愛德華生命科學 (EW) 2010 Q1 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation first quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. A brief 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, VP of 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 first quarter 2010 financial results. During today's call, we will discuss the results included in the press release and the accompanying 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'd like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to, our sales, gross profit margin, net income, earnings per share, and free cash flow goals and other financial expectations for 2010, the sales or regulatory approvals of Heart Valve Therapy products, including Magna Ease, Magna Mitral Ease and Physio II, clinical study of Project Odyssey, the continued adoption and expected 2010 sales of the SAPIEN and SAPIEN XT valves, 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, the development of continuous blood glucose monitoring technology and the impact of foreign exchange fluctuations on our financial results. These statements speak only as of the date on which they were 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 ended December 31st, 2009 and our other SEC filings which are available on our website at edwards.com. With that I'll turn the call over to Mike Mussallem. Mike.

Thank you, David. We're pleased to report solid first quarter financial results and continued clinical and commercial success in our Transcatheter Heart Valve program. During the quarter we strengthened our THV leadership, we launched the SAPIEN XT valve in Europe, we remain on track to attain significant US clinical trial milestones and the strength of our intellectual property was affirmed by a US Federal Court. This quarter, the Surgical Heart Valve growth rate was lower than expected however. However, our outlook for transcatheter heart valves has improved. In total, we expect our underlying heart valve therapy growth rate to remain unchanged.

Finally, last week we announced the two-for-one stock split which not only helps improve liquidity and trading volume but also acknowledges the outstanding return the Edwards shareholders have realized over the last ten years.

Now turning to first quarter results. On a reported basis, total sales grew 8.6% to $341 million, and grew 9.4% on an underlying basis. Reported sales were lifted by approximately $11 million of foreign exchange, which was more than offset by $13 million from sales of the discontinued products in the year ago period. Heart Valve Therapy reported $197 million in sales for the quarter, which included $39 million from transcatheter heart valves. On a reported basis, the global HVT franchise grew 15.4% over last year, which included a $6 billion contribution from foreign exchange. And Surgical Heart Valve products had a reported growth rate of 8.1%.

On an underlying basis, total Heart Valve Therapy sales grew approximately 12% in the quarter, as our transcatheter valves continue to drive significant growth. Surgical Heart Valves and repair products each grew 5% on an underlying basis, which was in line with the overall market growth rate but below levels we achieved in recent quarters. In the US, sales grew approximately 5% as the expected uptake of our recently-launched Magna Ease was below our expectations. While we expect our growth to improve over the next several quarters, we've also adjusted our sales approach to encourage wider adoption.

In Europe, sales were affected by the planned transition away from our distributors in Greece to a direct sales model, which proved to be disruptive. This will again affect the second quarter at which point the transition will be largely complete. In Japan, sales were strong. We are in the second year of the launch of Magna which has been clearly established as the number one selling valve in that country. We remain on track to introduce our new Magna Mitral Ease Valve in the United States and Europe in the third quarter. This valve is designed to be easier to implant and specifically configured to facilitate minimally invasive surgery. This is an important improvement to the Magna Mitral platform that we believe will help us regain momentum.

In January, we completed our first-in-man series for our TRITON clinical study, which is the European feasibility study of Project Odyssey, our minimally invasive surgical aortic valve system. This system marries our expertise in heart valves with innovations in delivery and valve deployment. We were pleased to observe positive 30-day results and significantly shorter implant and cardiopulmonary bypass times. This month we expanded the study into a CE Mark trial and we expect to complete enrollment in TRITON by the end of this year.

We also received FDA approval to begin exporting finished surgical valves to the US from our state of the art Singapore manufacturing facility. This is an important achievement to help us support the expanding global demand for our products. Looking forward, we now expect our full year Surgical Heart Valve growth rate to be 5% to 8%, and we remain confident that our new products, such as Magna Ease, Magna Mitral Ease and Physio II will increasingly drive growth and share gains for the remainder of the year.

Turning to transcatheter heart valves. For the first quarter we achieved SAPIEN sales of $39 million, driven once again by strong momentum in Europe. This technology is increasingly becoming a standard of care for aortic stenosis patients at high risk for surgery. Our acute procedural success rate remains high, pricing remains stable and we expect funding to be available to support procedure growth. We remain committed to expanding our leadership position in transcatheter heart valves.

During the quarter, we received a CE Mark for our next generation SAPIEN XT valve, as well as this NovaFlex and Ascendra 2 delivery systems. This new platform enables access to smaller arteries, thereby significantly expanding our treatable patient population. We are rapidly gaining experience with SAPIEN XT, with over 250 implants to date, although these valves only contributed about $1 million in sales in March.

At the end of the first quarter, we began a disciplined launch of SAPIEN XT and its 18 French NovaFlex transfemoral delivery system in Europe. We're very pleased with the clinical performance of the valve and delivery system. As planned, we are in a limited number of centers so far, and conversion from SAPIEN to SAPIEN XT through our in-hospital training program is going smoothly. Clinician enthusiasm for the low profile system and the performance of our new XT valve is very high and we expect this system to increase our transfemoral share in 2010.

We continue to enroll patients in our PREVAIL TA trial and surgeon feedback on the transapical delivery system has been extremely positive. We remain on track to begin the disciplined launch of SAPIEN XT with Ascendra 2 in Europe in the second quarter.

We continue to gain clinical experience with our new larger 29-millimeter SAPIEN XT valve. The addition of the 29-millimeter valve to our SAPIEN XT portfolio is important as it expands the treatable patient population for transcatheter heart valves. We continue to expect this valve to be commercially available in Europe in the second half of this year.

We continue to make good progress on obtaining formal reimbursement in Europe. Most notably in France, which is the second largest implanting country in Europe, the annual reimbursement rate was raised to EUR32,000 to EUR33,000. This new rate went into effect on March 1st. In the meantime, we continue to pursue formal reimbursement in other countries. We've not experienced any significant change in the availability of transitional funding and remain pleased that hospitals are able to perform these procedures while their governments continue to conduct reimbursement evaluations.

Turning to our US partner trial, all of our assumptions for timing remain unchanged. We continue to anticipate that cohort B data will be presented in the third quarter, and be submitted to the FDA for approval in the fourth quarter. Assuming a favorable data comparison and a one-year approval process, this will result in a US SAPIEN approval for medically managed patients in 2011. For cohort A, we continue to anticipate FDA submission in mid-2011. In response to requests from our trial sites to streamline continued access, the FDA has modified the enrollment process to allow each center to treat up to two transapical and two transfemoral patients per month. While this does not impact the partner trial, it simplifies the process and allows more patients to be treated.

We continue to make progress on our PARTNER 2 trial in the United States, which will study our SAPIEN XT valve. During the first quarter, we responded to questions from the FDA and remain optimistic about gaining an IDE approval in the second quarter of 2010. We expect PARTNER 2 to be another randomized trial.

In Japan, we're still on track to announce the start of our clinical trial with SAPIEN XT in the next few weeks. We're very excited to begin this new trial, which will be called PREVAIL Japan, as the XT technology is particularly well suited for Japanese patients. Successful trial completion could result in an approval as early as 2013.

Earlier this month, a Federal jury found that Medtronic CoreValve willfully infringes one of our US Andersen patents and awarded Edwards $74 million in damages. We will move vigorously to enforce this verdict and intend to seek a permanent injunction. We will also request increased damages of up to $220 million and a prompt resolution of both issues.

We plan to seek an extension to the current patent expiration date to account for the substantial duration of the SAPIEN FDA review process. We believe the facts support an extension of at least four years beyond the current expiration date of May 2012. This particular patent is only one of five issued US patents within the Andersen family of patents. Edwards Transcatheter Heart Valve portfolio includes several other patent families which we believe comprise the most expensive THV intellectual property in the industry. At the appropriate time, we plan to pursue enforcement of these additional patents which have much later expiration dates.

As you may have seen in the latest issue of circulation, Dr. John Webb authored an article on a multi-center experience with valve-in-valve procedures using SAPIEN technology. This article notes that 24 high-risk surgical patients received the SAPIEN valve inside of a failed surgical tissue valve. Interestingly, this procedure was performed in all four valve procedures-- positions. In addition, this article highlights the potential of this technology for patients with limited treatment options.

At the upcoming EuroPCR meeting in Paris, we expect a number of presentations on Edwards Transcatheter Technology. Most significantly, we expect one year follow-up from the source registry on our European commercial experience to be presented. This robust study has received high marks from clinicians for its level of integrity. The source data set includes patients treated in the same time frame as those enrolled in the PARTNER trial. At PCR, we also expect several live cases to be shown using our next generation SAPIEN XT valve, as well as updates on our MONARC system, including data from the EVOLUTION I and II feasibility studies.

Lastly, we'll be hosting an analyst reception on Wednesday, May 26th, for those analysts attending PCR. The reception will feature Dr. Martin Thomas and [Olar Winler] will who will discuss the source registry data. Additional details will soon be available.

Based on the continued demand for this technology and the positive clinician feedback on our SAPIEN XT valve, we now believe that we'll achieve full year transcatheter heart valve sales in the upper half of our $170 million to $190 million sales guidance. This is despite a negative $12 million foreign exchange impact at current rates in-- compared to December when we set our original guidance.

Now, turning to Critical Care. For the first quarter, Critical Care reported $105 million in sales. On an underlying basis, sales grew approximately 7%, which excludes the positive $4 million impact from foreign exchange and the $10 million of prior year sales from our divested hemofiltration product line. Strong sales of our premium products led by FloTrac track continued to drive underlying growth. In addition, pressure monitoring made a significant contribution. The divestiture of hemofiltration and the continued growth of FloTrac and our oximetry catheters, our premium products have become a larger component of total Critical Care sales. Our improved product mix drove gross profit margin improvement versus prior year. Consistent with past trends, we expect 2010 to be another year of improvement.

During the quarter, we received positive clinician feedback on Volumeview, a set of new parameters that are part of a substantial upgrade to our FloTrac system, which strengthens its utility in the medical ICU. We remain on track for a limited number, for a limited second quarter introduction and we expect to expand throughout the remainder of 2010. In conjunction with the Volumeview introduction, we plan to launch our new EV1000 hardware platform in the second quarter, which will provide users with a simpler more intuitive informational display.

With regard to our continuous glucose monitoring program, in Europe we're continuing our post approval trials in a limited number of centers to gain real world experience in a variety of clinical situations. We're very encouraged by the accuracy and reliability of our device and are excited about this new opportunity to fill an unmet need for critically ill patients. In the US we still anticipate filing for regulatory approval in the middle of 2010. In summary, based on our strong performance so far, we remain confident in our ability to deliver full year Critical Care underlying sales growth of 5% to 8%.

Turning to Cardiac Surgery Systems, or CSS, reported sales for the quarter were $25 million, a 10% increase from the prior year. Underlying growth was 7.4%. Last December, we re-entered the market with our EndoClamp balloon catheter and are ramping up sales in the US and Europe. We expect sales growth to improve throughout the year due to the strong interest in minimally invasive surgery and our continued investment in clinical education programs. We are expanding our manufacturing and are pleased with the progress we're making in bringing our Draper Utah facility online. We plan to transfer the CSS products that we're currently manufacturing at our existing facility in Utah to this new facility before the end of the year. For 2010, we expect CSS sales growth to increase during the remainder of the year, and we remain confident in achieving our full year revenue of $100 million to $110 million, representing an underlying growth rate of 11% to 13%.

Total reported sales of Vascular products were approximately $14 million this quarter, and were down year-over-year due to the divestiture of the LifeStent products. Sales of our base Fogarty products were slightly higher versus the prior year.

Earlier this month, we issued a press release regarding a warning letter we received from the FDA. Last September, during an inspection of our Irvine facility, the FDA observed six instances of late medical device reporting. At that time, we took immediate action to correct the process, and the FDA subsequently concluded its inspection. We do not expect this to have any impact on product approvals. And now, I will turn the call over to Tom.

Thank you, Mike. I am pleased to report we achieved diluted earnings per share of $0.80 and another quarter of strong gross profit margin improvement. Primarily as a result of our improving product mix, we are raising our full year net income growth rate estimate to approximately 19%. For the quarter, our gross profit margin was 71% compared to 69.1% in the same period last year. This 190 basis point improvement was due to an improved product mix and manufacturing efficiencies, partially offset by foreign exchange. Based on the strong performance and current FX rates we are anticipating a 200 basis point increase in our full year gross profit margin to approximately 72%.

First quarter SG&A expenses were $134 million, or 39.4% of sales, an increase of $12 million over the prior year. This increase was primarily driven by foreign exchange and higher sales and marketing expenses, primarily to support our transcatheter heart valve sales. For full year 2010, we continue to expect SG&A as a percentage of sales to be between [Audio difficulties]

Excuse me, gentlemen. This is the Operator.

I repeat. As a reminder, we anticipate receiving future earn outs of $1.5 million per quarter through the end of 2010 based upon the buyer's achievement of revenue objectives. Our reported tax rate for the first quarter was 27.2%. For the full year 2010, we continue to expect our rate to be between 25% and 26%, assuming the Federal R&D tax credit is renewed this year. This credit provides an approximate 150 basis points benefit to our annual rate. We are projecting a second quarter tax rate of 27%. When the credit is renewed, which we assume will be in the fourth quarter, our results will reflect the cumulative year-to-date benefit.

FX rates positively impacted the first quarter sales by approximately $11 million compared to the prior year. However, at current FX rate, the Euro will have an unfavorable impact on sales in the second half of the year. We now anticipate a nominal impact on full year sales, which is $15 million lower than last quarter's guidance and entirely eliminates the $40 million benefit that we projected at our investor conference in December. The FX impact on our bottom line in the first quarter was minimal due to our hedging program.

Free cash flow generated during the first quarter was $5 million. We define this as cash flow from operating activities of $13 million less capital spending of $8 million. For 2010, excluding special items, we continue to expect free cash flow to be between $190 million and $200 million.

For the first quarter, we repurchased 1.1 million shares of common stock for approximately $98 million. As previously announced, during it's February meeting, our Board of Directors authorized a new share repurchase program to acquire up to $500 million of additional shares.

Turning to our balance sheet, we ended the quarter with a net cash position of $192 million. Total cash at March 31st of $320 million exceeded our total debt of $129 million. Our DSO at the end of the quarter was 65 days, a one-day improvement from the prior quarter. Inventory turns were 2.3, a small decrease from the prior quarter.

Last week, we announced a two-for-one stock split. Our shareholders of record at the close of business on May 14th will be issued one additional share of common stock for each share they own. These additional shares will be distributed on May 27th. For modeling purposes, we estimate that the number of diluted shares outstanding for the remainder of the year will increase from approximately 60 million to 120 million.

Turning to our 2010 sales guidance. With the substantial movement in foreign exchange rates, primarily the weakening of the Euro, we now expect reported sales to be at the bottom of our original estimate of 1.43 to 1.50. However, we continue to expect the same strength in our underlying sales growth of 10% to 13%, which we discussed at our investor conference in December. For the full year, we expect Heart Valve Therapy underlying growth to remain unchanged at 14% to 17%. At today's exchange rates, we now expect full year Heart Valve Therapy sales to be $800 million to $840 million.

Our expected Critical Care underlying growth rate remains unchanged, at 5% to 8%, and in dollars, to be at the lower end of our original $445 million to $465 million range. In Cardiac Surgery Systems and Vascular, we expect underlying growth in sales guidance to remain unchanged.

For the full year 2010, we are raising the low end of our diluted EPS estimate by $0.02 despite the FX head wind. Our new range is $3.52 to $3.60, or $1.76 to $1.80 on a post-split basis. Finally, we are raising our previous 17% to 19% full year nonGAAP net income growth expectation to approximately 19%. For the second quarter 2010, we project total sales of $350 million to $370 million. We estimate that second quarter diluted EPS on a post-split basis will be between $0.43 and $0.46.

With the interruption with the microphones, I thought it necessary to repeat the SG&A, the R&D and the other income sections quickly here. So I am leaving off at gross profit margin. Our first quarter SG&A expenses were $134 million, or 39.4% of sales, an increase of $12 million over the prior year. This increase was primarily driven by foreign exchange and higher sales and marketing expenses, primarily to support our transcatheter heart valve sales. For full year 2010, we continue to expect SG&A as a percentage of sales to be between 37% and 39%.

R&D investments in the quarter were $45 million, or 13.3% of sales, an increase of $5 million over the prior year. This increase was primarily the result of additional investments in our Transcatheter and Surgical Heart Valve programs. For full year 2010, we now expect R&D as a percentage of sales to be approximately 14% as we increase our investment in transcatheter heart valve clinical trials.

For the quarter, we recorded other income of $3 million, which was primarily related to two items, a $1.3 million gain from the sale of an investment, and a $1.5 million earn-out associated with the earlier divestiture of our hemofiltration product line. As a result, we anticipate receiving future earn-outs of one point -- as a reminder we expect a future earn outs of $1.5 million per quarter through the end of 2010, based upon the buyer's achievement of revenue objectives. And with that, I'll turn it back over to Mike.

Thanks, Tom. So in summary, we remain on track to achieve our financial goals. We expect 2010 to be a pivotal year for Edwards and expect to achieve a number of important clinical and development milestones this year. Our investments in new technologies are generating growth today and we're confident that they'll become an even larger contributor to our growth and profitability in the future. And with that, I'll turn it back over to David.

We intend to end today's call at 6:00 p.m. Eastern and 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 re-enter the queue and we'll answer as many as we can during the remainder of the hour. Operator, we're ready to take questions.

Ladies and gentlemen, we will now conduct a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Mr. Larry Biegelsen with Wells Fargo Advisors. Your line is now open. You may proceed with your question.

Good afternoon. Thank you for taking the call. Just first on SAPIEN, the upper end of the $170 million to $190 million, I think if I'm doing my math correctly, implies an acceleration in the year-over-year growth rate going forward. Could you talk about just what is going to drive that acceleration going forward? That's my first question.

Larry, when we -- thanks for the question. When we originally did our guidance, we obviously provided wide guidance because we're uncertain as to what does market growth rate look like, what does currency look like, what does the adoption of SAPIEN XT look like, and now we're one quarter into the year. The market growth rate seems more clear to us, it seems solid, the reimbursement picture, I think seems clear for 2010, we've now had a positive early experience with XT, our clinicians are giving us favorably feedback on transapical and transfemoral. And so when you sum that together, even though there is an FX head wind, we think that we'll finish in the upper half of our previous range.

And then Mike, on Surgical Heart Valve sales, I'm sorry if I missed this, but why were -- why was it a little bit softer than you expected this quarter?

Yes, we don't -- it's hard to tell whether the market really changed. We're assuming that the market was pretty much unchanged at the growth rate. We would have expected to have higher sales in our recently approved Magna Ease products and that didn't happen. Possibly it's because we've been relatively rigorous about the price premiums that we've been driving. And what we're trying to signal here is that I think we're willing to possibly exhibit a little bit more flexibility for our customers in exchange for share. So possibly it was just our aggressiveness on the price premiums that we were asking for.

Thank you.

Thank you. Our next question is coming from the line of Mr. Jason Mills with Canaccord Adams. Your line is now open. You may proceed with your question.

Thanks, Mike, for taking the question. Can you hear me okay?

Hear you fine, Jason.

Great. Thank you. On SAPIEN first, following up on Larry's question, your guidance does also seem to imply that unit growth rate accelerated. In fact, you doubled last year, it looks like from your guidance, you more than doubled this year. I'm wondering if you could give us in an effort to sort of build that model and help us understand the reasons for this occurring, what's going on with new center adds, and implant rates, and anything specifically going on at your existing centers that have been with you for over a year in terms of the implant rate at these centers, whether or not it's increasing and why that may be?

Okay, a lot of questions in there, Jason. Let me see if I can get at it. I'm not trying to signal a doubling of the rate. I think that that's an overstatement of the situation. Remember, last year we-- I think our sales in total was around $112 million, and we're not signaling a doubling of that in 2010. So there clearly is a growth rate improvement. And we also said that we think that we'll gain some share in transfemoral.

We have continued to add centers. Although we're not adding centers the way we added centers early on. I'd say we're probably adding as many centers outside of Europe as we're actually adding inside of centers. So that is a component of the sales. I would say broadly what you're seeing is more units per center that's going on. And again, the reimbursement picture also helps.

Okay. Yes, I'm sorry if I misstated, Mike. I was referring, it looks like from the guidance if we're assuming a bit worse FX environment that backing into it, from a unit growth perspective, this year over last year that it does imply somewhere around a doubling of the units worldwide, is what I was saying there. And just maybe if you could comment on that, and then I have one follow up.

Yes, we wouldn't necessarily expect that there'll be a doubling of the units, Jason. So we weren't trying to send that signal. We think it did that last year. We think there'll be some slowdown. But we're encouraged that the growth rate we think should be pretty substantial, certainly in excess of 50%, and not clear to see where it's all going to come out.

Okay. Helpful. Last question, as we get ready for EuroPCR, and specifically the source data, perhaps you could take us back to some of the comments you made at your analyst meeting as to that source data being a good leading indicator for what we may see later in the year with PARTNER and specifically what you're seeing in the data for survival and hospitalization, what we should expect. I think what you talked about back on your analyst data was the trends we've seen as more and more patients have been enrolled in the various trials we've seen over the last three or four years. Maybe you could refresh us on that front.

Okay thanks, Jason. And just to be fair to other folks, we'll ask that you go back in the queue at this point.

Sure.

But yes just to try and be a little bit more clear on that, there's no perfect comparison that exists. What we were trying to draw the parallel to is the vintage of the data, if you will, or the time frame of the data of source, meaning our commercial experience in Europe pretty much parallels the same time frame as the PARTNER enrollment in the US. And so therefore the level of experience of clinicians is similar, the level -- the devices themselves were very similar being used in both locations. And I'll remind you that PARTNER they have some more strict enrollment criteria and so forth, so the patient population might not be exactly the same but it's probably the closest comparison we have, although there is no perfect comparison.

Thanks, guys.

Sure.

Thank you. Our next question is coming from the line of Mr. Mike Weinstein with JPMorgan. Your line is now open. You may proceed with your question.

Hi, guys. This is Chris here for Mike. Can you hear me okay?

Yes, Chris.

Mike, just to start off with. Can you quantify for us the impact of the distributor transition in Greece? I wouldn't think that would be a particularly large market for you guys.

Yes, it's not a particularly large market and you know what if the-- under normal situations, you wouldn't think that that would be disruptive, but what we actually had was product returns. So for example this quarter I think we had a product return in the neighborhood of $700,000. And when you combine it to a reduced growth rate, because of the disruption, it actually does turn out to be meaningful. That impact would have been probably in excess of $1 million in the quarter, if that helps. We might have a similar situation, we're not sure, but you could have a return of a similar quantity again in the second quarter. So we're not real happy about this. But we're pleased with the overall strategy of being able to go direct in that country.

Okay. And given how strong the adoption of transcatheter valves has been in Europe so far, are you confident that it's issues like Greece that caused the slowdown this quarter and not that the transcatheter adoption is start having a negative impact on the base surgical market?

No, I don't think that's the case, Chris. As a matter of fact, I don't want to get into specific situations, but if we go to our big markets like France and Germany, we saw actually substantial growth in our surgical heart valves in those two market, and probably they might have been the fastest growing markets in surgical heart valves across Europe.

Okay, that's helpful. And then just one quick one for Tom and I'll jump back into queue. Can you talk a little bit about what's driving the increase in your gross margin guidance and how much of that is due to reduced drag from FX versus better than expected operational performance?

Sure. It's a substantial improvement from where we started the year. Product mix is the majority of it. I'd say of the 200 basis points for the full year, you're probably looking at 100 of each maybe improvement in the foreign exchange and then the product mix being the remainder.

Okay. Great. Thank you.

Thank you. Our next question is coming from the line of Kristen Stewart with Credit Suisse. Your line is now open. You may proceed with your question.

Hi, thanks for taking the question. Just going back to the Surgical Valve business, can you maybe just quantify what type of a price increase you were taking and just kind of broadly speaking, are you seeing pricing push back across other products and kind of how you balance that with your gross margin kind of increase for the balance of the year?

Yes the price increases that we were driving in Magna Ease were probably in -- somewhere in 10% plus kind of range, okay. What it is is especially substantial when you start comparing it to competitive valves, we're probably priced-- it's probably priced easily $2,000 above competitive valves.

And then I guess are you going to now do a strategy that prices it more in line with your existing higher-end valves? I mean do you have to take substantial --

No we'll still get a price premium. Kristen, the sort of-- if there was-- the good news about what happened in the US this quarter is actually ASPs across the country were up and maybe that's a signal to us that we're sort of demonstrating a little bit too much aggressiveness on driving the price premiums. And what we're trying to do is to just be a little bit more flexible in our approach to allow people to adopt this valve that we think they really want to adopt, and so it sort of provides some opportunities for them to increase share, increase units and maybe at a lower premium.

Okay and then just at-- at, sorry, EuroPCR you mentioned you were going to be seeing source. Is there going to be any safety in XT data presented at EuroPCR?

Yes, it's a good question. I'm sure that XT is going to be topical at EuroPCR. As I mentioned there'll be some live cases. Because it's so young I don't expect that there's going to be a lot of in terms of data. I wouldn't be surprised if individual clinicians speak to their isolated cases. But I wouldn't expect there to be much in terms of real data analysis.

Okay, I guess when can we expect to see then some of the data that you guys collected from your European trial?

It's not clear. I would imagine a little later on, probably when you get to TCT, but certainly as time goes on that's going to be data that everyone's going to anticipate. I would imagine there'll be some available, maybe in the third quarter and beyond.

Okay. Perfect. Thanks very much.

Sure.

Thank you. Our next question is coming from the line of Mr. Bruce Nudell with UBS. Your line is now open. You may proceed with your question.

Thanks so much. Good afternoon. Mike, the literature has suggested that SAPIEN is kind of unsuitable for transfemoral access in as much as two-thirds the cases. Now that you've had some experience with SAPIEN XT under your belt, and I know that you don't have the full range of sizes yet, but where do you expect that percentage to go relative to the two-thirds suggested by the literature?

Yes, so when you say -- you're saying the literature suggested two-thirds are not accessible by SAPIEN, is that --

Yes, it was like -- it was at least less preferred option.

No, it's a good point. It's a little bit more complex than that, Bruce, if you will, because people go through a process today where they dilate the vessel, so even if the vessel is maybe tortuous or not quite large enough, by using a series of dilators in a careful fashion they can get access to vessels that otherwise you'd, well you wouldn't technically get there just by measurement. And so one of the things you get from XT, not only are you going to access vessels that you didn't before, but you won't go through that dilation process. So broadly here, this is really going to access quite a number of patients and it is going to be actually interesting for us to see how that plays out. We're excited about XT, not only because of it's size and it's lower profile but because it's a better valve as well. And we're also going to be excited, as you know that we didn't have all of the sizes to have the 29-millimeter valve later on in the second half of this year.

But if you-- just to push a little bit, if you had to push on it, would you say 70%, 80% of the patients are now transfemorally accessible based on the size advantage of XT?

Yes that's -- it's a question I'm probably not the best one to answer. It's certainly going up, Bruce, and I would imagine that there'll be clinicians at the PCR that will be willing to speculate on what that turns out to be. But I think it's going to go up substantially. We may -- I don't know, it's certainly going to go up to the more than two-thirds and maybe it goes higher into the 80% range. But it's not clear at this point. We're still continuing to be very pleased about TA, I'll add. It's not like we're not able to do procedures on these patients. The TA, especially the new Ascendra 2 system has been very well received so we don't expect that to be timid as well.

And just one follow-up on PARTNER 2, I guess this is the first time you've actually said it's an RCT. Would it suggest that we're talking about after enrollment that we're really talking about mid-2013 completion and launch in mid-2014 and I know that has competitive consequences especially given the pacemaker dependency of the Medtronic device. Could you just in that context comment on the background information that gives you confidence you can get a four-year extension which would effectively put them out beyond, if the patent holds, beyond your launch of XT.

All right, Bruce, we're giving you a lot of latitude here. That's the most incredible follow-on question to SAPIEN XT in Europe that I've heard for a while. So you have to promise to get back in line here. Let me answer part of that and then we'll leave some of this for others to ask as well. As it relates to the PARTNER 2 trial, yes indeed we'd say at this point it's pretty clear that FDA would want a randomized trial. We're really not sharing more than that. But the inference is that the trial gets larger because it's going to be a randomized trial, and that part is clearly true. It's going to be more PARTNER like in design.

But what we have going for us at this point is that we have trained centers that are already up, that already have primed pipelines and so we would expect this trial to enroll much more quickly than the PARTNER trial did, so I don't know when you start estimating how long it'll take to enroll, I think it's going to move much faster than what the traditional speed has been. Now, when we get into all of the complexities of how that relates to the court case, maybe I'll just put that off for now, let some other people ask questions on that and then if we don't answer it, we'll circle back at the end, Bruce.

Thanks.

Thank you. Our next question is coming from the line of Mr. David Roman with Goldman Sachs. Your line is now open. You may proceed with your question.

Hi, this is [Nick Keel] for David. Thank you for taking our question. In the past I think you guys have talked about R&D remaining about flat as a percentage of sales for the long term. That suggests, according to our calculations, that R&D dedicated to valves will go up to about $200 million by 2014. So first could you talk about maybe how you plan to spend the additional R&D there?

I'll start with that, Nick Keel, and then I'll let Tom jump in. Yes actually what we're signaling for this year here is more like a 14% R&D as a percent of sales spending rate. And that probably takes us up to the $200 million range sort of for this year, not in 2014. And part of that is just the reflection of what we see ahead for some of the transcatheter trials. If you were to say what were our estimates back when we were building the budget and giving guidance, we might not have imagined we were going to be in a randomized trial for PARTNER 2. We hadn't made the decision to expand enrollment in the registry in Europe.

But when you combine those with the Japanese trial that we're now starting, we think we're going to have more R&D spending and that's what really runs the meter on R&D spending are those clinical trials. We think the return on that spending is outstanding. And we love our lead, we love our leadership. And we think it is a great return for shareholders. But now we think it's going to be a little bigger this year than we might have originally anticipated. Although as sales increase, particularly after the US launch, the percent of sales start coming down in the future.

Thank you. And then just one follow on. It looks like despite the fact that FX is going to be less of a tailwind than originally expected, you guys are raising gross margin guidance in 2010 by about 100 basis points. So I know you talked a little bit about this before but is it really -- are the drivers really just product mix, or is there something else flowing into gross margins? Thank you.

We had -- and I break that answer into two parts. One would be the quarter. The quarter, we did have a couple of components. But the product mix on its own for the quarter was more like 200 basis points on its own. We had a hedge that was working against us in the quarter, about 150. But I mentioned the manufacturing performance. We had a great performance by our guys in the plants, and therefore, they pretty much offset the hedge. So if you think about the quarter's 190, it's a very different composition than the full year. You're right about FX coming off so for it's gross profit margin it becomes kind of neutral. It's slightly positive even but very late in the year and what comes through then is the product mix. So the 200 for the full year is more mainly composed primarily of just the product performance. Does that answer your question?

Yes. Thank you very much.

Okay, great.

Thank you. Our next question comes from the line of Mr. Bob Hopkins with Banc of America/Merrill Lynch. Your line is open. You may proceed with your question.

Hi, guys. It's [Alec Covert] in for Bob Hopkins, can you hear me okay?

Sure can, Alec.

Mike I just wanted to ask you if you could talk maybe in a little more detail about what led the FDA to increase the number of patients that could be treated under the continued access protocol?

Yes this was in direct response from requests from our clinicians that are in this trial. They were going through a pretty frustrating experience. Remember what FDA approved before was approximately 40 patients per month. And what this led to is somebody having to decide which 40 patients in the United States would get treated. And so we routinely have had Monday morning calls where the clinicians come in and present their cases, and that turned into almost the triaging event where you had to try and determine which were the 39 most deserving patients. That was extremely cumbersome and difficult process. And the clinicians said please make this simpler.

By going to a process that says, okay, if you're a site that is approved and has experience in transfemoral and transapical, you're allowed two per month. Then each site can do their own prioritization on a monthly basis and stay within those boundaries. So does that help answer the question?

Yes, it does. And then what, I guess maybe you (inaudible) my answer, but what was it that led them to allow two patients under the transfemoral route and two patients on the transapical route as opposed to perhaps three and one for transfemoral, transapical?

Well there was-- it was sort of an argument. I think the FDA was a little bit concerned here about having this be too large, and so there was going to be some sort of cap on this. And so by having two transapical and two transfemoral, when you think about approximately 20 sites you can see that they're concerned about not letting it get too large. But on the other side of it, the clinicians also had an argument that said they wanted to be able to keep their skills sharp. And they needed a minimum level per month to be able to keep skills sharp. And so through whatever process FDA used, this is what they decided.

Great. Thank you very much.

Sure.

Thank you. Our next question comes from the line of Mr. David Lewis with Morgan Stanley. Your line is now open. You may proceed with your question.

Good afternoon.

Hey, David.

Mike, I just want to come back to TVR visibility and it sounds like obviously the increasing guidance or the upper end of the guidance for TVR has a lot to do with obviously the gross margin mix shift, so I would think it's pretty important in the P&L here for 2010. So what's interesting is the quarterly number was not significantly above our expectation, so it sounds like there's something in the month of April that's led to you believe that visibility has sort of materially improved. So that sounds to me like it's more XT related than it is necessarily reimbursement in certain countries. Can you maybe talk about sort of that increasing visibility, is it XT related and did this-- is this sort of the last 30 days or this is sort of building throughout the quarter but just didn't materialize in the first quarter?

Yes, a little bit. It's really not new information in April but let's just, let's walk through it. Even though we got the XT approval in the middle of Q1, by the time that we get the labeling created and have the product in place, it only was available here starting for the last really couple weeks of the quarter. And so yes, our experience here over the past month or so has been largely this new experience with XT and that does help -- that does help improve our optimism. At the same time, French reimbursement being available by March 1st, wasn't clear exactly what that would do, that certainly helps, it's the second biggest country in Europe. And just broadly the fact that the market looks pretty solid to us when we reflect on Q1. We sort of put those together and that's what builds broadly our confidence.

Okay, Mike, just a second question and I'll finish up here. In terms of the intellectual property suit with Medtronic, you laid out a whole series of sort of remediations, one could be filing for IP extension and the other would obviously be a formal injunction. Can you just sort of lay out some loose time lines for us during this year of catalyst as it relates to the IP litigation?

Yes, I will make an attempt at this, David. Although I can tell you that this is a difficult one to predict exactly what the court is going to do. And some of this is driven by the court calendar. So we will petition for the court for a permanent injunction. We'll also petition for the trouble damages. And we'll also hope that the court makes these decisions in a relatively prompt time line. All of these are driven by the court calendar. So I would say here it's going to be the next few months although it's tough. I use that loosely, that we will get decisions on those particular issues, okay. There's a chance that things could go to the summer and beyond. We're hoping it doesn't go beyond the August recess that the court takes. But that, we just won't know until we know. Does that help?

Yes, that's I guess that's as good as we can do right now. Maybe just one quick follow up then just for Tom on gross margins you're very clear about the two primary dynamics of GM expansion here. You mentioned Singapore manufacturing, so is Singapore a headwind or tailwind to GM's in 2010?

This year you'd say Singapore is pretty much even, on an even keel. I'd say it's in our plan from the beginning, but I'd say slightly higher costs but longer term. I mean obviously Singapore is all about the net income impact after tax. So I'd say on a GP level, maybe a slight penalty if and approaching even.

Great. Thank you very much.

Thank you. Our next question comes from the line of Mr. Amit Bhalla with Citigroup. Your line is now open. You may proceed with your question.

Hi, I had a question on the glucose monitoring product. I was wondering, Mike, if you can go into a little detail about kind of what you've actually learned in Europe so far and what types of technical improvements you've had to make in order to get it ready for the US filing?

Yes, the primary goals that we're looking at, we were obviously trying to get confirmation that our system was accurate in a variety of settings and so that's one of the things we were looking at. And the other one broadly I'll put in the category of ease of use. It was still a relatively early model here and so we were looking at what sort of ease of use features that we needed to add to be able to prepare ourselves for a more suitable commercial launch.

In terms of the US filing, this is one that probably ease of use issues are not going to really be an important factor and we'll-- what we're going to really be doing is generating data on that sensor and that's not necessarily a precursor. It'll be our generation one, if you will, that we'll end up filing in the US.

Okay. And just on XT for a second, you mentioned in the press release and a couple of times on the call that this is a disciplined rollout for the product. When do you expect this to be kind of a full launch where it's available to most of your user base? Is it this quarter? Is it next quarter? Just walk us through that rollout. Thanks.

Yes, it's a little different on the TF and TA side. So with NovaFlex, I would say later on in Q2, sort of mid to late Q2, that we will be ramping up so sort of think of May and beyond I would expect that that starts ramping up. In the Ascendra procedure, it probably will be Q3 before we really ramp that up. And again, a little bit of this is our own resources. You know that we exercise a lot of discipline, we try and make sure that centers are well trained and so we use the clinical resources that we have available to make sure that we do this, and so a little bit of that we're doing in a serial fashion, or a discipline fashion to make sure that we get great results as we rollout.

Hey, Mike, I don't know if you answered this earlier, just the last thing, could you split out price versus unit growth for the base Surgical Valve business? Thanks a lot.

Do you mean globally or in the US or is--?

Both if you could.

Okay.

Globally, if I had to pick one.

Okay, let's see, let's see what I have here. So I would say it looks like out of the approximate 5% growth for the business about 4% of it was units and about 1% of it was ASP on a global basis, if that makes sense, right. In the US, it probably flips the other way around, okay. Where it's small unit growth, more like 1% and more like 4% price increase.

Okay. Thanks.

Thank you. Our next question comes from the line of Mr. Glenn Novarro with RBC Capital Markets. Your line is open. You may proceed with your question.

Thanks. Yes, two quick questions. One, what's the pricing on SAPIEN XT in Europe? I'm just trying to get a sense of the type of premium that you're going to charge with this. And then secondly, last year when we look at how SAPIEN did on a quarterly basis, 3Q was flat sequentially to account for seasonality. Should we assume that this year or will the launch of Ascendra in 3Q and NovaFlex late 2Q, will that allow 3Q to be an uptick or are we really baking in a lot of revenues into the fourth quarter? Thanks.

Okay thanks, Glenn. Good question. Broadly on XT, we would expect our premium to be in the 5% to 10% range. It's-- that's not uniform across all accounts because there would be some accounts where there would actually be higher increases and other accounts where it would be lower. But broadly I think those are the kind of numbers that you should think about.

In terms of Q3 sales of SAPIEN, SAPIEN XT, that's always -- we're always going to be affected by seasonality. And a matter of fact, the seasonality tends to be more pronounced in Europe than it does probably anywhere. And so that'll be there. You're right, because we're launching TA, it'll mitigate some of that but we'd still expect there to be a pretty substantial seasonal effect there and I would consider that to be the dominant one.

Okay. So just to clarify, slight uptick in 3Q revenues sequentially and then more of a 4Q big ramp up from a quarterly standpoint?

It's unusual for us to have a Q3 higher than Q2. It really is. And so I'm not trying to signal that it will be an uptick.

Okay, all right. Great, thank you.

I haven't looked at it the that carefully, Glenn, so I hesitate to give you a firm answer.

All right, thanks.

Thank you. Our next question is coming from the line of Mr. Tim Lee with Piper Jaffray. Your line is now open. You may proceed with your question.

Good afternoon, thanks for taking the question. I think in recent quarters your commercial sales mix on the transcatheter is now 75% transfemoral and 25% transapical. Now with the rollout of XT, how should we think of the mix going forward? As we think yet 12 months out, could we see transfemoral become more than half your sales mix or do you expect these current numbers to kind of stay constant?

Yes, I would say that probably if we reflect on our past, I think we probably feel like it's been more two-thirds transapical and one-third transfemoral, just for clarity. Going forward, what we would expect is that transapical actual-- probably that volume to stay relatively strong and stay relatively constant while the transfemoral will grow. So I hesitate to give you an exact split out because I think it's going to be trending over time but that would be our expectation.

And is it as your transfemoral side gets bigger, do you need to make any changes to your sales force and start calling on more intervention cardiologists or is the same sales force or just any comments on that front?

Yes, the way that we have deployed in Europe is we've employed a partner concept. So we have the same people that are helping the people in the cath lab that are helping the people in surgery. And so those specialists sort of move seamlessly between it and they help both groups. And so regardless of how that sort of shifts around, we think that that'll be one that we're able to handle with our existing staff. The lower profile is going to be attractive and particularly going to be attractive as you note in the -- to the interventional cardiologists and that's going to be a driver of growth. I would expect our people to be spending more time there as time goes on.

If I could just sneak one more in just on the legal side. I mean just given the pace of the US legal system, this suit with Medtronic, when do you expect to see any type of final resolution? I'm assuming it's still a couple years away until we get finality on this case.

I don't know. I think we're going to learn some things, we're going to learn some things over the next several months as we talked about. An appeal usually moves pretty quickly. It could be a one-year appeal process, that's at least what we have in our mind. And then in terms of this patent extension, and this is one that was asked about earlier, this is one that we probably learned at the end of the PARTNER trial, because it's at that point that FDA can do an accurate estimate of how much impact there was, and that's what -- that's why we believe that the best calculation at this point is for four-plus years added to the US Andersen patent.

Great. Thank you.

Sure.

Thank you, ladies and gentlemen, our final question comes from the line of Mr. Doug Tsao with Barclay's Capital. Your line is now open. You may proceed with your question.

Thanks a lot for taking the question. Tom, I was just wondering if you could sort of walk through the progression in gross margins for the year? You've sort of indicated that, unless I'm mistaken, it was going to be 72%, was that for the full year or was that the exit number?

Yes, that was for the full year. And starting with the 71%, it's pretty much implied that we're going to average slightly better than that for the remainder of the year.

Okay. And so would you think that we'll be above the 72% exiting in the fourth quarter due to-- given sort of at that point we'll see a lot of benefit of mix in terms of XT as well as the other sort of continued growth in SAPIEN?

A little better. A little bit better, yes.

And then just one final question, Mike, you've sort of indicated on the Odyssey valve that you've transitioned the initial feasibility study, or the TRITON study, into a full CE mark study and you would expect to see enrollment completed by the year end. When would you anticipate perhaps seeing-- getting the commercial launch for that product in Europe?

Yes, it's a good question. We really haven't offered that guidance up yet. We obviously want to see how this goes. If everything went well, you would think that we could get a launch later on and maybe in the back half of 2011. But that presumes that we're --- that we get all green lights along the way.

Okay. Great. Thank you very much.

Okay, thanks.

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the floor back over to Management for any closing comments.

Okay. Thanks all for your continued interest in Edwards. Tom and David and I welcome any additional questions by telephone. And with that I'll turn it back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and nonGAAP 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 348741. I'll repeat those numbers. Dial 877-660-6853 or 201-612-7415. The account number is 2995. The pass code is 348741. Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you very much.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you, very much, for your participation. Have a wonderful afternoon.