愛德華生命科學 (EW) 2010 Q3 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation Third Quarter 2010 earnings conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

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

Welcome and thank you for joining us today. Just after the close of regular trading, we released our Third Quarter 2010 Financial Results. However, we've been made aware that our 8-K filing was unintentionally made public just minutes before the close of the market and in advance of our press release. We are disappointed this occurred and are currently researching the cause. During today's call we'll discuss the results included in the press release and the Company's 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 expectations regarding sales and sales growth, gross profit margin, net income and net income growth, goals for earnings per share and earnings growth, and free cash flow and other financial expectations for 2010, the sales 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 and PARTNER II trials, the development of continuous blood glucose monitoring technology and the impact of foreign exchange fluctuations and special items on our financial results.

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 all available on our website at edwards.com. With that I'll turn it over to Mike Mussallem. Mike?

Thank you, David. We're very pleased to report solid Third Quarter results. Continued demand for our innovative new products again drove double-digit underlying sales growth. This combined with a more favorable foreign exchange environment, gives us confidence to raise our earnings outlook for the year even during this difficult economic climate. Other highlights include the very favorable PARTNER Cohort B result and approval to begin the PARTNER II trial. The progress in these US clinical trials advances our leadership position in transcatheter heart valves.

Now turning to results. On a reported basis, Third Quarter sales grew 7.1% to $349 million. Reported sales were reduced by $12 million from discontinued products and $4 million from foreign exchange versus last year. Underlying sales growth for the quarter was 12.6%. For the Third Quarter we reported Heart Valve Therapy sales of $201 million which included $49 million from transcatheter heart valves. On a reported basis, the global Heart Valve Therapy franchise grew 15.2%. On an underlying basis, total Heart Valve Therapy sales for the Third Quarter were up 18%. Transcatheter heart valve sales doubled excluding foreign exchange while surgical heart valve sales grew 3.4% led by the continued global adoption of our Magna platform and Physio II rings.

In the US, surgical heart valve sales growth was flat compared to a strong quarter in the prior year while outside the US, underlying sales grew approximately 7%. The environment in the US was challenging where our growth was impacted by an apparent modest slowdown in heart valve surgeries. However; customers are continuing to adopt our newest products, and sales of our Magna Ease aortic valve more than doubled over the prior year. Outside the US, we again gained share this quarter led by the continued strong performance in Japan. In aggregate, our pricing globally remained unchanged.

In September we launched our new Magna Mitral Ease valve in both the US and Europe. This valve 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 toward our Mitral platform and is off to a strong start.

During the quarter, we completed enrollment in TRITON ahead of schedule. As a reminder, TRITON is the CE Mark trial for Project Odyssey, our rapid deployment surgical aortic valve system. We're pleased with the growing surgeon enthusiasm for this platform which has the potential to further improve the clinical outcomes of patients undergoing minimally invasive aortic valve surgery. We now have increased confidence that we will receive a CE Mark in 2011.

At the EACTS meeting in September, Dr. Shrestha of Hannover, Germany provided data from the first 21 patients treated at his center with the Project Odyssey platform. This early TRITON data demonstrated an approximate 50% reduction in bypass and cross-clamp times compared to conventional surgery while maintaining excellent hemodynamic performance. Looking forward we expect our full year surgical heart valve underlying growth rate to be at the bottom of our previous 5% to 8% range.

Now turning to transcatheter heart valves. Sales were strong again this quarter at $49 million, a 102% year-over-year increase on an underlying basis. The Third Quarter stocking orders for SAPIEN XT were minimal compared to the $4 million to $5 million of stocking orders in the second quarter. Transfemoral sales tripled versus last year. At the same time, transapical sales remarkably remained consistent with levels seen in the first half of the year. Transapical and transfemoral sales were about evenly split. With the introduction of SAPIEN XT, our aggregate pricing was approximately 5% to 10% above the prior year. Given the typically slow summer season, we were pleased with this quarter's continued momentum.

We continue to receive positive feedback on SAPIEN XT with its 18 French NovaFlex transfemoral delivery system as well as our in-hospital training program, which together have enabled clinicians to modestly improve their already high level of procedural success. The rollout of SAPIEN XT with Ascendra 2, the transapical delivery system, is progressing well and approximately 25% of our customers have already been converted. Surgeon feedback has been very positive on both the improved valve design and the new delivery system which is easier to use and can help improve outcomes. Conversion to Ascendra 2 will continue as clinicians utilize the remaining inventory of earlier systems. We expect to receive approval in Europe of our new larger 29 millimeter SAPIEN XT valve around the end of the year which will increase the treatable patient population for this important therapy.

Turning to our US PARTNER Trial. Last month results from Cohort B of the PARTNER Trial were published in the New England Journal of Medicine and presented at the TCT. We are proud that the primary endpoints were met and that the Journal article concluded that balloon-expandable TAVI should be the new standard of care for patients with aortic stenosis who are not suitable candidates for surgery. Reaction from US clinicians to the trial results has been extremely positive and they're eager to offer a superior therapy option for these patients. The trial results also identified areas for improvement, particularly vascular complications and stroke rates. We are hopeful that our advances in delivery systems and next-generation lower profile valves will demonstrate even stronger outcomes.

As it relates to the US PARTNER trial, all of our assumptions for timing remain unchanged. For Cohort B we expect a complete submission of our PMA to the FDA in the next two weeks. And for Cohort A, we're optimistic the results from this arm will be presented during the second quarter of 2011 and continue to expect PMA submission in mid-2011.

During the Third Quarter we received conditional approval for the first of two planned Cohorts in the PARTNER II trial to study up to 450 inoperable patients using a 2 to 1 randomization. Our plan calls for completion of enrollment in the first cohort before the approval of SAPIEN in the US. We expect to begin enrollment this quarter. For the second planned Cohort, the high-risk surgical arm, we're actively working with the FDA and are optimistic about receiving IDE approval before the end of the year.

During the quarter we continue to enroll patients in our PREVAIL Japan clinical trial with the SAPIEN XT valve. We remain on track with our previous expectation that regulatory approval could be received as early as 2013.

In November at this year's American Heart Association Conference, which will be held in Chicago. This will be a notable meeting for Edwards as the health-related quality of life results from Cohort B of the PARTNER trial will be presented by Dr. David Cohen of St. Luke's Mid America Heart Institute.

As previously reported, a Federal jury found that Medtronic Core Valve willfully infringed one of the US Anderson patents and awarded Edwards $74 million in damages. We still hope the court will provide the motions on permanent injunction and enhanced damages before the end of the year.

In Europe, the launch of our SAPIEN valve in the pulmonic position is going very well with procedural success tracking at high levels. This valve serves a small but important group of patients and has the potential to reduce the number of open heart surgeries they undergo. In the US, we completed enrollment of our 30-patient three site pulmonic feasibility trial and recently received conditional IDE approval to expand to 70 centers and -- seven centers and 70 patients in support of a humanitarian device exemption. Based on our year-to-date success and the continued rollout of new products in Europe and a stronger euro, we now expect full year THV sales to be approximately $200 million.

For the quarter, Critical Care reported $111 million in sales. On an underlying basis sales grew 5.6% which excluded $10 million of prior year sales from our divested hemofiltration product lines and a positive $1 million impact from foreign exchange. Strong sales of our premium products led by FloTrac continue to drive underlying growth. In addition, pressure monitoring once again made a significant contribution.

Earlier this month we unveiled Volumeview and our new EV1000 clinical platform at the European Society of Intensive Care Medicine in Barcelona. The innovative technology of Volumeview combined with the more intuitive and meaningful EV3 1000 display will strengthen our product offering in the medical ICU. We are continuing our clinical study in a select number of centers and receiving a very positive response from its users. We anticipate receiving CE Mark in the fourth quarter and believe that these technologies can become best-in-class and will drive future growth in our Critical Care franchise.

With regard to our in-hospital glucose monitoring program, we're continuing to gain real world experience with our first generation glucose system in a variety of clinical settings as part of our post-approval trials. Clinicians are excited about the potential of our continuous glucose monitor to help them better manage patients. We're making good progress on the development of a second generation product designed to enhance ease-of-use and anticipate commercial availability in Europe in late 2011. In summary, based on our performance thus 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. Reported sales for the quarter increased to $24 million and grew 7% on an underlying basis. During the quarter we continued to see a lift in our EndoClamp balloon catheter and our EndoDirect arterial cannula system in both the US and Europe. However our sales were negatively impacted by more than $1 million due to a supply issue, which will continue into the Fourth Quarter.

Earlier this month we hosted a ribbon-cutting ceremony at our Draper, Utah facility. This new plant will enable us to significantly expand our manufacturing capabilities and reduce our dependence on outside suppliers. We expect to move our existing operations from our nearby Midvale facility to Draper by the end of the year and plan to transfer additional product lines over time. We expect solid CSS sales growth due to the strong interest in minimally invasive surgery and our continued investment in clinical education programs. We now anticipate achieving full year revenue at the lower end of our previous $100 million to $110 million sales range representing an underlying growth rate of 9% to 11%.

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. Underlying sales of our base Fogarty products grew 4% versus the prior year. And now I'll turn the call over to Tom.

Thank you, Mike. I'm pleased to report we achieved Third Quarter non-GAAP diluted earnings per share of $0.43, a 19% increase versus prior year. This improvement was highlighted by the continued substantial expansion of our gross profit margin. We increased our R&D investments by 18% while achieving a strong operating margin. Based upon our performance to date, we now estimate our full year net income growth rate excluding special items to be more than 20%. For the quarter, our gross profit margin was 72.5% compared to 69.8% in the same period last year. This 270 basis point improvement was driven by an improved product mix, favorable foreign exchange and to a lesser extent, manufacturing performance. Given our existing hedge contracts and the recent movements in foreign to exchange rates, we now expect a slightly lower gross profit margin of 71% to 72% in the Fourth Quarter. For the full year, we expect the GP rate of approximately 72%, an improvement of over 200 basis points.

Third Quarter SG&A expenses were $133 million, or 33.1% of sales, an increase of $7 million over prior year, 38.1% of sales. This increase was driven by sales and marketing expenses primarily for the transcatheter valve program, partially offset by FX. For Full Year 2010, we expect SG&A as a percentage of sales to be approximately 38%. R&D investments in the quarter were $53 million, or 15.1% of sales, an increase of $8 million over the prior year. This increase resulted from additional investments in all major product lines, particularly our Transcatheter Heart Valve program. For Full Year 2010, we continue to expect R&D as a percentage of sales to be approximately 14%.

During the quarter we recorded a $3.9 million pretax special charge for the write-down to market value of two nonstrategic investments. Remember in the year ago period, the Company recorded a $38 million net pretax special gain. Other income of $3 million in the quarter consisted primarily of balance sheet-related foreign exchange gains of $1.7 million and a $1.5 million continuing earnout associated with last year's divestiture of our hemofiltration product line. Our reported tax rate for the Third Quarter was 27.5%. Excluding special items, this rate was 27.8%. Assuming the federal R&D tax credit is renewed in the Fourth Quarter and excluding special items, we continue to expect our Full Year tax rate to be between 25% and 26%.

Foreign exchange rates negatively impacted Third Quarter sales by approximately $4 million compared to the prior year. At current exchange rates, we now anticipate a modest positive impact on 2010 sales versus prior year. Relative to last quarter's guidance, foreign exchange lifted our Third Quarter net income by approximately $2 million, which is primarily attributable to the FX item and other income.

Free cash flow generated during the Third Quarter was $80 million. We defined this as cash flow from operating activities of $96 million, less capital spending of $16 billion. Year-to-date free cash flow was $117 million. We will continue to strive to achieve this year's goal of $190 million to $200 million. Consistent with our first six months, total share repurchases year-to-date were approximately four million shares or $200 million. We expect Fourth Quarter diluted shares to be approximately $120 million.

Turning to our balance sheet, we ended the quarter with a net cash position of $260 million. Total cash of $361 million exceeded our total debt of $101 million. Our DSO at the end of the quarter was 74 days and inventory turns were 1.8.

Turning to our 2010 sales guidance. For Full Year 2010, we are raising our full year sales guidance to between $1.435 billion and $1.455 billion primarily attributable to improved foreign exchange rates. For Heart Valve Therapy, we are raising our Full Year sales guidance to the high end of our previous range of $800 million to $840 million. In Critical Care, we expect sales to be between $445 million and $465 million. In Cardiac Surgery Systems, we now expect to be at the lower end of our previous range of $100 million to $110 million. And in Vascular, we continue to expect sales of $50 million to $60 million. For Fourth Quarter 2010 we project total sales of $380 million to $400 million and diluted EPS, excluding special items, of $0.52 to $0.54. For Full Year 2010, excluding special items, we are increasing the midpoint of our guidance for diluted EPS by $0.02 to $1.81 to $1.83 representing an annual growth rate of 19% to 20%. And we now expect our full year non-GAAP net income growth to be more than 20%. And with that, I'll turn it back over to Mike.

Thanks, Tom. We're on track for a strong 2010 and we continue to aggressively invest in our future which we believe is very bright. Our innovative new products are enabling clinicians to improve the care they provide to very sick patients and we are proud to participate in shaping the future of medicine.

Before we open it up to questions, I'd like to remind you that our 2010 Investor Conference which will be held in New York on Monday, December 13. At this event we'll provide an update on our new technologies, our US launch plans for SAPIEN and a detailed financial outlook for 2011. We've also lined up leading clinicians who will share their experiences with our transcatheter valve technologies. Additional details will be sent out shortly. And with that I'll turn it back over to David.

Thank you, Mike. We intend to end today's call by 6 p.m. Eastern. In order to allow for broad participation in the Q&A we ask that you please limit the number of questions. If you have additional questions, please reenter the queue and we'll answer as many as we can during the remainder of the hour. Operator, we are ready to take our questions.

Thank you. Ladies and gentlemen, we'll now be conducting the question-and-answer session. (Operator Instructions) Our first question is coming from Mike Weinstein of JPMorgan. Please state your question.

Thanks for taking the question. I guess two items I'd be interested in you commenting on. First is could you talk about implant trends post the presentation of PARTNER TCT whether you've seen a pickup in your volumes outside the US now that that data is out there? And second could you talk a little bit about 2011 and the expected buildout of your US sales force and infrastructure ahead of the US launch and how we should be thinking about that? Thanks.

Sure. First on the implant trends, it's a little tough, Mike, to know for sure what's going on there. Remember in the summer season we always see the slowdown, so we certainly saw a pickup once we got to October after the TCT trial, and it's hard to know exactly how much of that is attributable to PARTNER results as opposed to just the pickup of the normal seasonality. But you can tell from our estimates, we're targeting $200 million worth of sales for the year, so that gives you a sense of where we are on that.

On the 2011 buildup, yes we're prepared to provide some details when we get to our December investor conference. I can tell you this, we clearly plan to invest in that US launch organization in advance of the launch. At this point, although we'll do some leveraging of the Heart Valve sales force, we're pretty much going to have an independent organization that launches this product in transcatheter heart valves. And we're going to begin this hiring process and we'll start with the most senior people, and then they'll hire regional people and then ultimately clinician -- clinical specialist and sales folks. So you'll see a buildup during the course of the year that'll be in advance and that'll have some expenses associated with that. But we're not prepared to detail that just yet.

Okay. Just one follow up, if I can. If you could just touch on maybe on, maybe -- this is Tom -- the use of cash. The Company has been buying back stock but that's been principally just to offset your option program at this point. As we move forward in your cash generation ramps particularly with the US launch, can you just talk about how you view your spending plans?

We will -- we've been very consistent. I think this year we spent -- from the very beginning we defined $200 million as our goal, and we accomplished that in the first half of the year. Next year we'll have to look at it again and we'll look at acquisitions that are close to the strategy focus that we have right now. And I think the stock remains attractive at these levels and we'll keep -- we'll probably be very consistent in 2011 to what you saw this year. And then 2012 maybe that's a different story.

Okay. Great. Thank you.

Our next question is coming from the line of Tim Lee with Piper Jeffery. Please state your question.

Hi, good afternoon and thanks for taking the question. Mike, if you can kind of expand on your comments regarding just the overall US heart valve environment? You said it was challenging and seeing a modest slowdown. I mean are these patients deferring procedures, or -- I'm trying to grapple with those comments and trying to see how that goes on a going forward basis?

Yes, thanks, Tim. Yes, I hope I didn't overstate the case. I tried to make the point that it was modest. In heart valves this is such a stable business and it's so solid and our leadership position is so strong that even a couple of percent change is something that we think is noticeable. But our sense of it and most of this is from anecdotal reports from specific hospitals, that they are feeling that there's some impact on procedures. Again, it's not big and for the most part heart valve procedures are not that elective. But probably on the margin, there is some that can be postponed. I do not believe that there's any impact. I think the disease is the same as it's been in the past. So yes, it probably is a postponement, we seem to notice it more though in the US than elsewhere.

Got it, thank you. And then just one follow up on your XT rollout in Europe, I think you'd noted that the transapical/transfemoral is about half and half right now in terms of your mix. What -- XT, where do you see that going? I mean a year from now will XT be the predominantly -- the major product line? Would the transfemoral -- excuse me, transapical being a lesser portion, or how should we see that playing out over the next 12 to 24 months?

Yes, good question. One of the things that I tried to share in the remarks is how remarkably stable transapical was even with the advance of this lower profile XT system. So yes, we think that XT will continue to grow. And that transapical, at least the early indications are, that it's going to stay quite stable. So I would expect transfemoral to become a larger percentage over time although transapical is remarkably staying very popular with surgeons.

Got it. Thank you.

Thanks, Tim.

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

Hi, thanks for taking the question. I was just wondering if post kind of the -- obviously the really good Cohort B data that came out at TCT, if you could comment on any discussions that you've had with any of the European countries with respect to formalized reimbursement, if that's making any more progress? And then if there's been any kind of things that you can tell us about just kind of the FDA maybe with the randomization scheme, if there's any desire for them to maybe loosen that and look to go to more of a single arm study given that the results were so positive?

Okay, thanks, Kristen. Well first of all, you can be sure that we tried to share the message around Europe, although I think the message had already moved pretty fast about the favorable clinical results in Cohort B. We're still looking forward to seeing quality-of-life data and cost data and so that'll all be part of the package. So we don't have anything new to report at this moment, but you can be sure that we're active communicators. As it relates to PARTNER -- and I guess were you referring to PARTNER in particular when you talk about FDA questions?

For PARTNER -- for PARTNER II because you had mentioned that the FDA did not see the PARTNER Cohort B data before giving the conditional approval for PARTNER II Cohort B like patients. I'm just curious if there's been any change in tone from the FDA on their desire to make sure that it's recognized?

Yes, I think we all had a chance to hear from them publicly from the podium in terms of what their position is. Bottom line we were obviously very pleased that with the positive data that was demonstrated in the New England article about SAPIEN and in particular the SAPIEN and balloon-expandable TAVI related to the standard traditional medical management treatment of these patients. It was remarkable. And we are having discussions with the FDA, we don't have anything new to report at this time. We're proceeding down the path that we've got a randomized trial, although you, probably like us, have heard from clinicians that they're not really excited about randomizing to medical management.

Okay. And when should -- you said by the end of the year we should hear on the second group with PARTNER II and that's a high-risk group? And that's also for 450 patients?

No, I hope that I didn't indicate that that was 450 patients. We do expect and hope to hear by the end of the year, we don't know how many patients that is. It' going to be a larger number for sure in this comparison, the surgery. And so PARTNER I was I think 690 patients, Kristen, and I think there's every indication that this will be just as large, if not probably larger.

Okay, thank you very much.

The next question is coming from Amit Bhalla with Citi. Please state your question.

Hi, good afternoon. I wanted to start with SAPIEN XT and I was hoping you could elaborate a little bit more about penetration. Last quarter you talked about a push within existing accounts, is that still the focus? And in the terms of new procedure share, is 75/25 versus Medtronic still the mix in the transfemoral space?

Yes, first on the penetration question. I would have to say that in the third quarter, Amit, the thing to keep in mind is just the seasonality of what happens in Europe. Most of our sales are there and you know how much things slow down in Europe at that time. We really didn't start much in the way of accounts. And given that if you back out the $4 million to $5 million worth of stocking orders out of Q2, it was pretty flattish from quarter to quarter which is pretty doggone good when you consider the slowdown. So it's hard to say increased penetration, I would say that pretty much we'd stayed at a pretty similar rate in Q3 versus Q2, which is quite good.

In terms of the 75/25, well that mix has started to change. I'd say we certainly gain some TF share in the quarter. We'll have to learn more about that when we -- if they actually give results of our competitors -- actually give their detailed results we'll be able to calculate that more accurately. But right now, it's difficult to say exactly what happens.

Okay, thanks. And my follow up, could you give us just the unit verses price contribution for the worldwide Heart Valve Therapy growth rate? And just comment on European austerity, if you're seeing any impact there? Thanks.

Yes, so again you're -- the question, Amit, just to make sure I have it, it's on a global basis surgical heart valves, units and price?

Sure. And if you have the US number that'd be great too. Thanks.

Okay. Well let me start out with the globe. The sales growth here was all primarily unit growth. I think units were up about 3%, 4% range where ASP's were pretty flat and maybe just ever so slightly up on a global basis. If you were to go to the US, you'd actually see a little bit more favorable price and less favorable units just slightly though.

And the European austerity?

What was the question? And Amit, this has to be the last one, buddy, so we can get around to everybody.

Yes, no problem. Just wondering what kind of impact you're seeing. I think last quarter you said European austerity measures were impacting your more mature products, is that still the case?

Yes, although we'd say that if you look at surgical heart valves in Europe they're continuing to clock along at mid-singles kind of growth rates which is not far off what they had been traditionally doing over the years. So given the rapid uptake of transcatheter technology, that's pretty good. Although there might be a little bit of -- maybe there's a little bit of cannibalization, I think it's, if that is, it's more than offset by share.

Thank you.

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

Hi, thanks. Mike, I want -- if you could clarify something. Did you say that transcatheter valve pricing was up 10% year-over-year? And if that is the case, I'm just curious how sustainable that pricing is given the pending austerity measures. And I'm wondering if you've gotten any recent push back on pricing with XT? That is question one.

And then at TCT, there was almost a whole day dedicated to mitral valve. I'm wondering if you could update us on what you've got going on in the mitral development side? Thanks.

Sure. Yes, just to clarify my comments, I believe what I said and what I intended to say is that pricing year-over-year for transcatheter heart valves is up in the neighborhood of 5% to 10%, and that is driven by the XT. And so what we did with XT, and again it's -- not everybody's price came up, but certainly the lower prices came up during that time and its aggregate effect was a 5% to 10% increase. And we believe that that is sustainable, we -- even though the climate is very difficult, their reimbursement has been improved in the two largest countries in Europe and we've seen that be solid now for the two quarters since XT has been introduced.

As relates to mitral valves, this remains highly interesting to us and is the kind of thing that we work on internally and watch very carefully externally, but we really don't have anything specific to report at this time.

And -- can I just one quick follow up -- ?

Sure.

For Tom. The tax rate, is that -- have you lowered the tax rate guidance for the full year?

No, it's unchanged, Glenn. We had a couple items that actually -- discreet items in the quarter that penalized this quarter about 80 basis points. If you remember I guided to 27% flat, so it's a little higher. But net net, that's just timing differences and we're still thinking 25% to 26% with the passing the R&D credit.

Okay. Thank you very much.

You bet.

Our next question is coming from Bruce Nudell with UBS.

Good afternoon. Thank you. Mike, one of the things that we noticed and was related to your comments about vascular complications was that PARTNER B was burdened with an early generation delivery system. To what extent will that also kind of impact PARTNER A? And then I have a follow-up.

Yes, so I think just to be more specific to your point, but we'd say most of the patients in PARTNER B had our, what we'd call our RF1, or our first generation delivery system for SAPIEN. At some point late in the trial we were able to cut in our gen three. If you're -- are you asking specifically about Cohort A of the PARTNER trial?

Yes, I am. Thank you.

Okay. Well, so, in Cohort A of the PARTNER trial, I expect that that was probably enrolled much along the same lines as Cohort B. There may have been a little bit more of the mix that got an R3 or a third generation delivery system. So there'd be some uplift from it, but still it was -- it's one of those that'll still see a fair amount of R1 in it.

Okay. And my final question, Mike, is more of a strategic one regarding to get to about a $1.7 billion mark in 2014 or so, you need 60,000 or so TAVIs -- Perc valves for aortic. 160,000 potential people over 65 who have surgical aortic candidates -- how do you see your ability to grow your surgical franchise in the presence of that huge potential cannibalization from TAVI?

I think Bruce, it's a good question Bruce. I think it's just our belief, and we've learned so much more about this over the recent years, that they are just a lot of untreated patients. Because the treatment is, and the only alternative in the past has been open heart surgery, we think a lot of people have been on the sidelines. And when you combine it with an aging population and all of the baby boomers in the US let alone what goes on outside the US, we expect that there are going to be many people that come into the system. And so although there may be some cannibalization in the surgical business, we don't expect it to be dramatic.

Thanks so much.

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

Good evening, thanks for taking my question. First could -- Mike, could you be a little bit more specific about what the holdup is with the high risk arm of PARTNER II and are you concerned about falling behind CoreValve with the XT in the US?

Yes, I -- if I express that I was concerned, I didn't mean to do that. I didn't -- I wasn't trying to indicate that there was any particular holdup, Larry. I'd say what we're doing at this point, is just dialing this in. As you can imagine what you have to do is you have to get through IRB's and go through our final refinement of this group. So you're talking about just for me to be -- to make sure that I understand -- you're talking about -- are you talking about the Cohort A group or what we use to call the surgical group?

No, PARTNER II, the -- you haven't gotten FDA approval yet if I'm not mistaken for the surgical arm.

Okay, I'm sorry. Yes, what the goal here for us is, although we know that clearly we're going to be at a high risk surgical population. What we'd like to do is to be able to lower the risk for some so that this can appeal to a slightly larger group of patients, so we're going through that discussion with FDA right now. And you can imagine when we were having the discussion before, we didn't have the benefit of the PARTNER trial and now that we have the benefit of the PARTNER trial we can even have a more fulsome discussion. So we only see this as a positive not a negative or a concern.

That's helpful. And second, have you been able to leverage the SAPIEN to benefit your surgical valve and Critical Care business in Europe? And do you see this as an opportunity in the US when you launch SAPIEN? Thanks.

It's a good question. It's not clear. I can cite a couple of things. If you go to countries where the adoption is large like in Germany, I'd say in general we're seeing market share gains. And so does that say that we're able to get leverage out of it? It's possible that it's there. We seem to see higher surgical growth rates in those countries where we're seeing the most growth of the transcatheter technology. So I think it bodes pretty positively for the Company's offerings.

Thank you.

The next question is coming from Bob Hopkins with Banc of America/Merrill Lynch.

Hi, thanks, can you hear me okay?

Yes, Bob.

Great. Mike, so just wanted to follow up on your comments about the data presentation at the American Heart Association on the quality of life side. Could you just remind us exactly what will be presented and your perceptions of the importance of the data and just what we should be looking for?

Sure. I'm not sure how exact I can be, but let me give it a shot. So Dr. David Cohen, who's a noted authority from St. Luke's Mid America Hospital, is going to be doing the presenting and he's going to get into the quality of life data. And so that should speak to things like the New York Heart Association score, it should speak to things like the six minute walk test, I think there's some -- there's some other things, and I'm searching for the right terms, I think there's a Kansas City quality of life score. So I wish I could be clearer. Let's see if we can get something out to you so that we can be a little clearer in terms of what you'll see, but there are a number of those quality of life measures that were included in the PARTNER trial as secondary endpoints.

Okay. And then on the PARTNER II centers in the US, I think at TCT you guys said that at first it would be -- the number of centers would be at that 20 area, and I was wondering if you guys have considered ramping that up to a higher number at this point and whether you'll have more centers available as enrolling centers for PARTNER II?

Yes, we're -- our thought is that we'll get started with the PARTNER sites first. But we do hope to expand it to some other sites beyond that. The -- it's not been our focus initially, but we certainly will do that over time. But we want to make sure that these sites come up and they come up in a high-quality fashion. It potentially is helpful if we can bring it up, but this could be a pretty fast enrolling trial given that you have pretty well-developed referral networks in the PARTNER sites already.

All right. Great, thank you.

Our next question is coming from the line of Jason Mills with Canaccord Genuity.

Thanks, Mike, for taking the question. I want to follow up on that last comment you made and Bob's question about the PARTNER II sites. Just -- you clearly had to go through the rigor of training these sites initially with PARTNER, you don't have that issue so much this time around, so could you put a finer pin perhaps to your thinking on the ramp of the centers getting IRB approvals this time around? And also maybe also a finer pin to the enrollment timeline relative to PARTNER?

Yes, well you had a chance to observe us in Europe when we moved from SAPIEN to SAPIEN XT and we were able to do that pretty seamlessly within hospital training and we think that we will employ that same kind of technique. Now the -- we need to go through the IRB's again, so there's that hurdle. I would like to think that'd be a little easier to go through this time then the last time around. But we certainly think enrollment is going to go faster. You've been able to see what continued access has been and so I would say you have referral networks that's continuing to drive it at that level. And so sort of the bottom line for us is that we hope to get this enrolled even before SAPIEN is approved. If SAPIEN's approved then the timelines that we thought before, at least the B -- the inoperable patient portion of it.

Okay. That's helpful. My second question in Europe with respect to the number of centers, you guys have continued to add centers, you mentioned that in the third quarter, not surprisingly, there were just a few center adds. Could you talk about what the landscape may provide for you in terms of new center penetration over the next couple of quarters given that first -- fourth and first quarters tend to be a little bit more robust in terms of the European market?

Yes, I think that we'll still add centers. I think that'll be more modest. I think the centers that are already in Europe today will probably tend to attract more patients and that'll be the primary source of growth and drive, although there will be an increase in centers. And then you're continuing to see sort of more countries come on as well that -- beyond just centers being added in Europe. The highest quality centers in Europe probably are already into transcatheter technologies, so we'll be moving into smaller centers and it'd be a more modest impact.

Great. And just a follow up for Tom on the tax rate question. Tom, your guidance does not include the R&D tax credit insofar as you've given the updated guidance today. Correct?

No, it does for the full year. We're fully expecting in Q4 in the numbers we've provided.

Okay. Thank you very much.

You're welcome.

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

Good evening, everyone. Want to just quickly follow up on the surgical valve business this quarter. Mike, I think in the US you mentioned that it was flat and if I remember correctly, I think that's up against something like a 14% comp that you put up in the third quarter of last year. But on -- I guess first is that, correct? And then on a global basis, could you talk a little bit about if you're seeing any competitive trialing? St. Jude's has just rolled out some new products. What you're -- maybe help us understand how we should think about the surgical valve business going forward. Because up until this quarter you had been generating growth way in excess of I think where the market was growing. And then I have a follow-up on currency.

Okay. Yes, make sure that I get them all David because I want to make sure that I'm tracking with you. Yes, last quarter's growth rate was quite strong. Matter of fact -- or I mean a year ago last quarter was quite strong. The US was I want to say somewhere in that 10%, 12% range last year in terms of what its growth was compared to this year. So yes, it is a tough comparable from that point of view. I would say I don't know that we've been impacted by any competitive launches if we look at the current Q3. Does that answer your question?

Yes. And then on currency, Tom, could you just remind us I guess on the top line how you mark-to-market FX in terms of revenue recognition? Some of your peers do it just they pick the rate at the first day of the month and then that's the rate that's used throughout the month. How does it work at Edwards? And then does -- could you just remind us of the P&L impact?

Okay, sure. The method we use is exactly that. It's the first day or approximately maybe a week just prior we take an opportunity to set the rate. So we're always maybe a month in arrears on rates, and that's as regards to revenue recognition. Obviously, the balance sheet is on its spot rate at the very end. In regards to FX impact, you thinking year-over-year full?

No, just how it flows through from revenue down to net income. So I know that you hedge through the gross margin line but is there any benefit to EPS from currency or is it completely awash?

Usually we never are able to get it exactly right with all the multiple currencies of the different timing of the agreements and so forth. Our goal is to get within 10%, 15% of the movement. We don't want to over hedge, we're not sitting here to try to over hedge the situation. Generally we've been pretty successful this year and despite a pretty big hit at the top line, we're pretty flat on EPS. So this year versus the investor conference, I should say, comparison when we first set guidance, we've pretty much negated that impact of a $30 million to $35 million hit on the top.

Got it. That's very helpful. Thank you.

You bet.

Our next question is coming from Sean Lavin with Lazard Capital. Please state your question.

Hi, thank you for taking my question.

Sure.

Just was wondering if you could walk us through I guess your change in fourth quarter margin with the 72.5% this quarter and the guiding to 71% to 72%, what is changing there?

Sure, Sean. Really the impact of the rate changes, as I just mentioned to David, we're a little bit behind. So Q3 had very little impact from the recent moves in rate. Q4, however, you will see a benefit. So it was an improvement on the revenue line but you have the give back. So it cost us probably in the quarter 100 to 150 basis points. So that's really the one item that's moving from guidance. And I'd say that the -- hang on one second, say the 71% to 72% is a result of that. So the product mix was fine, it picked up slightly. Full year, I know what it was, I lost my train of thought for a second, we were guiding to 72% to 73%, it's probably 50 basis points [depending] the end of full-year.

Okay. But the -- I guess the change between the third and fourth quarter that's simply the rates hit the expenses more than revenue?

Yes. Hold on. No, it's got to do with the revenue and the hedge agreements. And there is an expense component to that that gives you a natural hedge but net net we're generally into that.

Okay, that's all I have. Thank you very much.

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

Good afternoon. Tom, maybe I missed it, but can you just update us I think last quarter you talked about just for THV a $20 million FX headwind on the revenue side. Do you have an updated number for that FX hit for THV, Tom?

Yes, you probably saw something in the neighborhood of about $5 million benefit, so you're thinking more like probably closer to $15 million of headwind.

Okay.

So was that your question?

That was my question, very helpful, very clear. And just as a follow up, Mike, just on this issue of TATF mix being 50/50 I guess that number still surprises me so in the quarter in Europe, post XT, in terms of the trends, would you say at a given center you saw more benefit -- or you can talk about it on a multi-center basis. Did you see more benefit from share or would you say you saw more benefit from an expanding patient Cohort perhaps vascular complications? Which do you think was the more prominent driver in the particular quarter?

Okay. I'm not sure what part surprised you about the 50/50. You're saying what is driving the tripling of the transfemoral volume, is that the question?

So Mike, I would have assumed that the TF/TA mix would have shifted much more in favor of TF even this early in the third quarter. And so I'm just wondering in light of that, where did you see the most significant gains? Did you see them from share, from other competitors, or did you see them from expanding the usefulness of the 18 French device in perhaps vascularly complicated patients?

Yes, I'd say a couple things. Just if you go back historically we used to say we were around two thirds TA, one third TF. The -- I think the things that are remarkable is TA stayed remarkably stable. So even in this slow quarter we had a similar number of TAs as we saw the second quarter, so that was remarkably strong. So maybe that's one of the reasons why TF didn't overtake it. I'd say so -- I would have to say that share was substantial in terms of that was a significant component in terms of what was added. Remember we had a slow summer. So is that -- does that get there?

Yes, that's helpful, Mike. Thank you.

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

Hi, thanks for taking my question. Mike, I was just wondering if you could give an update in terms of how widely launched XT is in terms of in Europe? Is it in all customers or is there still a reasonable amount of just the original SAPIEN device being used in Europe?

Yes, I think it sort of breaks down by delivery positions. So in the transfemoral position, the NovaFlex we're about 100% converted in Europe, I think it's about across the board from what we understand. In transapical at the end of the quarter we were around 25% of the volume was there. We're asking people to use up their inventory of the first generation SAPIEN and Ascendra system before we convert over to Ascendra 2, but we've had very favorable feedback.

Okay, was that throughout the second quarter, was large -- on the transfemoral side was almost all XT, or was that sort of a progression throughout the quarter?

You mean throughout the third quarter?

For third quarter, third quarter.

Yes, I would say we made a lot of that progress in the second quarter. So Q3 was probably almost all XT.

Okay, great. And then finally just one question in terms of how you're thinking about the transapical approach. In -- when I was at TCT and talking to a couple of the investigators who were surgeons, they noted that they had certain high-risk patients who didn't qualify for the trial because of the fact -- they didn't have appropriate transfemoral access. Have you ever thought about doing -- but they did think that they would be good candidates for the transapical approach. Have you ever thought about doing clinical work around -- utilizing the TA approach in high-risk patients?

Yes, of course that's been discussed. And I think the belief still is that when you have these patients that are judged inoperable to come through the chest wall, there's potentially -- it's potentially a difficult procedure for these patients. And so although this gets discussed, I think probably the trial design that you're going to see in PARTNER II is going to look much like what you see in PARTNER I. The -- you'll have a certain group of patients like patients with porcelain aortas for example that maybe you'd argue are appropriate for transapical approach, but we think where TA is going to make it's headway is particularly in comparisons to a full sternotomy. And that's, we think, that makes the TA procedure have very bright prospects.

Okay. Great. Thank you very much.

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

Thanks very much for taking the question. Mike, can you maybe just provide an update on the Japan trial with respect to where you are on the enrollment, I know you guys just started it recently, and when you would expect to complete the transfemoral and transapical arms there?

Yes, well we're very pleased with the way that's going. We're continuing to enroll patients in that clinical trial and we're pretty much on track. We haven't, Paul, given a lot of detail about that trial for competitive reasons, so I'm not going to get much deeper in it at this point. But we're right on track. And we're hopeful that we could get XT in Japan as early as 2013, which probably wouldn't make its timing very much different than the US, if you stop and thought about it, right?

Okay. That's useful. And then Tom, just if you could clarify did you say the net impact from the hedges in Q4 would be 150 to 150 basis points headwinds, is that correct?

I said for the fourth quarter versus what we thought they were in July.

Okay.

They went down 100 to 150, say.

Okay.

Of additional pressure.

Okay. Thank you very much.

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

Thank you very much for taking my questions. Pulmonic valves, can you give details on what the contribution was in the quarter?

Contribution from -- to sales from pulmonic?

Yes, please.

Yes, let's see if we can dig that up, Joanne. Hold on a second. I know it was minimal. I don't think there were a whole lot of units. Let's see if we have a number.

While you're looking can I ask my second question?

Sure, just off the top here, I don't know we're still looking for it, but it must be less than 20 units so it can't be huge.

Okay, that's very helpful. SG&A -- sorry, R&D in the quarter as a percentage of revenue was a little bit higher than I was looking for or thinking about. Anything in particular that we should be thinking of that for?

No, Joanne, you're right, as a percentage it was -- it jumped a full percent over what I was expecting. We were thinking 14%, it ended up 15%. Typically the third quarter as a percentage of sales is a combination of both the spending and the sales. And in this case we saw the R&D pretty level, in fact up slightly from the prior quarter, so it was strong quarter but not as strong as the percentage would indicate. In a typical quarter that would be back in 14% or sub 14%.

And what made this atypical?

Just the fact that the spending, it did not decrease as it typically does in Q3.

Yes, just to build on this. Because sales are lower seasonally in the third quarter it makes these -- it makes spending as a percent of sales look more dramatic than it would typically be. And that tends to be one that is not volume related that's pretty flat.

Okay. Thank you very much.

You're welcome.

Okay, one more question, please.

Thank you. Our last question is coming from Sara Michelmore with Cowen and Company. Please state your question.

Yes, thank you so much for taking the question. Mike, people have kind of circled around this so maybe a different way to ask the question about what's going on in Europe after the release of Cohort B data. Do you have any sense of the proportion of patients today that are treated with SAPIEN that are inoperable as described by the pertinent criteria? Is that a small number? Or are those patients being treated already in Europe?

Yes, Sara, what we do track there is our source database. And I can tell you I don't have probably the most recent statistics because those get reported at major meetings. We have to say that it's not obvious. There are certainly less than half of the population of patients that are treated in Europe are these inoperable patients, probably more of them are these high risk. And everything that we saw out of source data in the past suggest that it was staying very close to the indication as it was approved in the CE Mark from the beginning. So not obviously at an uptick, although it's very early. Remember the release of this data came at the very end of the third quarter. I want to say was the third week of September. So we really wouldn't have seen any impact so far from any of that data.

Okay. And -- but as you look out to 2011 and incremental legs of growth for the product in Europe, I mean, is that one of the bigger opportunities that you see? Or how should we think about the trajectory of the product next year?

Well, we clearly think it's going to continue to grow. We think the market is growing this year. It probably doesn't grow as fast next year. We're prepared to come forward with some more specifics, Sara, when we get together in December. So I don't have anything that's specific other than to say that we know these favorable partner results can't hurt and additional reimbursement is also a driving force.

Okay, that's great. And then just one last one. On the diabetes product, Mike, you mentioned at the first generation product was on track to be released in Europe. Where are you with the second generation version of the product? Thanks.

Yes, if I said than I misspoke or didn't communicate clearly enough. We're making good progress on the second generation and that's the one with -- designed for more ease-of-use. And we anticipate that it's that one that'll be available in Europe by late 2011.

(multiple speakers).

That first generation is out there right now and we're taking advantage of the post approval period here to gather a lot of data in a whole variety of clinical settings.

Yes, I probably misspoke, Mike, I guess there's a version beyond that second generation one, correct?

Well I think at some point there will be, but right now we're working pretty hard on that second generation.

All right, thanks so much.

You bet. Thank you, Sara. And with that thank you very much for your continued interest in Edwards. Tom and David and I welcome additional questions by telephone. 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 included 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. And to access this, please dial 877-660-6853 or 201-612-7415, use account number 2995 and passcode number 358054. I'll repeat those numbers. Dial 877-660-6853 or 201-612-7415. The account number is 2995 and the passcode is 358054. Finally an audio replay will be archived on the investor relations section of our website. Thank you.

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