愛德華生命科學 (EW) 2010 Q2 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

It's now my pleasure to introduce your host, Mr. David Erickson, Vice President of Investor Relations for Edwards Lifesciences. Thank you, Mr Erickson, you may begin.

Welcome, and thank you for joining us today.

Just after the close of regular trading, we released our second quarter 2010 financial results. During today's call, we will discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A.

Our presenters on today's call are Mike Mussallem, Chairman and CEO; Tom Abate, CFO and Treasurer; and Carlyn Solomon, Corporate Vice President, Critical Care.

Before I turn the call over 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 include but aren't limited to our expectations regarding sales and sales growth, gross profit margin, net income and net income growth; 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 timing and results of transcatheter valve clinical studies including the partner trial; the development of continuous blood glucose monitoring technology; and the impact of foreign exchange fluctuations and special items on our financial sheets. These statements speak only as of the date on 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 ended December 31, 2009, and our other SEC filings, which are available on our website at Edwards.com.

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

Thank you, David.

We're very pleased to be reporting strong second quarter results, with total underlying sales growth of 15%. This quarter was highlighted by a notable transcatheter heart valve performance, as the successful launch of SAPIEN XT in Europe drove transcatheter sales to $53 million. We also continued to see a step up in gross profit margin, driven by the strong performance of new products and divestiture of lower margin product lines.

Now turning to the results. On a reported basis, second quarter sales grew 8.9% to $365 million. Reported sales were reduced by $19 million, primarily from discontinued products, and lifted by $2 million from foreign exchange versus last year. For the second quarter we reported heart valve therapy sales of $215 million, which included $53 million from transcatheter heart valves. On a reported basis, the global heart valve therapy franchise grew 18%, with surgical heart valve products increasing 3.8%. Both of these growth rates were negatively impacted by $4.1 million of [IMR & DT Logics] repair products returned to customers in the second quarter of last year. Excluding this effect, on an underlying basis our heart valve therapy franchise grew 20.7%, led by continued adoption of transcatheter valves. And second quarter surgical heart valve underlying sales grew 5.5%, led by continued adoption of Magna, Magna Ease and Physio II globally. Sales were negatively impacted by approximately $1 million from our previously-discussed Greece inventory buy back.

In the U.S., the sales growth rate was consistent with the first quarter. The implementation of new sales initiatives discussed during our last call led many hospitals to upgrade from our base products to Magna Ease. In Europe, surgical heart valve sales were slightly impacted by our now completed transition away from distributors in Greece to a direct sales model. Going forward, we expect growth in Europe to return to more normal levels. And lastly, in Japan, sales were very strong, as we saw both unit and price gains across most key product categories.

We remain on track to introduce our new Magna Mitral Ease valve in the U.S. and Europe during the third quarter. This valve system is designed to be easier to implant, and is specifically configured to facilitate minimally invasive surgery. We believe that Magna Mitral Ease represents an important improvement to our Mitral platform.

During the quarter, we began enrollment -- enrolling patients in TRITON, the CE Mark trial of the Project Odyssey platform, our new minimally invasive rapid deployment surgical aortic valve system. This new system is designed to reduce procedure times, and simplify transaortic valve implementation -- implantation through a small incision. The system has been well received by surgeons, and already resulted in significant learnings that will drive additional improvements. While still early, we are seeing meaningful reductions in implant and bypass times, improvements that we believe benefit patients undergoing on-pump aortic valve replacement. We remain on track to complete enrollment by the end of the year.

Looking forward, we now expect our full year surgical heart valve growth rate to be at the lower end of our previous 5% to 8% range. However, we expect our second half growth rates to improve, as new products such as Magna Ease, Magna Mitral Ease and Physio II increasingly drives share gains.

Turning to transcatheter heart valves, second quarter global sales of $53.2 million exceeded our expectations, with SAPIEN XT making a strong contribution during its first full quarter of launch in Europe. Sales benefited from about $4 million to $5 million of stocking orders in the quarter, as we introduced SAPIEN XT. Total transcatheter valve sales doubled versus the same quarter last year, driven mainly by deeper penetration into existing accounts. Transapical sales this quarter remained strong, consistent with the first quarter. Transfemoral unit sales increased substantially in the quarter, and slightly exceeded transapical valves.

The rollout of SAPIEN XT, and its 18 French NovaFlex transfemoral delivery system, is going extremely well, and our in-hospital training program has enabled clinicians to actually improve their high level of procedurally success. Clinician enthusiasm and demand has been so strong that we already converted the majority of our existing customers to this low-profile system.

At the end of the quarter, we began our disciplined launch in Europe of SAPIEN XT with the Ascendra 2 transapical delivery system. As planned, we are in a limited number of centers so far, and conversion through our training program is going very smoothly. Surgeon feedback on this new system is extremely positive. We continue to gain clinical experience with our new larger 29-millimeter SAPIEN XT valve, and expect it to be commercially available in Europe in the fourth quarter, which will expand the treatable patient population for this important technology.

Turning to our U.S. partner trial, all of our assumptions for timing remain unchanged. It is our expectation that cohort B data will be presented at the TCT conference in Washington, D.C. in September. Due to the confidential nature of this data, we will not be commenting on the clinical results until they are presented. We expect to submit our PMA to the FDA in the fourth quarter, and for cohort A we continue to anticipate FDA submission in mid-2011.

During the second quarter, we received additional questions from the FDA on our PARTNER II trial in the U.S., which will study the SAPIEN XT valve. We are continuing our dialogue with the FDA, and we now anticipate receiving IDE approval in the third quarter of 2010. We still anticipate PARTNER II will be a randomized trial.

In Japan, we announced the start PREVAIL JAPAN clinical trial with the SAPIEN XT valve, which received a considerable amount of media coverage. Our XT technology is particularly well-suited for Japanese patients, and enrollment in the trial is progressing very well. We remain on track with our previous expectation that regulatory approval could be received as early as 2013.

As reported last quarter, a Federal jury has found that the Medtronic CoreValve willfully infringes one of our U.S. Andersen patents, and awarded Edwards $74 million in damages. We are moving vigorously to enforce this verdict and secure a permanent injunction, while also seeking enhanced damages. We expect the court will decide these motions this year.

Separately, we also have a second lawsuit pending against Medtronic in the same U.S. court on additional Andersen patents, as -- a trial date for this case has not yet been set. There are presently a total of five issued U.S. patents within the Andersen family of patents. Edwards' transcatheter heart valve portfolio also includes several other patent families, which comprise the most extensive transcatheter valve intellectual property in the industry. If necessary, we will pursue enforcement of these additional portfolios, which generally have later expiration dates than the Andersen portfolio.

In May, we received CE Mark for our SAPIEN valve in the pulmonic position. This valve serves a small but important group of patients, and has the potential to reduce the number of open heart surgeries they undergo. Like our aortic program, the focus of the launch is on proctoring and clinical success. We've completed more than ten commercial cases, and are very encouraged by the early success.

During the next few months, our transcatheter technology will be featured at several conferences, including EACTS, the European Cardiac Surgery meeting, and TCT, both of which will be in September.

Based on the success of our XT launch, we now believe we will achieve full year transcatheter heart valve sales of $190 million to $205 million. This is the despite a negative $20 million foreign exchange impact at current rates versus the rates in December, when we set our original guidance. Also, please note that we expect third quarter transcatheter valve sales to be less than sales reported in the second quarter, due to the normal seasonality of procedures in Europe and the expectation of fewer stocking orders.

Before I discuss cardiac surgery systems and vascular, I want to share with you that Corinne Nevinny, our Corporate Vice President, has decided to leave the company to pursue new opportunities and focus on her external Board memberships. Corinne has served in a number of roles within the Company, including our Board of Directors, Chief Financial Officer, Global Operations Head, and most recently leader of Cardiac Surgery Systems, Vascular, in Canada. And although we are disappointed by her departure, we respect her decision, and wish her the best, and express our sincere thanks to Corinne for her many contributions.

Turning to cardiac surgery systems, reported sales for the quarter were $26.5 million, a 10% increase from the prior year, including a slight lift from foreign currency. U.S. and European sales of our EndoClamp balloon catheter continue to ramp up as this is the second cohort of sales since we re-entered the market last December. In May we launched our EndoDirect arterial cannula, which provides cardiac surgeons with an additional minimally-invasive alternative when femoral access is not an option. For 2010, we remain confident in achieving a full year CSS revenue of $100 million to $110 million, representing an underlying growth rate of 11% to 13%.

Total reported vascular products were approximately $13.4 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. After careful consideration, we've decided to discontinue our MONARC Transcatheter Mitral Valve program, due to slow enrollment in our EVOLUTION II trial. Also, in an early analysis of the data, MONARC did not demonstrate a significant efficacy advantage.

We remain committed to extending our global leadership in transcatheter technology, and our level of interest in providing solutions for patients suffering from mitral valve disease remains very high. We continue to make significant investments in the exploration of new devices, delivery approaches, materials, and procedural techniques across structural heart disease.

And I will now turn the call over to Carlyn Solomon to discuss our critical care results, and following that Tom will review the financial results.

Thank you, Mike.

For the quarter, critical care reported $111 million in sales. On an underlying basis, sales grew 7.7%, which excludes $12 million of prior year sales from our divested hemofiltration product line, and a positive $2 million impact from FX. Strong sales of our premium products, led by FloTrac, continue to drive underlying growth. In addition, pressure monitoring once again made a significant contribution to sales growth. The divestiture of hemofiltration, and the continued high growth of our premium products, continued to drive gross profit margin improvement versus prior year. This is also a contributor to Edwards' improving gross profit margin.

In the quarter, more than half of our growth came from premium products. FloTrac continues to benefit from increased clinical evidence supporting the patient benefits of fluid optimization. During the quarter, a study by Benes was published in Critical Care showing fluid optimization using parameters from FloTrac can improve patient outcomes. Additionally, a 15-year follow-up study on patients receiving goal-directed therapy by Rhodes was published in Intensive Care Medicine, demonstrating possible long-term benefits of fluid optimization.

We also saw strong growth in pressure monitoring as a result of an improved competitive environment. Specifically, a key competitor announced its exit from the business and another experienced supply issues. During the quarter, we continued to study [Volume View] in the clinical setting. This innovative technology provides new parameters that are complementary to our FloTrac system, strengthening Edwards' offering in the medical ICU. We have experienced a one-quarter delay in the program as we finalize software development, and now expect to initiate a controlled launch by the end of the third quarter.

Our new EV1000 clinical platform, which will provide users with a more intuitive and meaningful display, will be launched in conjunction with Volume View this quarter. Based on feedback we have received from clinicians, we believe Volume View and EV1000 can become best-in-class technologies, and are excited about their future contribution to growth.

With regard to our in-hospital glucose monitoring program, in Europe we are continuing to gain real world experience with our first generation glucose system in a variety of clinical situations, as part of our post-approval trials. We are extremely pleased with the accuracy and reliability of our [system]. In cooperation with our partner, DexCom, the 510-K submission for regulatory approval was filed during the second quarter, and we are in the process of responding to questions from the FDA. Pending regulatory approval, we will begin our U.S. clinical experience with this first generation system in a variety of settings.

Clinicians are excited about the potential of our continuous glucose monitor to help them better manage patients. We continue to receive clinical feedback on our system, and are making good progress on the development of a second-generation product designed to enhance ease of use. We expect to monitor our first patients with this new system in early 2011, leading to commercial availability in Europe in late 2011.

In summary, based on our strong performance thus far, we remain confident in our ability to deliver full year critical care underlying sales growth of 5% to 8%. In the second half of the year, we expect sales growth will be lifted by premium products, but this lift will be largely offset by strong prior year comparisons, and a challenging economic environment in some European countries.

And now I will turn the call over to Tom.

Thank you, Carlyn.

In addition to the strong performance that Mike and Carlyn have discussed, I am pleased to report we achieved non-GAAP diluted earnings per share of $0.46, a 15% increase versus prior year, driven by a 290-basis point improvement in gross profit margin. Based upon our strong operating performance, we now estimate our full year net income growth rate to be approximately 20%.

Before I go through the P&L, I would like to remind you of our accounting treatment for last year's return of our IMR& DET Logics rings, since it impacted this year's growth rate. Our second quarter 2009 GAAP results included $4.1 million of sales, gross profit and pre-tax income from products that were returned to customers. For non-GAAP growth rates, we will exclude these prior year sales and profits.

For the quarter, our gross profit margin was 72.5%, compared to 69.6% in the same period last year. This 290-basis point improvement was due primarily to an improved product mix, and to a lesser extent manufacturing performance. Based on this strong performance and current foreign exchange rate, we are anticipating our gross profit margin in the second half of the year to be between 72% and 73%.

Second quarter SG&A expenses were $141 million, or 38.5% of sales, an increase of $12 million over the prior year. This increase was driven mainly by higher transcatheter heart valve sales expense. For full year 2010, we continue to expect SG&A as percentage of sales to be between 37% and 39%.

R&D investments in the quarter were $51 million, or 13.9% of sales, an increase of $8 million over the prior year. This increase is primarily the result of additional investments in our transcatheter heart valve program. For full year 2010, we continue to expect R&D as a percentage of sales to be approximately 14%.

As Mike previously discussed, during the quarter we discontinued our MONARC clinical trial. Accordingly, we wrote down the value of the assets associated with this program, which consisted primarily of intellectual property, resulting in a pre-tax charge of $8.3 million. Additionally, during the quarter we recorded a $9.8 million income tax benefit resulting from the partial settlement of a prior year tax audit. This audit is still in process, and the future outcome could have an offsetting effect.

Our reported tax rate for the second quarter was 13.4%; excluding special items, this rate was 26.4%. We are projecting a third quarter tax rate of 27%. Assuming the anticipated renewal of the Federal R&D tax credit later this year, and excluding special items, we expect our full year rate to be between 25% and 26%.

Foreign exchange rates positively impacted second quarter sales by approximately $2 million compared to the prior year. However, at current foreign exchange rates the Euro will have an unfavorable impact on sales in the second half of the year. We now anticipate a negative $10 million to $15 million effect on our full year sales versus prior year. Relative to our prior guidance, there was minimal FX impact on our bottom line in the second quarter and in our full year expectations.

Free cash flow generated during the second quarter was $32 million. We define this as cash flow from operating activities of $48 million, less capital spending of $16 million. Year to date, free cash flow is $37 million, which is $18 million lower than anticipated, due to the classification of a future tax benefit. However, this item has no impact on our total cash flow. Looking forward, we typically generate significantly more cash in the second half of the year, and will strive to achieve this year's free cash flow goal of $190 million to $200 million.

For the second quarter, we repurchased approximately 2 million shares of common stock on a post-split basis for $101 million. During the first six months of the year, we repurchased approximately 4 million shares for $199 million. Total cash at June 30, of $320 million exceeded our total debt of $177 million. In aggregate, our net cash position was $143 million, which is $49 million lower than last quarter, primarily as a result of our significant share repurchases. Our DSO at the end of the quarter was 67 days, and inventory turns were 2.2.

Turning to our 2010 sales guidance. Going forward, the strong outlook for our transcatheter heart valve sales is expected to offset the negative impact from the recent movement of foreign exchange rates. Therefore, we continue to project total 2010 sales to be at the bottom of our full year guidance of $1.43 billion to $1.5 billion. Based on our current trajectory, we are also raising our full year estimated underlying sales growth rate to 12% to 14%.

For heart valve therapy, we now expect full year underlying growth to be between 17% and 20%, and at current exchange rates we continue to expect full year heart valve sales of $800 million to $840 million. In critical care, cardiac surgery systems and vascular, underlying growth rates and the sales guidance remain unchanged.

For full year 2010, excluding special items, we are raising our guidance for diluted EPS by $0.02, from $1.78 to $1.82, and now expect our non-GAAP net income growth to be approximately 20%. For the third quarter 2010, we project total sales of $340 million to $360 million. We estimate that third quarter diluted EPS will be between $0.40 and $0.42.

And with that, I will turn it back over to Mike.

Thanks, Tom.

Overall, we've had a very successful first six months, and we are expecting an eventful second half of the year, with continued sales momentum outside of the U.S. from our new lower-profile SAPIEN XT valve, and the presentation of the first data from our ground-breaking U.S. PARTNER trial. We look forward to sharing our continued progress with you.

And with that, I will turn it back over to David.

Thank you, Mike.

We have a couple of upcoming analyst events, and I would encourage you to take note of these. In September, we plan to host an analyst meeting in conjunction with the TCT Conference in Washington, D.C. We will be providing additional details about this event in the near future. Additionally, on Monday December 13, we will host our 2010 investor conference in New York, which will include updates on our new technologies as well as our outlook for 2011. Information about this event will be available later this year.

Before we open it up to questions, as a reminder, please remember that we will not be commenting on the PARTNER trial clinical results until the cohort B data is presented later this quarter. We intend to end today's call by 6:00 PM Eastern today, 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 will answer as many as we can during the remainder of the hour.

Operator, we are ready to take questions.

(Operator Instructions)

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

Hi, it's [Steve Busha] for David. Good afternoon. Thank you for taking the questions. I'd like to ask for a bit more detail around the impact of SAPIEN XT in Europe. Specifically, could you give us a little bit more granularity on the impact that it's having on the market size? That's question one. Is this expanding the market? It sounds like from your comments that may not be the primary driver, but we have to think that there is some market expansion. Whatever you can tell us there will be helpful, and then I will have one follow-up on that.

Steve, it's not clear what those exact numbers look like. We only have one quarter of experience. SAPIEN XT was very well received, and you know our growth rate in the second quarter was higher than our growth rate in the first quarter, and so the fact that we doubled sales, I would say that there has to be market expansion that must be associated with that. We only introduced the XT valve primarily into our own existing accounts, and so what you primarily seeing in the second quarter is deeper penetration into existing accounts. There's only a couple of places where we went to new accounts. Does that answer your question, Steve?

That is helpful. So it sounds like these centers then would be doing more procedures, rather than shifting from other approaches?

That's correct. The other thing that was notable, obviously, was the fact that the transapical procedure stayed stable.

Thank you, that's very helpful. And then taking it to the next step, with the Ascendra 2 rollout, as that becomes real and more of a full launch, how do you expect that to impact market share and the addressable patient population?

You know, we are the only ones out there right now with a transapical system, and so we pretty much have all that share. We think clinicians are going to be enthusiastic with the newt Ascendra 2 system, those that have experienced it have been very happy.

It will be interesting to see what happens with TA volumes. As we mentioned, those stayed pretty much constant from the first quarter, and so there must be something about the referral patterns that are independent of what goes on in the transfemoral side.

Thanks. Very helpful.

Thanks, Steve.

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

Thanks. Two questions. One, can you maybe share with us what may be the issues at the FDA with the SAPIEN XT and PARTNER 2? And then number two, Mike, you mentioned you hoped to hear about the injunction in the second half of the year. I thought we were going to hear like as early as August. So maybe clarify the timing a little bit? Thanks.

Thanks, Glenn. First on PARTNER 2, there were a variety of questions that got raised, and it was everything from trial design to more than that. I would say the bulk of them that we are working on right now are related to additional bench testing, and this is more bench testing than we have been asked for in the past, and hopefully that provides some clarification on that.

In terms of the calendar, yes, the court goes on recess in August, and we were hoping to hear something before August. That was not the case. So now we're hopeful that when they come back, that they resolve it here before the end of the year.

Okay. One last follow-up. Medtronic on one of their previous calls had mentioned that they thought they had like 55% of European market, versus you guys at 45%. Can you give us your opinion on how you think the market is currently split between you and Medtronic right now?

You know, it's very difficult for me to say. You have all the data. The beauty of this market, there is are only two players in it, and so when they report you will be able to make a very direct comparison. In the second quarter, I will note that we did have some stocking orders and so, you know, that may influence your market share calculations. But I think it's one of those that you can pretty much see, you have as much information as we do.

Thanks, Mike.

Sure.

Our next question is coming from Bob Hopkins with Banc of America. Please state your question.

Thank you. Can you hear me okay?

We hear you.

Great, Bob.

Great. Good afternoon. So can you give us a sense as to what the ASP delta is between SAPIEN and XT, and give us a sense maybe as to what percentage of your sales this quarter were XT?

Yes, it's interesting, Bob, I would say -- if we were to generalize we would say ASP and XT are about 5% to 10% higher. It's not uniform, though. It does vary by country. It varies about account. And we've probably narrowed the range, so those that were lower have come up more than those that were already higher. I'm trying to remember the rest of your question?

How much was XT?

Well, XT was the bulk of the sales. As a matter of fact, there were probably negative sales on SAPIEN because there were actually returns in the quarter, or if anything it probably netted out to near zero, so virtually all the sales in the quarter were XT.

The other thing that was kind of notable here, once a customer flipped over to XT, it pretty much became a permanent flip. I can't think of any particular account that went back to SAPIEN. They pretty much have converted wholesale.

And those comments are exclusively for the TF procedure; obviously, TA is still SAPIEN.

Right. And then as a quick follow-up, Tom, can you give us a sense as to whether or not the transcatheter valve line item for Edwards right now, is that a profitable business? Has that crossed over to profitable, either on a fully-allocated or stand-alone basis? And then also your new guidance for 2010, could you give us a sense of what -- the year-over-year unit growth rate that implies? I know currency has wreaked havoc with numbers here. Just wondering what the unit growth that implies year-over-year, and sense for profitability?

Sure. In terms of profitability, we are getting close. I would say we are probably still on the short end of that. It looks like it could be close, but as you know 2011 will be a complicated year. I would say it will probably go -- we will seesaw a little bit in 2011 and come out of it clearly in a profitable situation in 2012. In terms of the overall growth of the units, you would say it has to be close to -- I'd say close to, what is it, 100%?

I would say -- it's somewhere in the 50% to 100% range. You know we had doubling, which is 100% growth this quarter. I don't know that we will see that uniformly. We were closer to 50% in the first quarter. You will see something between that for the full year.

Okay, that's all. Thanks so much.

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

Good afternoon, and thanks for taking the question. Mike, you noted that transfemoral is now greater than 50% of the units. If you had to guess exiting the year, what would your split be?

I have a tough time guessing that. One of the things that's notable, Bruce, is that in the first quarter the stocking orders we saw probably all fell into the transfemoral category, right, because it was the XT launch; and so we still have some growing to do.

What is remarkable to us is that the transapical procedure stayed rock solid, with this big growth in transfemoral. We might have imagined there was a cannibalization, because now you have a smaller size available to access more patients. But there is something very solid about --- at least so far, about what's happened in transapical. So we will see how that plays out.

And, Mike, if you could remind me, I don't know -- I think the Company has disclosed it, but given the changing health care environment in the United States, where do you see ASPs for your TAVI product when launched in the U.S., ballpark?

You know, I think the last guidance that we gave, and it wasn't really guidance, but we just said for the purpose of modeling that we were estimating around $30,000 a procedure. And I don't have anything, any new information that would cause us to change that opinion.

Thanks so much.

Your next question comes from the line of Larry Biegelsen with Wells Fargo. Please state your question.

Thank you for taking my question. Just two questions. First, Tom, you talked about 2011 being a complicated year. Is there -- before giving -- obviously you haven't given 2011 guidance yet, but is there anything you can say, anything you see that maybe the sale side's not taking into account?

No, I would think it's things that are already on your mind, Larry, things that we've said for awhile now, is that we would be spending in advance, and we do look forward to beginning the launch in 2011. So with that off and on, you will see a very different profile from quarter to quarter. Obviously, it will be penalized in the early quarters, and then when you actually get approval you see that change dramatically. But I don't see anything there different than what we have talked about in the past.

Then second, can you give us a little bit of color on why you asked the FDA to allow the medical management patients to cross over to SAPIEN in cohort B? Why did you not want the option of being able to follow-up these patients longer term? Thanks.

Larry, this was really a request on the part of the clinicians. The trial -- for the purpose of evaluating the data, the trial was over. So the data is all available to be able to do that. Now that the trial is over, there has been a petition on the part of clinicians that they wanted to be able to allow some of these patients to cross over.

Thank you.

Our next question comes from Jason Mills with Canaccord Adams.

Thanks for taking the questions. First on SAPIEN, second on the surgical heart valve business. I wondered if you could give us some flavor on trends in utilization per center in the quarter, and how many new centers you added for the SAPIEN franchise?

Sure. You can presume almost all the growth is deeper penetration in existing centers. We didn't add very many centers in the quarter. We were very focused on just launching the XT product line, and pretty much all of our clinical resources were focused on exactly doing that. And so it was penetration that really drove the bump in the volume you saw this quarter.

Okay. And then on the surgical heart valve side, in the first quarter you commented about the Magna Ease launch at the premium pricing having an impact. At the end of the quarter, you had changed your strategy there. I wondered if you could talk about any change in unit growth trends in the second quarter relative to what you saw in the first quarter?

You are talking about globally or in the U.S.?

I guess specifically in the U.S. and Europe, yes.

I would say -- well, it's probably a little different story in -- if we went to global results, where actually we continue to see more unit growth and ASP growth this quarter, probably of the underlying growth rate of 5.5%, probably 4% of it was units. But in the U.S., we probably saw more impact from raised price than we saw in Q1. We saw units not grow as fast. And so we saw an upgrade from, for example, standard Magna heart valves to Magna Ease valves. Magna Ease valves now account for, I would say, close to 40% of our Magna family of sales in the U.S.

Perfect. Thanks.

Our next question comes from line of Mike Weinstein with JPMorgan. Please state your question.

Good afternoon, guys. First question, the different moving parts in Europe, with the strength in your transcatheter heart valve versus some of the weakness in the surgical valve business, are you sure you're not seeing cannibalization at this point, given the overall size of the [incident] volumes in transcatheter valves?

Yes, thanks, Mike. Overall, broadly, although the growth in Europe was impacted by the Greek return -- there was $1 million in sales returns that actually detracted from it. The growth rate of surgical heart valves have been pretty stable in Europe over recent quarters, and even in this quarter we probably didn't see very much.

We have different growth rates of surgical heart valves, Mike, if you go country to country. So if you go into the countries where we had big growth, we actually had double-digit sales growth of our surgical heart valves in countries like Germany and France. So I don't think a cannibalization effect is the primary issue there.

And then, Mike, and Tom chime in here, too, but there was a question in the recent health care conference about management's visibility or insight into the mortality endpoint within the PARTNER trial, and i don't think it was clear to everybody whether or not Mike, or others in the senior management, actually knew the primary endpoint of the mortality piece at this point, and just weren't disclosing, or kind of what the level of knowledge of management was? Thanks.

I didn't follow the question. I heard the end of it, Mike, but I didn't follow the essence of the question.

Here, I will give you the quick and dirty. Mike, do you know the primary endpoint of the trial?

Got it. You know what, what we decided on this one, Mike, is we are just not going to get into a discussion of that, and hopefully you respect that. As we get close here to the PARTNER trial results, we think that we need to be very discreet on that, and we don't want to really get into a discussion of who knows and who doesn't.

Okay. So there is no disclosure requirements, what the senior management knows versus other people in the organization?

No, our plans are to disclose the results of the trial uniformly. The whole market will see it, and we expect that to be around TCT in September.

Okay. I appreciate it. Thank you.

Thank you.

Our next question is coming from Kristen Stewart with Deutsche Bank.

Thank you for taking my question. I was wondering given the ramp up in SAPIEN XT, if you could give us an update on the manufacturing?

We are having trouble hearing you. Something happened here where we got muted, maybe.

Can you hear me now?

Now we got it.

Great. I was wondering given the ramp up in SAPIEN and SAPIEN XT, if you could just give us an update on where you stand from a manufacturing standpoint?

Yes, well, we have been ramping up manufacturing, so we feel very good about that. We don't believe that we have any constraints, if that's what you asking. When we put out our guidance here of $190 million to $205 million, we feel comfortable that we will be able to supply at those levels.

And then just in terms of the profitability of SAPIEN XT, your manufacturing that you are planning for this year, will you have equal profitability for XT as you would with the base SAPIEN valve?

Yes, as a matter of fact, it's similar.

All right. And then quickly on reimbursement, given what's going on in Europe from a budgetary standpoint, can you maybe give us an update on what you are hearing and seeing there on the ground, additional countries coming online? Or if there has been any increase in pushback from price, or just kind of number of cases going through?

You know, it's been consistent with what it's been in the past, Kristen, and I can tell you reimbursement does matter in those countries where we have solid reimbursement, like Germany and France; we are seeing a stronger uptake than where reimbursement is not clear like, the UK. So we are still hopeful. We think that the UK is going to look forward to PARTNER data. We are collecting economic data as part of PARTNER, and they have sent signals they are interested in that kind of rigorous data. So we look forward to providing that to them when that becomes available.

Last question is just in terms of the U.S., you had mentioned filing for the PMA in the fourth quarter. Will you be doing -- are you doing a modular filing process, or are you just going to be filing all the data all at once?

Good question. There is some of that that does get presented in advance, but the bulk of it here, the really important clinical data gets presented -- will get handed over in the fourth quarter, and that will be the last piece at that point.

Thank you.

Our next question is coming from David Roman with Goldman Sachs.

Good evening and thank you for taking the questions. Tom, you talked about R&D spending coming in at about 14% of revenue. Can you maybe help us where the spending from MONARC is being redeployed, and how we should think about that on a go-forward basis?

Sure, well, MONARC itself in terms of spending, as you remember the clinical trial was not enrolling that quickly, so it's not a big item in terms of reallocation. And then the spending would be anything THB related that has to do with the development, and some of the things that we are working on there.

Okay. Then I assume on your comments that 2011 gets complicated with respect to profitability, and that has to do with spending in anticipation of the launch for transcatheter valves; can you help us understand in a little bit more detail what the trigger points are with respect to SG&A spending, and how far in advance of an impending approval you may start spending? I think you said something to the effect that the data would end up informing your spending decisions, and could you maybe elaborate on that a little?

This is Mike. Why don't I take a shot at that. The things that complicate 2011 are two. One is, of course, the advanced spending that you just noted, but also the uncertain timing of the approval of the product, if that happens somewhere during 2011. Those obviously would have a big swing effect on the year.

We've always presumed that we would be doing advanced spending, and actually we've been studying that very carefully and doing a lot of strategic work. We have been doing that probably for more than six months at this point, and actually -- the first part of that actually occurs yet this year, and then be built up through 2011. We don't have any specifics to share with you at this time. We will have specifics to share at the time of the investor conference and, yes, of course, that will be informed by PARTNER data.

And then lastly, have you been able to use the SOURCE trial results from a marketing standpoint in Europe? And maybe you could talk to us about trends in transcatheter valves post-PCR in the quarter versus previous to that?

Yes. You know, with the presentation of the SOURCE data at PCR came a lot of favorable publication. It got a lot of visibility, and I think it gave clinicians broadly a lot of confidence that this was a robust procedure, and that one year out they could see it. Some of the success probably that we enjoyed here after the launch of XT had to do with the fact that we had such a strong presentation at PCR.

Great. Thank you very much.

Sure.

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

Hi, good afternoon, and thank you for taking the question. First, a non-SAPIEN question. As we look at the balance of your businesses, are you seeing any impact from the European austerity measures, from either increased pricing or any slowdown of any procedure rates, just again in the non-SAPIEN franchises?

Yes, I will start out, Tim. Yes, I mean clearly we do feel the environmental issues that I think everyone does. We feel it more in our more mature products. Carlyn noted he has some concerns that even though new products would lift sales growth in the second half of the year, that there is concern about the environmental impact in certain countries in Europe. So yes, we are concerned about it. I don't know -- we could get more specific if you have something more on that, Tim.

I guess there is any certain -- either Spain or is it Italy, or I guess I'm trying to think -- another med tech company earlier talked about seeing some --

Maybe Carlyn will want to comment.

Yes, Tim, thank you for the question. You know where we really see it, and we see it in both base businesses, is that obviously in Greece we are having an effect there, a negative effect, and also in the UK we are seeing it as well, so those will be the two consistent countries we have at Edwards.

Got it. Thank you. And a follow-up in terms of the strength you saw on SAPIEN here, SAPIEN XT, excuse me, you noted it was driving penetration deeper into existing accounts. Now that you have a more competitive product from a [buyer's] perspective, you don't have the pacemaker rate that some of your competitors do, when will you start expanding into competitive accounts rather than just going deeper into your own accounts?

Of course, at some point clinicians are going to be interested in trying SAPIEN XT. I think there is interest out there and we will be happy to offer that to them. Of course, our focus is going to stay on procedurally success, and on making sure that people have a good experience. But yes, we are obviously not going to hold it back from anybody that's interested.

Thank you very much.

Our next question comes from Douglas Tsao with Barclays Capital. Please state your question.

Thank you for taking the question. Mike, in terms of the transapical volumes, you noted that they were consistent with the first quarter. Do you have any granularity, in that it might have grown in some of the TA centers like Leipzig, and you might have seen some cannibalization in other centers that are offering both the TS and TA approach?

I suppose that's possible. That's not the messages that I have gotten. We've had a fair amount of discussions with our European team, and it seems to be -- it doesn't seem to be lumpy like that. It doesn't seem to be concentrated. There just continues to be a level of -- I will call it excitement, about TA amongst the surgeons that's continued. And I don't think the surgeons look at it so much as a comparison versus TF, I think they think about it as a comparison to -- for these high-risk patients that otherwise might go through a high-risk surgery.

And then in terms of the number of centers, you said it was fairly modest this last quarter. I think it was at PCR, one of the presenters indicated that there were -- I think it was like 300 centers in Europe that were looking to add transcatheter heart valve programs. Does that number sound about right to you, and and sort of how do you look at the market sort of longer term?

I will tell you, at this point I believe that we are somewhere around 250, something like that, in terms of accounts outside the U.S. that are primarily all Europe. Yes, I think it could grow to over 300 accounts. I don't think there is a doubt about that. In terms of, is there a desire for there to be more than that? I suppose it's out there, but we still think it's prudent to stay in centers where there is a surgical program, where there is a partner approach, and so forth, and we think that potentially limits the overall number of centers.

And just finally one more question, if I might. In terms of the Odyssey program, you obviously are making good progress in Europe. You said you are also continuing to learn things. Is that -- I was just wondering if you had a comment in terms of your thought process in terms of potentially introducing that product to the U.S. market, you know, down the road?

Yes, you know, as I mentioned we are in this clinical trial right now, and we expect that to be enrolled this year. The learnings for the most part are procedural learnings. It looks like the product as it's designed today looks very good. So we don't expect a reset on the design. We are hopeful that we get great results in this clinical trial, and we keep moving ahead.

There obviously could be some tweaks in the delivery system, that would be the component of it. We haven't given any guidance on the U.S. yet; I would expect by the time we get to the investor conference in December that we will be prepared to do that.

And then in terms of initial thinking, would this be potentially a randomized study, or do you think it could go through the normal surgical heart valve process?

Yes, I don't think -- we really don't know what it's going to be. We haven't had a surgical product that had to go through a randomized study in the past, and we are hopeful that standard is maintained, but we really don't know.

Great. Thank you very much.

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

Hi. A question, Mike, you mentioned that the FDA for the PARTNER 2 study has asked you some questions on bench testing. Are they asking for just data you already have, or do you have to generate any additional bench testing data?

It's some of both, as you would imagine. If we had it, trust me, they would have it. So there are questions -- many of these turn out to be more or less theoretical questions about boundary conditions, that there would be calculated numbers based on a sophisticated analysis of things that are very hard to estimate. And so you get into generating models that you haven't generated in the past, and that's -- it's kind of an evolving field, if you will, and the FDA is hoping for answers that they haven't asked about in the past.

Okay. Second question on the surgical valve side in the U.S., given what happened with Magna Ease and the rollout there, what will you do differently on the Magna Mitral Ease rollout? Will it just be about bringing the pricing in line, or are you going to roll it out in any different way in the U.S.? Thanks.

Yes, that's a good question. You know, again, the mitral position today, there are still a lot of mechanical valves, and the tissue valves that are used are easy to implant. Remember, this is a difficult position to implant a valve. We are yet to be able to offer a very durable pericardial valve that has proved to be very easy to implant, and we are hoping that we really crack the code in a big way with the Magna Mitral Ease. There are going to be more ease-of-use features than ever before. We will indeed exercise some pricing flexibility. I think the environment is one that people are very thoughtful about new product additions, and we continue to learn a lot about that, and we're going to try and help hospitals get into it. But we are really going to focus on this minimally-invasive capability, which has the potential of saving hospitals beyond the price of the valve.

Mike, just the pricing premium, should that be similar to what you are getting on the Magna Ease side? That's the way to think about it?

Yes, I think that is the way to think about it.

Thanks.

Sure.

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

Thank you very much for taking my question. This is a two-part question. The first one is that in the last quarter you talked a fair amount on the difficulties of the Magna Ease launch, because that stage you were talking about the price premium; are you still managing that price premium and experiencing that?

Yes, we are managing it. And we saw some nice success in the second quarter in terms of helping people move to Magna Ease. And overall, our pricing in the U.S. actually ended up a little stronger than it was a year previous, or even last quarter, and this -- as people upgrade. So even though we have been able to exercise flexibility, ASPs have actually risen a little bit.

Very nice. And then my second question has to do with your relationship with DexCom for the continuous hemoglobin -- not hemoglobin, glucose monitoring system in the hospital. Can you give us an update on that, please? Thank you.

Joanne, we've enjoyed a really strong relationship with Dexcom, highly collaborative. We continue to work together side by side on the second generation product, and we've found them to be just a great partner for us. I don't know if there is anything specific around that, but --

No I was just thinking -- we were originally of an OUS launch later this year, and then maybe a U.S. launch thereafter, and I was curious about the update on that type of time line?

Okay, so what we anticipate now is really Gen 2 will be the product that we'll and go very aggressively with in the market. Gen 2 will get our first in-human experience at the beginning of next year, and plan to launch it near the end of next year in Europe. So that is kind of what you should put in. So no appreciable sales in 2011 in glucose.

Thank you.

Thanks.

Our next question is coming from Paul Choi with Caris & Company. Please state your question.

Can you hear me?

I hear you fine, Paul.

Mike, if we take a look at sort of the geographic split of the businesses, clearly your international business is doing well with SAPIEN XT in Europe, but the U.S. business was up I think just 1% here. With -- I think you said the surgical valves in the U.S. were up similar, about 5%, with the first quarter; can you comment a little bit more on what you are seeing in respect to pricing for your other businesses in the U.S. market here, and what your expectation is maybe for the remainder of the year?

Sure. Paul, in the U.S., one of the things you have to keep in mind is some of our discontinued products do affect the U.S. as well, but I think the growth in the heart valve side was pretty comparable to what it was in the first quarter. I would say a couple things things. If your broad question is about the environment in the U.S., hospitals, -- yes, indeed, we hear a lot of stories are struggling, and we clearly empathize with that, and that has impact with the speed they move with in new products and so forth.

In terms of our pricing and our margins, they are solid. We are fortunate enough to have proprietary positions both in our critical care business and in our surgical heart valve business. So we're really not seeing price deterioration, but we know hospitals are struggling and we are working hard to help them.

That's useful on discussing the general environment. And then just quickly for Tom, can you give us a sense of what your expectation is, like you did in the previous quarter, in terms of where growth margin will benefit in terms of price mix versus currency and manufacturing improvements, in terms of your guidance for 72% to 73% for back half of the year?

So probably the best thing I can give you, Paul, would be sort of a split of what the full year will look like, is what I do have, and I would say the product or the performance, if you took the midpoint of the range we are talking about you, would say approximately 250 basis points; then the remainder to the mix and the operational issues, so I would say about 150.

Great, that's very useful. Thank you.

You're welcome.

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

Hey, just a follow-up here. Tom, just I guess I'll piggy back to Paul here. As far as raising the bottom end -- or the top end of the EPS guidance here, I know obviously on a reported basis foreign exchange -- just to be clear, so it's a function of profitability improvement as result of mix shift, because obviously transcatheter coming up, or is it operational as well?

You will have to help me out there, because you were at EPS for $0.02 you were saying, and then it sounded like you switched to GP?

I guess what I'm saying is you took your EPS guidance up, right? On the reported sales line, that's down. So I guess I'm wondering what's kind of moving the needle there?

What's moving the needle is, I would say, as we pointed out the underlying strength of the business is doing well, while at the same time foreign exchange, we were getting an offset there, but we do have pretty a good portfolio of both synthetic and natural hedges.

The gross profit rate help soften -- certainly the lift in [THT] sales, you know, those are both big contributors.

So it's essentially a mix shift benefit; is that correct?

You could look at the second quarter and see that's pretty representative of what we would be thinking for the year.

Great. And then just follow-up, I know, Tom, you don't want to talk about 2011, and a bunch of people have asked because you made comments about it. Just so we know when you talk about spending ahead of a launch, obviously you guys have assumptions for approval and launch at certain time. When you talk about spending before the launch, obviously there is approval, and there is some time when you kind of do your slow launches; I guess what I'm trying to understand is, starting day one, 2011, are you sort of ramping up spend in hope of an approval? Or is it a situation where you wait until you get approval, and then you probably aggressively spend, even though the launch is sort of slow coming?

The nature of opportunity is regardless -- the intention from the very beginning was to spend in advance to be ready to meet the demand. So I think that's probably the best way to say it. Since it's an unknown, it may come a quarter early and need to be ready; if it's just a quarter backwards, you will have spending in front of it in any scenario.

Great. Thank you for taking my questions. Congrats.

Sure, you bet.

Well, thank you for your continued interest in Edwards. Tom, David and I will welcome any additional questions by telephone. So 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 the press release and can also be found in the Investor Relations section of our website at Edwards.com.

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