愛德華生命科學 (EW) 2010 Q4 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation fourth-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. 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 fourth-quarter 2010 financial results. During today's call, we'll discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO, and Tom Abate, CFO.

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; tax rates and free cash flow; and other financial expectations for 2011; the timing and results of the transcatheter valve clinical studies including the PARTNER and PARTNER II trials; expectations for regulatory submissions and approvals; new product launches and potential benefits and market expansion; manufacturing changes; 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 available on our website at Edwards.com. Also a quick reminder that when we use the terms underlying and excluding special items, we are referring to non-GAAP financial measures. Otherwise we are referring to our GAAP results. Additional information on our use of non-GAAP measures is included in today's press release.

And now I'll turn the call over to Mike Mussallem. Mike?

The fourth quarter capped a very strong year of financial results and progress on our exciting new technologies. We are proud of the many accomplishments we made in our transcatheter heart valve program last year which strengthened our leadership position in this emerging field. The PARTNER trial results reminded us of the importance of this therapy to the many patients who are not suitable candidates for open heart surgery. During the year, we also introduced new surgical heart valve therapy and critical care monitoring products and continued to aggressively invest in our product pipeline to bring emerging technologies to clinicians and their patients for years to come.

Now turning to the quarterly results. On a reported basis, fourth-quarter sales grew 13.2% to $392 million; underlying sales growth for the quarter was 13.7%. For the fourth quarter, Heart Valve Therapy grew 20% to $226 million, which included $65 million from transcatheter heart valves. On an underlying basis, total Heart Valve Therapy sales for the fourth quarter grew 22% and transcatheter heart valve sales once again doubled versus prior year, while surgical heart valve sales grew approximately 5%. Surgical valve growth was led by the continued adoption of our Magna platform and Physio II rings.

In the US, surgical heart valve sales grew 3% in the fourth quarter, an improvement from the third quarter. Outside the US, we again gained share this quarter with underlying sales growth of approximately 6%. In aggregate, global pricing remained unchanged versus the prior year. We continue to see strong adoption in both the US and Europe of our new Magna Mitral Ease valve, which was launched just last year. In Japan, we expect our Magna Ease aortic valve to be approved during the fourth quarter.

We are making good progress toward gaining European regulatory approval for Intuity, our rapid deployment surgical aortic valve system formerly referred to as Project Odyssey. We now expect to receive CE mark in mid-2011. Following CE mark approval, we will begin a limited European launch of Intuity and commence a clinical trial to establish quality of life and economic evidence to support reimbursement efforts. We believe Intuity has the potential to expand the adoption of minimally invasive aortic valve surgery for a broad group of patients. Lastly, in the US, we expect to obtain IDE approval for the trial of Intuity this year. During the second quarter, we expect to launch our Physio Tricuspid Ring in both the US and Europe. This new ring expands our market leading repair portfolio and is designed to provide a more physiologic repair for a patient's tricuspid valve. To summarize, in 2011 although we anticipate some continued economic pressure and new tissue valve competition, we expect to achieve global underlying growth of 3% to 5% driven by the continued momentum of our newest products.

Turning to transcatheter heart valves. We ended the fourth quarter with a very strong $65 million in global sales, doubling year-over-year on an underlying basis. This result included an estimated $3 million to $4 million in incremental stocking orders. With the introduction of the more advanced SAPIEN XT, our aggregate pricing increased 5% to 10% versus last year. In the fourth quarter, we saw impressive growth in transfemoral sales, which once again tripled versus last year driven by SAPIEN XT and the NovaFlex delivery system, and at the same time transapical sales remained strong, consistent with levels seen during the first 3 quarters of the year. The roll-out of our SAPIEN XT with Ascendra 2 transapical delivery system continues to go very well, with XT now accounting for over half of our TA sales. Surgeon feedback remains very positive on both the new valve design and delivery system which is easier to use and can help improve outcomes. We still expect to receive approval in Europe for our larger 29 millimeter SAPIEN XT valve within the next few weeks, which will increase the treatable patient population. We recently received CE mark for our new E-Sheath, an expandable sheath technology, to be used with the XT and the NovaFlex transfemoral delivery system. With this lower profile, E-Sheath has the potential to help reduce vascular complications. We anticipate a commercial launch at EuroPCR in May.

Turning to our US PARTNER trial, all of our assumptions for timing remain unchanged. In Cohort B, we completed submission of our PMA to the FDA at the end of October 2010. The build-out of our US field organization is proceeding as planned and will be adding additional resources throughout the year. We continue to assume a US launch in October of this year and expect US commercial sales of approximately $20 million to $25 million in the fourth quarter. And for Cohort A, we expect that the results will be presented at the American College of Cardiology annual conference in New Orleans in early April. Also during the second quarter, we still plan to submit our PMA.

Turning to our US PARTNER II trial, just today we received FDA approval to begin enrollment in the revised Cohort B arm of PARTNER II, which will study the XT valve in inoperable patients. All the expectations we set at our investor conference in December, including randomization to SAPIEN, remain unchanged. We expect enrollment to commence soon, proceed very rapidly, and be completed by the end of the year. For Cohort A, the high risk surgical arm, we are still actively working with the FDA and hope to receive IDE approval in the first quarter. We think the structure will be generally very similar to our first PARTNER trial. One of the items under discussion for Cohort A is the expansion of the definition of high risk patients.

In Japan, we are pursuing an aggressive strategy to gain regulatory approval of SAPIEN XT. Last year, we began enrolling patients in our PREVAIL JAPAN clinical trial and we continue to make progress to receive regulatory approval as early as 2013. In Europe, the SAPIEN valve in the pulmonic position continues to have high procedural success. This valve serves a small, but important group of younger patients and has the potential to reduce the number of open heart surgeries they undergo. In the US, SAPIEN may be considered for humanitarian device exemption due to the limited patient population. We plan to pursue a 75 patient study with six months' follow-up. In summary, our transcatheter valve sales outlook remains unchanged. We continue to project $300 million to $340 million of global transcatheter heart valve sales for full-year 2011, which includes $20 million to $25 million of US THV sales.

Turning to Critical Care. Sales were $128 million for the quarter. Against a strong comparable quarter last year, sales grew approximately 4% on an underlying basis, which excluded a positive $2 million impact from foreign exchange. This performance resulted in an underlying growth rate of 6% for the full year. Strong sales of our advanced monitoring products led by FloTrac continue to drive growth. In addition, pressure monitoring once again made a significant contribution. Our advanced monitoring portfolio expanded with the recent launch of VolumeView and EV1000 outside the United States. The innovative technology of VolumeView and EV1000's more intuitive display helped broaden our product offering in the medical ICU, and although sales in the fourth quarter were negligible, we believe these technologies have the potential to become best in class devices and drive share gains. We expect to receive approval to enter the US market with these products in the third quarter.

Consistent with our strategy to simplify our Critical Care business, there are two items worth highlighting. We have entered an agreement to transfer our US central venous catheter product line to a third party, which will trim approximately $4 million from our Critical Care sales in 2011. As we continue to supply product over the next two years, this will have minimal impact on our earnings. Also, in Japan, commencing in April, we will no longer distribute the Somanetics product line, which contributed approximately $7 million to sales in 2010. With regard to our in-hospital glucose monitoring program, we are continuing to make good progress on the development of a second generation product designed to enhance ease of use. We still anticipate obtaining CE mark for our Gen II device by the end of this year and expect to begin commercial sales in 2012. In summary, we remain confident in our ability to deliver full-year critical care underlying sales growth of 5% to 8% driven by ongoing advanced monitoring growth and the recent launch of VolumeView and EV1000.

Turning to Cardiac Surgery Systems, sales for the quarter increased to $25 million and grew 6% on an underlying basis. We ended the year achieving full-year revenue of $100 million. In December, we voluntarily withdrew one of our catheter products, which impacted our fourth quarter sales by approximately $1.5 million. We plan to reintroduce the product later this month. During the fourth quarter, we completed the move of our CSS manufacturing site to the Draper, Utah facility. We will continue to broaden our internal manufacturing capabilities there and significantly reduce our dependence on outside suppliers by year-end. We continue to anticipate achieving full-year CSS revenue between $105 million and $115 million and an underlying growth rate of approximately 10%, driven by the strong interest in minimally invasive surgery and our continued investment in clinical education programs. Total reported sales for vascular, which is now comprised of our Fogarty products, were approximately $14 million this quarter; underlying sales grew 4% versus the prior year.

Finally, before turning it over to Tom, I'd like to point out that during the fourth quarter we restructured our operations as part of our continuing efforts to align resources with our strategic imperatives. As a result, we incurred a $7 million special charge.

Now, I'll turn the call over to Tom.

In addition to the strong sales results Mike discussed, I am pleased to report for the full year, excluding special items, net income grew 22% versus the prior year, while we increased our R&D investment by 16%. This quarter, we achieved diluted EPS of $0.54 and non-GAAP diluted EPS of $0.55. For the quarter, our gross profit margin was 71.1% compared to 70.7% in the same period last year. This improvement was driven by foreign exchange, partially offset by investments in our manufacturing operations. For 2011, we continue to expect our gross profit margin to be between 71% and 73%, with the first 3 quarters at the low end of the range and the fourth quarter at the high end of the range. Fourth quarter SG&A expenses were $142 million or 36.3% of sales, an increase of $10 million over the prior year. This increase was driven primarily by transcatheter heart valve sales and marketing expenses. For full-year 2011, we continue to expect SG&A to be between 27% and 39% of sales, which includes an estimated $40 million investment in the US THV launch.

R&D investment in the quarter grew 15.7% to $56 million or 14.2% of sales. This increase was primarily the result of additional investments in our transcatheter valve program. For full-year 2011, we continue to expect R&D, as a percentage of sales, to be between 14% and 16%. During the quarter, we recorded a pre-tax $10.5 million special charge comprised of two items, a global realignment charge of $7.2 million, primarily related to severance costs, and a $3.3 million right down to market value of two minority interest investments. Additionally, during the quarter we recorded $7.9 million income tax benefit primarily related to a new international tax ruling regarding transfer pricing. Other income of $0.4 million in the quarter consisted primarily of a $1.5 million continuing earn-out associated with a 2009 divesture of our hemofiltration product line, offset by a balance sheet related foreign exchange loss of $1.5 million. As a reminder, the final hemofiltration earn-out of $1 million is expected in the first quarter of 2011.

Our reported tax rate for the fourth quarter was 7.6%, excluding the special items, the tax rate was 18.6%, which reflects the year-to-date benefit of the federal R&D tax credit renewal. Excluding special items, the 2010 full-year tax rate was 24.8%. For full-year 2011, we continue to expect our rate to be between 24% and 25%. FX had a negative $0.02 impact to EPS due to the balance sheet adjustment and other income I previously mentioned. Looking forward, if rates remain unchanged, we would expect a modest positive impact to 2011 full-year sales.

Free cash flow generated during the fourth quarter was $72 million. We define this as cash flow from operating activities of $94 million, less capital spending of $22 million. This resulted in full-year free cash flow of $190 million. For 2011, excluding special items, we continue to expect free cash flow to be between $190 million and $200 million as we invest additional capital associated with the US SAPIEN launch. Consistent with our objective for the full year, we repurchased approximately 4 million shares for $200 million. For modeling purposes, we project diluted shares outstanding to be approximately $120 million.

Turning to our balance sheet, we ended the quarter with a net cash position of $354 million, total cash of $396 million, exceeded our total debt of $42 million. Our DSO at the end of the quarter was 63 days, an improvement of 11 days from the prior quarter. Inventory turns were 2.2, a small improvement from the prior quarter.

Turning to our 2011 sales guidance, we continue to expect our full-year product line sales ranges and underlying growth rates to remain unchanged from the guidance we provided at our December investor conference. For Heart Valve Therapy, we expect sales to be between $960 million and $1 billion, with a 16% to 20% underlying growth rate. In Critical Care, we expect sales of $470 million to $500 million, with a 5% to 8% underlying rate. In Cardiac Surgery Systems, we expect $105 million to $115 million with a 9% to 11% underlying rate, and in Vascular, we expect sales of $50 million to $60 million. For the first quarter 2011, we project total sales of $370 million to $390 million. We estimate that first quarter diluted EPS will be between $0.40 and $0.42, excluding special items. For full-year 2011, we continue to estimate that diluted EPS will be between $1.91 and $1.97 excluding special items.

I believe I gave the SG&A growth rate range incorrectly. The correct range for SG&A as a percentage of sales would be between 37% and 39%.

With that, I'll turn it back over to Mike.

2011 promises to be an eventful year with new product introductions, important clinical milestones, and the anticipated FDA approval of our SAPIEN transcatheter valve in the United States. In addition, we are increasing our R&D investment by 20% to fuel the many promising opportunities that we see in structural heart disease and critical care technologies. In closing, all of our financial goals for 2011 remain unchanged. We are very focused on creating a bright future for Edwards and believe the best is yet to come.

With that, I'll turn it back over to David.

Before we open it up for questions, as a reminder, please remember that we will not be commenting on the results of Cohort A of the PARTNER trial until the data are presented. We intend to end today's call by 6.00 PM Eastern. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions, please re-enter the queue and we will answer as many as we can during the remainder of the hour.

Operator, we are ready for questions.

Thank you. (Operator instructions).

Amit Bhalla with Citigroup.

This is Valerie in for Amit.

Can you please elaborate on your discussions on the expansion of the definition of high risk patients?

Yes, happy to, Valerie.

In the first trial there was a very specific designation for high risk patients. In this trial in Cohort A, what we'd like to have is a slightly expanded, so we'd like to take an STS score that's a little lower than the STS score of 10 that was used in the PARTNER trial, and that's yet to be determined, but we are striving to accomplish that in this.

Okay. And just a follow-up. The operating expenses came in a little higher than we had expected. I was just wondering if there was any surprises so far related to your ramp-up for Heart Valve expenses last quarter that might help reset our expectations for 2011. Thank you.

No. Your question -- I think I'm right on as a percentage of sales to what we guided to and, no, there's nothing in there that comes as a surprise to us.

Thank you.

Larry Biegelsen with Wells Fargo.

Tom, could you tell us if the gross margin for SAPIEN is above or below the corporate average at this point? Where I'm going with this is, it's a little surprising that the gross margin doesn't improve more in 2011, given the increase in SAPIEN sales, and then I have one follow-up.

Larry, it's both a positive contributor in the quarter and for full year, to answer your question, so there's an awful lot that goes on and other costs of goods sold. It's a little bit tough to talk about the year in total, because, as you know, we are -- our assumption is a launch in the fourth quarter, so we are making investments of various types. Included in that are building the infrastructure in our Heart Valve business in advance of the launch. It does have a positive, which would imply it is above. I'll give you that, and from that point on I think it's multifaceted and we are sticking with the guidance we gave in December.

Let me ask you a question I asked Dr. Leon at the analyst meeting. The transapical arm of Cohort A is only 200 patients and there's clearly a steep learning curve with transapical. What if the transapical data is numerically inferior to surgery in Cohort A? What does that mean from a regulatory standpoint? If transapical isn't approved, how would it affect your launch assumptions? Thanks.

Yes, Larry, I think it's inappropriate for us to speculate on what the trial results might say. We are really not going to get into commenting on PARTNER A. We are not very far away. In April I think we ought to get a good look at that and I think it should stand on its own.

Bruce Nudell with UBS.

Mike, I think as originally configured, Cohort A and PARTNER II spoke to around 10% of surgical patients. What is the redefinition -- where are we going with this? Is it 20%, 30%? Could you give any color at all?

Yes, it's tough to say, Bruce. What happens is depending on what STS score, what discussion goes, when it gets smaller, it can certainly open up the patient population, so it would be inappropriate to speculate until we know exactly what FDA would be comfortable with.

And then my follow-up is, where would you estimate your transfemoral share is in Europe?

Well, it's tough to say. If you look at this quarter, obviously it was very strong, and we think there was very strong market growth in the quarter. To try and speculate on what's going on with market share gets very difficult to do. The other single competitor is on an off quarter from we are, so direct comparisons are difficult. We like our trend. I think our team in Europe feels like there may be modest share gains, but it would be relatively modest.

Kristen Stewart with Deutsche Bank.

Tom, I was wondering if you could look at 2010, where it ended up, and if we just isolate out the transcatheter valve business, all the related expenses to it, can you just comment on whether or not that business was break even or positive or still running at a loss relative to the rest of the core business?

Great question. I would say, overall -- I'm going to have to go from memory here, I know as the sales grow, obviously it's improving. My estimate would be we were positive by the end of the year. I just don't know, Kristen, if I added it all up, I would say it's pretty close to break even, if not slightly positive.

Great. Obviously, with all the ramp-up of the sales force and expenses ahead of the launch, do you think that the last quarter, what not, will overcome or will 2011 be another depressed year because of the spending, and then 2012, we should think about it as being accretive to the quarter?

Remember, we are putting $40 million in, and we are talking about a sales number, probably fourth quarter launch assumes $20 million, $25 million, so that's not going to make much progress, but the fourth quarter on its own begins to look -- looks much better. I would say first three, you think of it as an investment and probably going back a bit, backwards a bit in terms of making progress, but the fourth quarter turns that around and then obviously 2012, the big year.

Perfect. Can you just break out what the US sales were related to continued access and whatnot in the $65 million for the year?

We don't typically do that, Kristen. It's certainly a minority. I think it's under 10% of total, but I don't know precisely what that is offhand, although we can try to get it for you.

No problem. Thank you.

Thank you.

Mike Weinstein with JPMorgan.

Chris Pasquale here for Mike. Can you hear me okay?

Yes.

Mike, first, on the Cohort B PMA submission, you should be coming up on your 100 day meeting with the FDA in the next few weeks. Do you have something scheduled and can you let us know when you expect that to take place?

So the specific question again, Chris?

Your 100 day meeting with the FDA, do you have something on the calendar and is that coming up in the next couple weeks here?

Yes, I wouldn't put any special significance on a 100 day meeting. We have a lot of interaction going on with FDA. We have in the past and I expect that to continue, so I don't expect a milestone event to be coming up.

And then can you talk a little bit about the trial design for TRITON US, how you're thinking about that in terms of number of patients and length of follow-up that you need to generate the appropriate data?

Yes, as you might imagine, Chris, at this point, we are very early stages. We haven't had discussions that are specific enough to be able to indicate, exactly how many patients there might be or provide very much detail and I'd be hesitant to get out on a limb and suggest what that might be. Once that becomes firm, you can be sure we will be communicating on that.

One last quick one, then. Could you give us some sense of what repair grew in 2010 within your valve business and how you're thinking about that segment in 2011?

Yes. I think overall repair grew in -- I would say the mid-single digits in 2011, which is a little lower than typical. We like to think that our new products here are going to cause us to gain momentum as we go forward.

Great. Thanks.

You're welcome.

You bet.

Glenn Novarro with RBC Capital Markets.

Two questions. First, you had some stocking orders in the fourth quarter. I remember there were stocking orders a year ago as well. Can you remind us why you're seeing these stocking orders showing up in the fourth quarter? Is it just typical hospital buying at the end of the year? That's question one.

And then second, can you give us your mix between transapical and transfemoral in Europe? Thanks.

Sure. Thanks, Glenn.

Yes, so just to recount the stocking order, there's always a little bit of stocking order that goes on. We try to only point it out when it tends to be somewhat unusual. I think the last time we mentioned stocking wasn't the fourth quarter last year. It was actually when we launched the XT valve in the second quarter. We saw some pretty good stocking at that time and it was tied to hospitals buying in support of that launch. We believe the majority of the stocking that took place in the fourth quarter was the ramp-up of Ascendra 2 and the new XT system in Ascendra. That's what really caused people to buy. There's some of this that takes place in the fourth quarter that you correctly noted, but that's a minority of this. And, we don't know this number to be exact, but we estimate it at $3 million to $4 million in total in the fourth, but I wouldn't necessarily expect that to repeat fourth quarter next year.

On your second question, we think that TA and TF are pretty close to even at this point in time. The shares are pretty similar in Europe -- or in terms of our share of sales.

From a modeling point of view, I'm assuming you expect transfemoral to become the bulk of that in 2011; is that correct?

Yes, transfemoral is clearly growing much faster, so that's appropriate. Again, what I noted here in the fourth quarter, transapical, some of that stocking actually happened in transapical, so if you probably looked at it on a procedural basis, you would think that TF was probably a little higher than TA, but, yes, even though TA is staying very solid and we are so pleased with that, TF is on a pretty steep growth curve.

Okay. Thank you, Mike.

The one thing that I might add to that Glenn, just to help you for modeling purposes, when we launch this 29 millimeter valve, it's going to be TA only at this early stage, and we think that's going to be popular and probably bump up the TA sales.

Okay. Thanks, Mike.

David Lewis with Morgan Stanley.

It's Steve Beuchaw in for David. Thank you all for taking the question.

Sure, Steve.

One on the surgical valve business. I thought the comments you made about the outlook for 2011 were interesting that you acknowledge that there's macroeconomic pressure, that the buyer environment can be difficult, and that there are a couple of interesting new competitors in the market, and stood by your guidance which calls for some pretty significant and pretty steady growth in that market. I wonder if you might give us a sense for what it is we might be missing as we think about that growth -- market as one that could be facing those challenges in 2011? Is it something about market sizing or perhaps something competitive that we might not be thinking about that's behind your confidence?

Just to understand your question, Steve, do you think -- is your question that the 3% to 5% seems high to you or seems low to you? I wasn't following exactly what was behind it.

Well, our view is that with the market, in the single digits in 2010, that for Edwards in 2011, you could see something closer to the low single digits with new competitors and pricing pressure. Really, you're calling for something that could reach beyond that.

Sure.

Well, a couple of things. Yes, of course we see the economic pressure like everybody. We are hoping that it moderates, although we see it continuing, but the pressure that we felt in the Heart Valve business doesn't sound like it's as substantial as what may have been seen in some of the other medical device segments like orthopedics, for example, and so forth. That may be part of the issue.

Also, we did anticipate new competitors coming in midyear with tissue valve and right now our assumptions remain unchanged, so when we gave the 3% to 5% back in December, we anticipated this and we think the growth and strength of our premium products are going to have a positive uplift. And plus, we are seeing real growth outside the US and European market that will help drive some growth.

Thanks, Mike.

And then one question on SAPIEN in Europe. In the past you've commented that it would, of course, ultimately be the case that you would go head to head with competitors in some of the key centers in Europe. Are you starting to see that activity where you aggressively, or let's say, actively promote, now that you have XT and Ascendra 2?

I think we do end up in some of the same centers with the competitor; there's no doubt about that, Steve. I think in general what we have seen so far is market growth, but we certainly do -- we are in a position now where we do differentiate our product and point out the positive features of the Edwards SAPIEN valve.

Great. Thank you all.

Sure.

You bet.

Douglas Tsao with Barclays Capital.

Mike, I was wondering if you could run through a little bit in terms of the launch in second half -- towards the end of the year, what you're able to do in terms of training centers and where you are in the process in terms of prioritizing centers to launch the valve, say at the end upon approval?

Thanks for that, Doug.

Yes, as we mentioned in our comments, we are hiring the team at this point and one of the values there that the team brings -- and many of them come with deep experience in the field including interventional and that gives us insight as to what sites we might go to -- and so, we are in the process of working on that. We don't have it finished at this point, but we are gaining insight and that's becoming a clearer picture.

We don't anticipate doing much training in advance. We find that it's truly valuable for teams to go straight from their training right into screening patients and doing their first patients without a lag time; and since we can't accurately predict and we can't promote in advance, I think we are really going to fire up pretty consistent with when we really know we are going to be able to go.

Okay. In terms of the guidance that you have provided for sales of SAPIEN in the fourth quarter, that is largely or almost wholly predicated upon sales into the existing PARTNER sites who obviously don't need nearly as much training?

I think that's fair. One of the advantages that we get early on, Doug, as you might anticipate is there will be some stocking orders that take place and so when people get their initial stock of products it will help lift things early on, but you're right, the bulk of procedures in the fourth quarter probably get done by partner sites.

Finally, in terms of Intuity rolling out in Europe mid-year, should we see some lift in the Cardiac Surgery Systems, because I know you were planning to have that as a package device, as well as in terms of the minimally invasive procedure? Should there be some lift associated with the launch of that product in Cardiac Surgery Systems or is that going to all show up in the Surgical Valve business?

Yes, the short answer is it might be some lift, but it's not going to be big in terms of the total heart valve number. That's a pretty big business at this point in time. And we really anticipate this being a very important product, so we are going to have a disciplined launch; we are going to be collecting data; we are going to be, once again, prioritizing acute procedural success and tracking outcomes; and, we are also going to be making a case for its economic value in support of reimbursement and being able to really expect the premium that would be appropriate for this product. So, we are going to launch with those kind of principles in mind that probably don't say that it has a big lift on '11 numbers.

Great. Thank you very much.

Sure.

David Roman with Goldman Sachs.

I wanted to ask just one follow-up question for Tom on the tax rate for the year. I think at the time of the analyst meeting, it wasn't clear what the details of the renewal of the R&D tax credit were going to be and I think you had talked about a phasing in throughout the year with the lowest tax rate in the fourth quarter. Is that still the case now or are we seeing more consistent tax rates?

Those comments sound more like they were 2010 comments. I think '11 with the approval, it should be a relatively consistent number across the year.

Okay. On SAPIEN XT in Europe, Mike, you referenced that there were some accounts where you were overlapping with Medtronic, and I think at the time of the XT launch you talked about the initial goal being to convert current Edwards users from SAPIEN to SAPIEN XT and then go after some of the competitor accounts. Are we at a point yet where you're more aggressively going after those accounts or are you still converting existing users?

Yes, we've already converted, David, all of our accounts. As a matter of fact, it happened pretty quickly, as soon as the XT was available, the transfemoral users very quickly migrated and stopped using the SAPIEN and so that all happened over the first quarter or two.

Yes, at this point our growth is really coming from two elements. One would be market growth, and the other one would be some share gain. And indeed, we are going to accounts and it's -- there's a number of accounts where we are shared, where we're already in both and so influencing those accounts is a priority just like going to accounts where they are currently not using Edwards' products.

Okay.

And then just a quick follow-up on that. Were there surgeons you converted from transapical who were using Edwards because they were Edwards customers or wanted to transfemoral who were using XT, or is the transapical business pretty much untouched?

Yes, this is one of the things that we have -- we found most notable is just how solid this transapical has been. We frankly wondered when there was a smaller profile device like the XT available in transfemoral position, whether some of that transapical business would transition over, but it's been very solid throughout the year. As a matter of fact, the fourth quarter was the highest, but again, a little bit of that was the stocking orders that we mentioned, but even if you take those out, it's been very consistent throughout the year.

Okay. Thank you very much.

Sure.

Jason Mills with Canaccord Genuity.

Mike, the first question is on reimbursement. As you launch the SAPIEN in the US, you've talked about an expectation of matching the reimbursement for TAVI to the heart valve DRG codes and you've been collecting a fair bit of economic and QOL data running in parallel with the PARTNER study. Perhaps, can you give us an update on the collection of that data and how that's tracking and whether or not there's any change to your expectations for reimbursement rolling out in the US?

Yes. Thanks, Jason.

Yes, the headline is no change. We -- as you correctly noted, we are continuing to expect reimbursement to be in place. We expect it to track to high risk surgical DRG. We were very pleased with the American Heart Association presentation in November by Dr. Cohen of the Quality of Life results and that's only a positive in terms of making our case on reimbursement.

Further to that, we would expect there to be economic data for Cohort B that would soon be available. As a matter of fact, we are hoping that the first of those papers might be accepted at the ACC meeting coming up in April.

Okay. That's very helpful.

Just to follow-up to one of the previous questions about the number of centers that are implicit in your expectations for your fourth quarter SAPIEN launch. It sounds like the centers from PARTNER will be the primary -- the primary centers for the majority of the quarter, but as you exit the quarter and you're training new centers throughout the quarter, how should we think about the ramp and the number of centers with SAPIEN programs entering 2012? I understand you haven't given that granular of guidance yet, but just directionally?

Yes, I'm probably not going to give you the ultimate number that you're looking for here in terms of what an exit rate is on the fourth quarter. There's a few principles we are going to follow. We told you we are going to try and put a team together that could train up to 400 centers in the first year and where we continue to be committed to that with one really important gating item is we are going to put a big premium on procedural success and if that allows us and that continues to be very high, allows us to go fast, we will go fast and if it doesn't, then we will slow down. We still have a lot of confidence in this $150 million to $250 million sales estimate in the first four quarters.

Fair enough. Thank you very much.

Sure.

Spencer Nam with Madison Williams.

In terms of Europe in SAPIEN growth in 2011, where do you see growth coming from, existing centers or new countries as well as new centers?

So again, what you're talking about is in Europe, the SAPIEN? It would probably be driven, Spencer, by deeper penetration in the existing centers, particularly those countries where there's reimbursement like France and Germany would probably be the leaders for driving that growth, but I would say it's primarily going to come out of leading centers that have already developed a referral network.

Great. And then in terms of time lines, just a quick follow-up question, the -- how likely are you guys that you will present the data at ACC, and then when do you expect a panel to -- FDA panel on Cohort B?

Yes, thanks.

Really the decision maker on whether we present at ACC is going to be the ACC themselves and I don't know of anything official that's been stated by the ACC. We are very optimistic. We have petitioned them and we are hopeful, and we believe that will be the case and so that's what we are proceeding under.

In terms of the panel, we really don't have anything to say there. We don't have anything to announce. We frankly don't know, Spencer, and so that's yet to come.

Thanks, appreciate it.

Sure.

Bruce Jackson with Morgan Joseph.

You said you were looking at some other areas within structural heart. Can you give us a little bit more information on what some of those product areas might be?

Yes. What we say is that Edwards Lifesciences is very focused. We're very focused on structural heart disease and on critical care technologies. Within structural heart disease, of course, we believe the biggest device opportunities are in heart valves and that's our top priority, but we look at everything within structural heart disease for possible connection, especially where there might be leverage either from a technology or sales force perspective. I don't have anything in particular to call out at this point. We are very focused on being the leader in this field, and we would go after attractive technologies.

Would you do that in an internally developed product or would you potentially look outside?

As you may know, we have a pretty good investment on our internal R&D, and we have several, several programs going not only within our transcatheter heart valve area, but also within a group that we call advanced technologies. So there's quite a bit going on internally. We feel like we can take advantage of our early learning in this space to try and advance some new ideas. At the same time, we have a very aggressive effort to make sure we keep track of what's going on outside of Edwards and we track all the companies in the structural heart space that we know of aggressively to see if there's opportunities and if they would really complement us. So, yes, it could very well be a combination of internal and external developments.

All right. Thank you very much.

Sure.

Joanne Wuensch with BMO Capital Markets.

Can you hear me?

We can hear you great, Joanne.

Terrific.

I'm curious if you're able to quantify, or just even talk qualitatively, about the overflow benefit of the Cohort B data presentation in September and what that's doing or not doing for your THV sales in Europe.

It's going to be a little bit more qualitative because we can't -- we have a difficult time making it quantitative. More than anything else, what we hear is that our clinicians in Europe already believe this to be the case, and this data just confirmed or reinforced for them or built their confidence, if you will, that it's really what they believe was backed up by some strong scientific evidence and randomized clinical trial. I think it ought to help us down the road and gives us even more confidence in the estimate of $300 million to $340 million worth of sales in 2011.

A second question, which seems somewhat minor on the scope of things. You mentioned that you are exiting an agreement in Japan, about $7 million in 2010. What is that?

Yes. We were a distributor for the Somanetics product line in Japan. That matched up with a group that carried our critical care products because of it's more or less an oximetry product. In 2010, that generated about $7 million worth of sales for Edwards. So, starting this coming April, we will no longer be the distributor for Somanetics, and so we will lose the top and bottom line that was associated with that; and we anticipated that when we gave our guidance for 2011.

That's exactly what I wanted to know. Thank you.

Sure.

Suraj Kalia with Rodman and Renshaw.

Michael, specifically, and forgive me if this has been talked about, if I remember correctly, you hadn't mentioned on the call for Cohort A of PARTNER B, you're looking at expanding or [lowering] the SDS scores. Michael, the SDS score, as we all know, over-estimates mortality, so what I'm trying to understand is have you seen something in PARTNER A already due to which you are preemptively looking at a different, broader patient population? Is it driven more by your market analysis and to culminate all of this, the real reason is, look, when you lower your SDS scores, surgical options get better. You eventually, theoretically, should go lower, hence your sample size should go higher, and I'm trying to put all of those together in terms of your time lines, what you're assessing in terms of these changes, to the extent that you can share.

Let me take a shot at this, Suraj, and let me know if this answers your question.

First of all, I don't know that it's a known fact that SDS, either over or under-estimates the risk. Again, it is a slightly different population. We are only studying high risk heart valve patients with aortic stenosis and the SDS database certainly covers much more than that. One could argue that that's slightly different, but it's probably the best indicator that's out there.

Having said that, this has been our strategy all along. I think we've said for some time now that we would like to increase the indication in the -- again, in the Cohort A of PARTNER II, just to make that clear. This is not a new strategy. We really don't have any comments about PARTNER A at this point as we said before, because those results will be reported coming up, but this has been a long time strategy.

Okay. Fair enough, Mike. Thank you.

Sure.

Kristen Stewart with Deutsche Bank.

Did you guys ever present the SAPIEN XT data? I thought you guys had collected that in support of the CE mark and thought that was going to be presented at some point. Was that ever presented, SAPIEN XT?

I'm not sure exactly what you mean, Kristen. Are you talking about the European data?

Yes.

Yes. So yes, I mean, I would expect there to be data presented on that. I would more look probably to EuroPCR coming up in May to see follow-up on European results.

Okay. And then what sort of data should we expect this year, whether it be updates at ACC or EuroPCR or even TCT on the source registries?

Yes, I think you should definitely see updates on the registries. Precisely what's going to be available, I don't know at this point in time, but I would expect you to routinely see presentations at each of the major meetings, certainly PC -- EuroPCR and the TCT meeting. At ACC, I don't expect you to see really European data presented there. I think, we already talked about what you're likely to see there.

And the cost-effectiveness for PARTNER Cohort B, is that still expected at ACC or is that -- ?

Again, we can't be certain of that, but we are hopeful that will be the case.

Okay. Last one is European reimbursement, any changes now that we have entered into a new year with austerity measures -- doesn't seem to be suggested by the guidance, but any further expansion of formal reimbursement or any tightening of reimbursement to note?

I'm pleased to say although these get renewed annually that our reimbursement picture in Europe looks largely the same in 2011 as it did in 2010, particularly in the big countries of Germany and France.

Perfect. Thanks a lot.

Sure.

Larry Biegelsen with Wells Fargo.

Couple of quick ones. Any plans to issue top line results for Cohort A ahead of ACC, Mike?

No. I think much like we did in the release of PARTNER B, I expect the results to actually become first available at the ACC meeting if they choose to accept that paper, so I wouldn't expect a pre-announcement there, Larry.

Okay.

ASPs, I know you talked about them being up year-over-year. Can you talk about sequentially what -- how ASPs trended? And, I have one last question.

Yes, I'm not sure I have the exact data, but I can probably give it to you qualitatively. The step-up came when XT was introduced and that was introduced in the second quarter, and I think you're not seeing probably much difference sequentially. It's just more a matter of penetration.

Lastly, the valve in valve program did not, I don't think, get a lot of attention at the analyst meeting. How significant is that opportunity? When can it be launched in Europe and does that give you an entree into the mitral position? Thanks.

Yes, I think valve in valve is probably turns out to be more important for our surgical HVT business than actually driving sales itself. As you may know, there aren't a lot of tissue valves that fail, but knowing that there's a solution for a patient that might have a failed tissue valve is very reassuring and might indeed encourage somebody not to take the risks associated with a lifetime of anticoagulants like Coumadin if they could have a solution like a valve in valve. I think that's going to be its most dominant effect. I don't know -- of course, it would -- it has the possibility of being used by clinicians in the mitral position, but we think that's small and not as important as a true solution that's tailored for mitrals.

Thanks a lot.

Thanks very much, Larry.

Thanks, everybody, for your continued interest in Edwards. Tom and David and I welcome any additional questions by telephone.

With that back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying growth rates and amounts adjusted for special items, are included in today's press release and can also be found in the investor relations section of our Website at Edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours and to access this, please dial (877)660-6853, or (201)612-7415 and use account number 2995 and pass code number 364523.

Let me repeat those numbers. Dial (877)660-6853 or (201)612-7415, the account number is 2995 and the pass code is 364523. Finally, an audio replay will be archived on the investor relations section of our website. Thank you very much.

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