from in terms of reimbursement in 2010?

You know, what -- what happens is there's a lot of countries in the EU at this point. I think it probably approaches 20. And so I'm not sure we keep score on all the smaller countries. We keep score on the larger countries. We would expect out of the big countries that we might hear from another three, four during 2010, if that gives you some sense.

Yes, that's helpful. And does that mean that the reimbursement will kick in for 2011 for those countries, or could we see some reimbursement kick in for second half 2010 or things like that?

Yes, I'm not sure that it's necessarily all on a calendar year, Spencer. So, yes, we could see some King sooner. I hate to speculate exactly how that works.

Okay, that's helpful. Then second question, second and final question is I wasn't sure whether you had commented in your prepared statement about the conclusion of cohort B trial and whether we could expect any sort of FDA filing on that cohort in 2010.

Well, yes, we didn't speak to it on this call, but we spoke to that previously, Spencer. Cohort B enrolled first. This was -- we completed enrollment back in March of this year. So once we have that data, we've decided that we will submit that data first and not wait for the cohort A data. So that will indeed go in our expectation here that it goes in sometime mid-2010, if that's the question.

Great. Helpful, thank you.

Sure.

Our next question is coming from Brooks West with Craig-Hallum Capital Group.

Hi, guys, thanks for taking the question.

Thanks, Craig.

Mike, it's Brooks actually.

I'm sorry.

That's fine. It's the end of the call here. Hey, I wanted to drill down a little bit more on potential impact of SAPIEN XT in Europe. Looking, Mike, trying to get your thoughts on how that might impact your transapical procedures, and then some thoughts on ability to potentially take some share from CoreValve, and what might the training or familiarity hurdle be with the physicians that are using CoreValve and how you might overcome that?

Okay. First, and again this gets a little speculative, because we really don't know yet. You would get -- right now, patients that would not be good candidates for a TF procedure, once their XT is in place they could indeed be candidates for that. So I think does it mean that you have the potential to do more TF.

Having said that TA is very popular, and it's become very popular with these surgeons. So I don't expect them to walk away from the procedure, and I wonder whether they will continue to do this and even consider an interesting alternative versus an open sternotomy. When we try and contrast it to the customers that are CoreValve customers and their ability to learn the XT, I think it's always helpful, if if you've already done transcathater valves, then you've developed a certain skill level around that, and that's helpful. You still have to go through the training but you clearly have made some big steps forward, competence level is probably up, you've learned to work as a team, and so I think it definitely is a pretty substantial step forward.

So can you -- I mean, obviously you've probably had had some conversations with centers that are using both devices. Is there a great interest in CoreValve doctors in the new slimmed down XT delivery system?

Yes, there's clear interest, that's for sure. And I think that's more or less interventional cardiology as a community when there's something new and interesting, they're very interested, and I wouldn't be surprised if they look at it very carefully.

Great, thank you, and congratulations on a great quarter.

Thanks so much.

Thanks, Brooks.

Okay, thanks so much, folks, for all your continued interest in Edwards. Tom and David and I are welcoming any additional questions by telephone and with that, back to you David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call which include underlying growth rates and amounts adjusted for special items are included in today's press release and can also be found in the Investor Relations section of our website at Edwards.com. If you missed any portion of today's call a telephonic replay will be available for 72 hours. To access this please dial, 877-660-6853, or 201-612-7415, use account number 2995, and passcode 334198. I will repeat those numbers. 877-660-6853, or 201-612-7415, account number is 2995, and the passcode is 334198. Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you.

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