愛德華生命科學 (EW) 2011 Q1 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences Corporation first-quarter 2011 earnings conference call. At this time all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Erickson, Vice President, Investor Relations. Thank you, Mr. Erickson, you now may begin.

Welcome and thank you for joining us today. Just after the close of regular trading we released our first-quarter 2011 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 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 transcatheter valve clinical studies, including the PARTNER and PARTNER II trials, expectations for regulatory submissions and approvals, new product launches and potential benefits, reimbursement and market expansion; 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 obligations 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, 2010, 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 about our use of non-GAAP measures is include in today's press release.

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

Thank you, David. We are very pleased to report that in the first quarter, all of our major product lines recorded strong sales growth, including another significant increase in transcatheter heart valves. On a reported basis first-quarter sales grew nearly 19% to $404 million. Underlying sales growth for the quarter was 17.3%. The US growth rate rebounded strongly compared to last year, and each international region grew more than 20%. This quarter's results were also aided by several one-time events, including unanticipated sales in Japan, stocking sales of our new 29-millimeter SAPIEN XT valve and gains on transactions closed in the first quarter.

Before we get into more detailed results, I'd like to spend a moment talking about Japan. As you know, Edwards has a substantial presence in that country accounting for approximately 17% of sales. Fortunately, our operations were not significantly affected by the quake and tsunami. Despite the devastation and hardship caused by the disaster, Edwards customers have continued to receive product with minimal disruption, thanks to the tireless efforts of our Japan employees.

Many of our team members have gone to extraordinary lengths to ensure product delivery to the affected areas and we commend them for their dedication to clinicians and patients. Ironically, the events in Japan may have slightly boosted our first-quarter sales, as customers concerned about disruption in supply ordered extra inventory. This particularly impacted critical care, which is our largest business there.

Turning to results, with only a modest foreign exchange impact, first quarter reported heart valve therapy sales grew 24.5% to $245 million. This included $73 million from transcatheter heart valves, where underlying sales were up 88% compared to last year, as the number of procedures outside the US continued to increase. On an unrelying basis surgical heart valves were up 7.8%, which represents one of our strongest recent quarters.

Growth was consistently strong across all regions, driven by continued adoption of our newest products. With first quarter US surgical heart valve sales growth of approximately 8%, we believe procedural volumes improved this quarter from levels seen in the second half of last year. Globally, growth was uniformly strong, and we likely gained share in all regions. In aggregate, unit growth represented the majority of the sales increase, while the shift to newer products also contributed.

In Japan, our results were remarkably unaffected, as surgeries continued at near normal level. We remain on track to broaden our market-leading heart valve therapy portfolio with the anticipated second quarter clearance and launch of the Physio tricuspid ring in both the US and Europe. With this introduction nearly -- with this introduction each product family has recently been enhanced.

This includes Magna Ease for both aortic and micro replacement and Physio II and Physio tricuspid for repair. In Japan, we received approval during the quarter for our mitral valve with ThermaFix, and we will be actively converting customers to this upgraded platform beginning mid-year. We also continue to expect fourth-quarter approval of our Magna Ease Aortic Valve there.

We continue to make good progress on the INTUITY platform, our rapid deployment aortic valve system. In Europe we've continued to enroll the TRITON study and we remain hopeful that we'll receive CE mark in mid-2011. At the AATS Thoracic Surgeon meeting in Philadelphia next month, Dr. Shrestha, a professor of surgery in Hanover, Germany, will present interim data on this trial. We believe this platform represents a compelling value proposition.

Accordingly, we plan to introduce INTUITY to centers participating in our post-approval studies, where we'll measure clinical outcomes, as well as establish quality of life and economic evidence to support reimbursement efforts. We anticipate those results to be available in 2012. In the US we expect to obtain IDE approval for the trial of INTUITY later this year.

As their interest in less invasive technologies grow, surgeons are becoming increasingly interested in the INTUITY platform and its potential to treat a broad group of patients, who today receive conventional surgical valves. In summary, even with the new tissue valve competition in the US and Japan this year, the strong start to this year gives us confidence in reaching the top of our 3% to 5% underlying sales growth goal.

Turning to transcatheter heart valves. Sales of $73 million were driven primarily by robust growth in Europe. This was fueled by continued procedure growth and the launch of our new 29-millimeter SAPIEN XT valve. This introduction generated $2 million to $3 million in incremental stocking orders. Sales of transfemoral products once again tripled versus last year, and sales of our new 29-millimeter valve lifted transapical sales, which grew approximately 40% year-over-year.

Next month at Euro PCR conference we plan to introduce our new eSheath expandable sheath technology and NovaFlex Plus delivery system. With it's lower profile, eSheath has the potential to help reduce vascular complications. We believe the ease of use and ergonomic enhancements of NovaFlex Plus will make it a best-in-class transfemoral delivery system. Both new products will be used exclusively with the SAPIEN XT valve.

Turning to our US partner trial. At the ACC conference a few weeks ago, the results from Cohort A were presented and we were very pleased this trial met its primary endpoints. For high-risk patients at one year, it was impressive to see this new, rapidly evolving therapy deliver outcomes similar to the well-established standard of open heart surgery at top US centers. The reaction has been very positive. We're in the process of completing our PMA filing for Cohort A, and expect to submit it to the FDA within the next few weeks and our timelines remain unchanged.

Just as with Cohort B results, the Cohort A results identified areas for improvement, particularly vascular complications and stroke rates, and we are committed to seeing those outcomes improve. We are hopeful that our advances in delivery systems and the next generation lower-profile valves will continue to improve results. In addition, we'll study the potential of our recently acquired Embrella deflection device to reduce embolic events.

While the product has a CE Mark we plan to conduct further clinical trials this year to better understand its impact on procedural outcomes, and anticipate $4 million to $5 million of additional expenses in the remainder of the year. Also presented at ACC was the cost effectiveness of SAPIEN from the Cohort B arm of the PARTNER trial. This study demonstrated that the costs of treating inoperable patients with severe aortic stenosis was well within the range of other commonly utilized cardiovascular technologies.

The formation of our US field organization is proceeding on is schedule and we continue to prepare for a projected October launch of SAPIEN for inoperable patients. At this point, we've filled most of the key leadership roles and are continuing to add field resources. Leveraging our experience in Europe, we're building a world-class training organization, with the goal to educate US clinical teams to achieve high levels of procedural success from the very start. Additionally, our discussions with CMS are proceeding as expected, and we believe that the reimbursement available today will continue to be available upon US approval.

Turning to our US PARTNER II trial. Enrollment has begun for the Cohort B arm and we continue to expect enrollment to be completed by the end of this year. For Cohort A, the surgical arm, we're still actively working with the FDA to finalize the optimal trial design. The PARTNER Cohort A data presented earlier this month, reinforce our confidence in broadening the inclusion criteria in PARTNER II beyond the current high-risk definition. We are optimistic that we'll receive IDE approval during the current quarter.

In Japan, enrollment of our PREVAIL trial of SAPIEN XT is on track and we still anticipate regulatory approval could be received as early as 2013. At AATS we're expecting the additional detail to be presented from Cohort A of PARTNER. The following week, at Euro PCR in Paris, in addition to the launch of our new delivery systems, there'll be several presentations featuring our SAPIEN technology, including data from the source registry and several live cases. Given current exchange rates, and our strong first quarter, we now project global transcatheter heart valve sales for the full year to be at the top of our $300 million to $340 million range, which includes $20 million to $25 million of commercial US PHV sales.

Turning to critical care, sales were $121 million in the quarter, up 15% on a reported basis, and up 12% on an underlying basis. Growth was strong across all geographies, with particular strength in Japan, where we recorded some unanticipated sales. Sales of our advanced monitoring products, including FloTrac, once again generated strong results this quarter. In our legacy products, pressure monitoring sales were particularly strong as we continued to gain market share.

In our advanced monitoring portfolio, the recent launches of our innovative volume view and EV1000 products outside the US, are proceeding well, although they contributed modestly to this quarter's sales. Clinician feedback has been very positive and we believe that these technologies have the potential to become best-in-class devices and drive share gains. We continue to expect receipt of US regulatory clearance for these products in the third quarter.

As mentioned last quarter, we entered into an agreement to transfer our US Central Venous Catheter product line to a third party. We now expect that this will trim an estimated $3 million from our remaining critical care sales in 2011, primarily in the fourth quarter, and will have minimal impact on our earnings. As previously mentioned, in Japan, commencing this month, we're no longer distributing the [sominetic] product line, which contributed approximately $7 million to sales in 2010. As the contract concluded, we benefited from inventory purchases and realized sales of $3.5 million in the first quarter.

With regard to our in-hospital glucose monitoring program, we're 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 2 device by the end of this year, and expect to begin European sales in 2012.

Separately, we were disappointed to learn that one of the co-authors of several studies of our FloTrac system, Dr. Joachim Boldt, a German physician, is now under investigation for potential falsification of data in a wide variety of research. Under the circumstances, we are no longer promoting his work. A significant body of other evidence supports FloTrac's clinical value.

In summary, given our strong first quarter start we are more confident in our outlook for critical care. Even though we're in the process of discontinuing some non-strategic products, we now believe that we will achieve the top of our full-year underlying sales growth guidance of 5% to 8%.

Turning to cardiac surgery systems, sales for the quarter increased to $26 million, and grew 4% on an underlying basis. Growth was below typical levels this quarter, as we completed the previously-mentioned voluntary withdrawal of one of our catheter products. We have begun reintroducing that product and expect our CSS product line to achieve double-digit growth for the year.

I'm pleased to announce that we have a new leader for our CSS product line. Rich Lunsford, a veteran of the medical device industry, has recently joined Edwards to lead the transformation of this group. Rich's objective is to position CSS to capitalize on the growing interest in MIS procedures, and we look forward to his contributions. We now anticipate achieving the upper end of our full-year CSS revenue guidance of $105 million to $115 million, and an underlying growth rate of approximately 11%, driven by minimally invasive surgery products and our continued investment in programs to expand its use.

Total reported sales of vascular, which was comprised of our Fogarty products, were approximately $13 million this quarter, down $1 million from the prior year, as we no longer distribute a PTFE graft.

And now I'll turn the call over to Tom.

Thank you, Mike. In addition to the very strong sales growth Mike discussed, I'm pleased to report our operating income grew 25% versus the prior year, while we increased our R&D investment by 30%. Net income grew 34%, aided by a one-time transaction gain, which I will detail later. And we achieved diluted EPS of $0.53 this quarter. For the quarter, our gross profit margin was 71.1%, compared to 71% in the same period last year.

This slight improvement was driven by an improved product mix, offset by continuing investments and expansion of our manufacturing capacity, in preparation for our THV launch in the US. Based on where foreign exchange rates are today, we now expect our full-year gross profit margin to be at the bottom of our 71% to 73% range, with the next two quarters at the low end of this range, and the fourth quarter at the high end.

First-quarter SG&A expenses were $150 million, or 37.2% of sales, an increase of $60 million over the prior year. This increase was driven primarily by transcatheter heart valve sales and marketing expenses, including the US THV launch expenses of more than $4 million. For full-year 2011, we continue to expect SG&A to be between 37% and 39% of sales, which includes an estimated $40 million investment in the US THV, launch.

R&D investments in the quarter grew 30% to $59 million, or 14.6% of sales. This increase was primarily the result of additional investments in clinical studies and development efforts 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%, including additional expenses associated with the recent acquisition of Embrella.

Other income of $6.2 million in the quarter consisted primarily of three items. A $2.2 million investment gain, associated with our acquisition of Embrella, in which we had a small ownership position; a $1.6 million gain related to the sale of another company in which we had a minor investment; and the final hemofiltration earn-out payment of $1 million. Our reported tax rate for the quarter was 24.5%. And for the full-year 2011 we continue to expect our rate to be between 24% and 25%.

In the quarter FX had approximately a $0.01 impact on our bottom line versus the prior year. Looking forward, at current rates we now expect a $40 million to $50 million positive impact to 2011 full-year sales, versus the prior year. Free cash flow generated during the first quarter was $1 million. For 2011, excluding special items, we continue to expect free cash flow to be between $190 million and $200 million.

During the quarter we repurchased 885,000 shares for $76 million. We continue to project diluted shares outstanding to be approximately 120 million shares for the remainder of the year. On the balance sheet we ended the quarter with net cash position of $284 million. Total cash of $434 million exceeded our total debt of $150 million. Our DSO at the end of the quarter was 68 days, an increase of five days from the prior quarter. Inventory turns were 2.1, relatively unchanged from the prior quarter.

Turning to our 2011 sales guidance. Given the strong performance this quarter, coupled with an FX tailwind, we are raising our full-year sales guidance in three product lines. For heart valve therapy, we now expect sales to be between $1.01 billion and $1.05 billion, with an underlying growth rate at the upper end of our previously-stated 16% to 20% range. In critical care we expect sales to be at the top of our previous $470 million to $500 million range, with an underlying growth at the top of our previous 5% to 8% range.

In cardiac surgery systems, we expect to be at the upper end of our previously-stated $105 million to $115 million range, with an underlying sales growth increasing to approximately 11%. For vascular we are maintaining our current expected sales of $50 million to $60 million, and we now expect total net sales to be in the range of $1.66 billion to $1.74 billion. For the second-quarter 2011 we project total sales of $420 million to $440 million, and diluted EPS of $0.49 to $0.51, excluding special items. Based upon our strong first quarter performance, we now expect full-year net income growth of 11% to 13%, and are raising our diluted EPS guidance by $0.10 to a range of $2.01 to $2.07, excluding special items.

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

Thanks, Tom. We believe this quarter's results demonstrate our market-leading product lines are well positioned to contribute to our long-term success. And our anticipated launch of SAPIEN in the US and its global expansion, should position the Company for accelerating revenue growth and fuel an expanding operating margin. We look forward to sharing our progress with you this year.

And with that, I'll turn to back over to David.

Thank you, Mike. 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'll answer as many as we can during the remainder of the hour.

Operator, we are ready for questions.

Thank you. (Operator Instructions) Our first question is coming from the line of Mr. Bob Hopkins with Banc of America Merrill Lynch. Your line is now open, you may proceed with your question. It appears that Mr. Hopkins has disconnected. Our next question is coming from the line of Mr. Glenn Navarro with RBC Capital Markets. Your line is now open, you may proceed.

Thanks, two questions. First, on the -- for the US SAPIEN, have you been able to touch base with the FDA and get a sense of when you'll have an FDA advisory panel? That's question one. I'm assuming that the panel's got to be the next couple of months, because if you're thinking about an October launch that means we probably should get a May or June panel, so any updates there? And then another strong quarter with SAPIEN o-US, can you give us a sense of what your market share is? I know in the past you said 50-50, but I've got to believe you're trending a little bit higher than that given that you've got XT, in the marketplace. Thanks.

Yes, thanks, Glenn. First on the panel, we just don't have anything official to announce at this point. Once we know we'll certainly inform you. We've been involved in conversations. But your big picture comment is correct. We would anticipate that we would have a panel here over the next few months, and that we still think that estimate of an October launch is as good as any. So that's where we think we are on that front. In terms of o-US and share gain, one of the things that we believe lifted us this quarter is the 29-millimeter launch. That's only in the transapical position. To some extent not only we get stocking orders, there may have been some patients saved up, so we got a bump from that. In addition, we just believe that there's been market growth. So although there may be some share gain in there -- and I can't tell you just what that is -- I would say that that's probably secondary to what we've seen in terms of market growth.

Okay and can I just ask one follow up on the surgery business. You mentioned you took share, one of your top competitors is St. Judes. They just got approval today of Trifecta. Any thoughts of how that's going to impact your business going forward? Thanks.

Yes. Things really have stepped up in the surgical business. We had a really great quarter. When we gave this guidance for the remainder of the year, we do that with the knowledge of the announcement this morning about this competition that is going to be in the US, so that is in our numbers. When we say we think we're going to hit the high end of the previous range here, meaning the 5% range, that does include the introduction of the competitor.

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

Thanks, guys, it's Chris here for Mike. You talked about how you feel confident about your reimbursement position once SAPIEN is approved. Mike, can you just talk a little bit about your conversations with CMS and how you're approaching the question of whether you should be coded into a surgical DRG, or given the less invasive nature of the procedure should be something different?

Yes, we've had great conversations with them and the talks are going just as we expected. We've been happy with their support recently of the interim coding, and that interim coding, as you know, maps through DRGs that are the high-risk surgical DRGs that are in use, and we expect that to continue at the time of introduction. So we don't have any reason to believe that that's not going to stay on that track.

Okay. And then for the critical care business, you mentioned what seemed like a couple of one-time items potentially this quarter boosting growth. One of them was the Somanetics agreement ending and sounded like some bulk purchasing ahead of that transition. And then also you thought there was some inventory stocking broadly across the business. Could you just size those for us so we get a sense of what the underlying growth rate really looked like?

Yes, one of the most significant ones is Somanetics. And again, although we say -- last year, for example, there were $7 million worth of Somanetics sales in Japan. In the first quarter alone we saw $3.5 million so it definitely stepped up. We saw a bump there. But the thing to keep in mind is that goes to zero in the second, third and fourth quarter going forward, so you're going to see that hit. Besides that probably it's around 10% without that effect. The rest of the things that are going on in critical care are all positive. We saw things that were strong across all the regions. Again, probably saw a little bit of a bump in Japan, which is a little surprising to us, where people may have blocked defensively to some extent. But does that answer your question, Chris?

Yes, I guess it was that second piece I was trying to size.

Yes. No, it's small.

Okay.

That effect, by itself, is maybe $1 million.

Would you say that the two combined would represent probably a $2 million to $3 million increase over what we would have expected?

I'd say in the category of stocking or special, probably $2 million to $3 million would cover both of those.

Thanks, guys.

Thank you. Our next question is coming from the line of Mr. Larry Biegelsen with Wells Fargo. Your line is now open, you may proceed with your question.

Thanks for taking my question. Let me start off on reimbursement. How confident are you, Mike, that CMS will not open a national coverage decision once you have approval?

I don't think we ever said that CMS wouldn't open a national coverage decision at some point. We do think that that's going to happen at some point in time, but we don't anticipate that that's going to be in place at the time of launch and I'd hate to speculate just exactly when that happens.

So you do believe that they will open one at some point?

Well, yes, we would think that that would be the natural course of events.

Okay. And then on the guidance, you beat by $15 million this quarter, I'm just trying to understand the raise of $70 million. How much was that FX and how much was that operational?

Yes, Larry, I'd say it's probably two-thirds/one-third, FX mostly, somewhere in the neighborhood of about $50 million in terms of a change. Let's say back at investors conference it was about $50 million, $60 million more and I'd say operational you'd probably put that in the $20 million to $25 million.

Thanks a lot, guys.

Okay.

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

Hi, good afternoon. In terms of the heart valve business, the surgical business, can you just comment on performance of repair? Is that also -- are you also seeing a rebound in that segment?

Yes, I think repair -- Amit, the repair this quarter was in mid single-digit growth, so I think that was slightly better than it has been in recent quarters. Some of that may have been procedures, but that is a little better than we've seen recently.

Mike, just in terms of panel, I know you're having discussions with FDA. Are those discussions circling around Cohort A and B together being discussed at the panel?

We don't have any reason to believe that things aren't still on the same track that we've said right along, that the discussions are just about B and that those are going to be considered very separate. A has not even been submitted yet. We expect to submit that within the next few weeks so we would expect the panel to be just related to Cohort B.

Thank you.

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

Hi, Mike, thanks for taking the questions, appreciate it.

Sure.

First question is, if memory serves, Cohort A, showed a trend toward superiority for TAVI treatment for women and counter to that we see a very strong quarter this quarter again in transapical. I think you said up 40%. So, given generally speaking the smaller vasculature of women, as we think about the progression of the TAVI market over a longer period of time and transapical's position in it, could you give us some of your thoughts as it relates to what Cohort A showed us and what that may mean for your reaching your longer-term goals that you laid out at the analyst's day?

First of all, in terms of the TA bump, one of the things that we'd always wondered about is when the XT was launched with its lower profile if we actually might see a flattening or decrease of transapical and it's not only stayed solid, but this quarter it actually stepped up. We think that was driven primarily by this 29-millimeter valve introduction and there may even be some patients that have been saved up in addition to the stocking orders that took place. It's hard for me to comment how transapical relates to women precisely and I think in Cohort A what we saw was it looked like there was a difference in mortality, women compared to men. I don't -- I think it's too soon for us to say anything profound. That trial was really not powered to be able to tell the difference between how men and women did, and so it would be speculative at this point.

Okay. As my follow up then, perhaps you could give us, generally speaking, your updated thoughts on -- at your analyst's day I think a lot of interest was paid to some of your long-term projections for your SAPIEN business. Based on what you've seen now from Cohort B and then more recently Cohort A, and your discussions with, including your -- RD's discussions for Cohort A for PARTNER II and what patient population that could include, do you have any updated thoughts on some of your long-term revenue projections for SAPIEN?

We continue to be -- to feel confident in what we said at the investor conference. Now that we've seen Cohort A, since that time it just reinforces our confidence, Jason. So really, I don't have any updated broad numbers to share with you, but I can tell you that we feel just as good, if not better, than we did before.

Thank you very much.

Thank you. Our next question is coming from the line of Ms. Kristen Stewart with Deutsche Bank. Your line is now open, you may proceed with your question.

Hi, thanks for taking the question. Tom, is there anything you can just help us understand maybe the EPS guidance? You guys came in about $0.12 above the mid point of your range and raised the full year by $0.10. You've got currency going more in your favor, sounds like a little bit stronger operations, too. So are you just investing more, or is currency just not at all positive on the bottom line?

It's a little bit, Kristen, and it moves constantly, so you don't want to put too much on the FX. But I'd say at this point there's probably a couple of cents in the remainder of the year. But let's not forget, we did make the investment in Embrella and we did not change guidance at that time, so part of this is absorbing those incremental expenses of, say, $0.03 or $0.04 there.

Okay, perfect. And then I guess just on the FDA with Cohort B, did you guys formally get an expedited review?

Cohort A of?

Sorry, Cohort B of PARTNER, when you submitted your PMA of being granted an expedited review?

We didn't get it. I wouldn't say that we got an expedited review. We've got their full attention and they're very engaged in this. I don't know what exactly expedited review means. All of you that watch the data know sometimes that expedited review doesn't always equal that. Sometimes it even takes longer. But we think we have their full attention and they're really doing their best here to work their way through that.

Okay, and I know you mentioned some data coming out at source. Did you guys have the two-year abstract that you guys had mentioned at ACC that you presented in, was it formally accepted?

Yes, I don't have any confirmation that it's been formally accepted at this point, Kristen.

Okay, no problem. That's all I've got. Thanks.

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

Good evening. Mike, in your prepared remarks you talked a little bit about the about some of the data we would have been seeing at AATS and I believe one of the surgeons at the investor meeting at ACC also talked a little bit about some of the data being presented on strokes. Is there any detail you can provide us at this point on what we should be looking for in that data and what types of things you're going to be looking for to take away from that data?

Yes, in particular what you're not going to see necessarily is new data, but what you'll see is a deeper analysis of data. I understand that a paper's been accepted, for example, to get deeper into stroke data. So rather than just see a gross number we're going to have an opportunity to see maybe it's spread out by rank and score, maybe you see it spread out by is it aggregated in fewer or many accounts, maybe you'll transapical versus [transzone]. You'll see more definitions of what's in there and that's what I would say would be the highlights.

So in seeing that data you think we'd be able to better stratify as to where the stroke patients occur, whether there was a consistent trend across those patients or not? That's sort of the key take away we may or may not be able to get from that?

That would be a logical conclusion. That's what we're hopeful is to get greater insight.

Okay. And then, Tom, maybe on the gross margin, your commentary about lower gross margins in the second and third quarter and then that ramping up as you head toward the fourth quarter, is that just a result of mix as we get US SAPIEN toward the end of the year, or is there something about the either under absorption about the up-front investment that rolls off so that once we get to Q4, Q4 is a good normalized picture of the gross margin with US transcatheter valves?

David, you're pretty close. David, that's good thinking. I'd say a part of the story -- there's probably two major pieces. The one portion is THV definitely adding to the product mix -- the positive product mix in the fourth quarter. But we also have the biggest headwind in terms of margin, from FX in Q2 and Q3. So we're fighting -- if it worsens from what we saw in Q1, it actually wasn't very significant in Q1, but it picks up in Q2 and Q3 and relieves for Q4. So those two factors I'd say are the two major items.

And then the investments in manufacturing that you referenced as a source of a headwind on the gross margin this quarter, do those abate as we go through the rest of the year?

Well, an excellent selection of words, terminology there. Yes. I'll acknowledge that. It's logical, obviously as we pick up volume. What you're doing is we're giving up -- we're sacrificing some efficiency for capacity right now, when you're moving things around to maximize your flexibility as we prepare for the launch. So it makes sense that once we dig in and start doing some volume that that certainly would be a benefit. I'm not certain that that's part of the Q4 story, that it happens that quickly, but it's definitely part of a 2012 story.

Okay, great. Thank you.

You bet.

Thank you. Our next question is coming from the line of Mr. Douglas Tsao with Barclays Capital. Your line is now open, you may proceed with your questions.

Thanks for taking the question. Mike, I was just curious if you had an early assessment in terms of how much the 29-millimeter valve might expand the addressable patient population, or is it simply too early to tell at this point?

It probably is a little early to tell. Our belief was, going into this, that there's 10% to 15% of the patients that we were not able to treat without a 29-millimeter valve. It's clear that this is transapical only, and we did see a real bump this quarter. So we have some good leading indicators, but we'll get a clearer picture as time goes on.

Okay, great. Then in terms of the ESHEATH technology, I believe in Cohort A, if a procedure in which they initiated fully -- part cutaneous, but then they switched to a surgical cut down for the closure, that was counted as a vascular complication, do you have a sense of -- or a hope in terms of what the ESHEATH can do in terms of getting to a fully percutaneous paradigm with SAPIEN?

Yes, we think ESHEATH's a very positive step forward and we think because of its lower profile in the same patient group it would reduce complications. Here's where it gets a little bit trickier, Doug. For example, in Europe, there aren't any hard and fast rules exactly of what size femoral artery that you might go into, so if physicians get a little more aggressive and go into patients they might not have, they might still have a complication rate that doesn't decline aggressively. We feel like -- in the US trial, for example, you get to see something very specific, and so we have to be careful in comparing it, but we really think that ESHEATH is a step forward. It's either in the same patient group with really reduce vascular complications, or it allows you to treat more patients.

Okay, great. And then just finally, Tom, if you could give us a sense of how much FX might have contributed on a sequential basis for the SAPIEN number?

Sequentially? I don't have it sequentially. I could tell you, Doug, that year over year it was actually a slight negative.

Okay.

So if that helps you at all. If you look at -- we gave both the underlying and the reported growth rates and I want to say it was a downtick for us, but not major.

Okay, great. Thank you.

Maybe $0.5 million.

Okay, great. Thank you very much.

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

Good afternoon.

Hey, David.

Tom, two quick leverage questions for you. The first is, this is the second straight quarter, at least in our estimation, that revenue has contributed a much higher margin rate, specifically it looks like TAVI, so greater leverage in the business. I wonder -- if you think about Europe, are you starting to see a relatively-lower contribution of selling expenses?

I haven't pointed to that directly. I would say that our leverage this -- our expenses -- let me start by this. I'd say our expenses pretty much landed in the quarter where we expected them to be, but it was the result of, obviously, the sales being above target. We obviously picked up some leverage there. It's not something that I expected as percentages, but your theory in terms of Europe, it's got to be happening because Europe's the main driver for THV. It only makes sense that you're looking at better leverage in Europe, in particular. I think that's a solid theory.

Okay. So, Tom, I guess the second related question is, as I think about research and development you're kind of trending to the lower end. It's early in the year but you're trending to the lower end of the guidance range and this year you're beginning to anniversary your most significant pivotal expense, really, in the Company's history and you head into next year consensus forecasts have the Company accelerating the top line. So can you think of an eventuality looking out in the future on a much higher sales base where you're spending more than 14% to 16% of your revenue in R&D?

That's -- now we're looking way into the future. I'd say for the year, let me start a little closer term. For the year we really don't see a change. While we are starting out positive to that you've got to remember that in the third quarter we've got some seasonality to sales, so I'd still say our original guidance holds. Going out in the future it's logical that with the ramp up of THV in the US that we've been paying for all of that without any help from US sales so that they had some potential. But we would give specific guidance as we get closer to that. But in general, I'd say that's pretty sound logic.

Great. That is all I got. Thanks.

Thank you. Our next question is coming from the line of Mr. Raj Denhoy with Jefferies & Company. Your line is now open, you may proceed with your question.

Hi, good afternoon. I wonder if I could ask on European reimbursement in some particular countries. Have you seen any more substantive discussions now that the economic data was presented at ACC? Some of the countries like the UK where there wasn't established reimbursement yet.

Yes, thanks. Raj. You can guess that we immediately took our cost effectiveness data and went to the UK and some of the other folks that really value that kind of date that would come out of a randomized clinical trial. So, yes, we've definitely stepped up and we feel like there's progress being made there in the UK and in Italy where a lot of times the decisions get made on a more regional level. But it takes time for these major changes to wash through. I think what we're mostly encouraged by, you can see the step up in sales, 88% increase. We feel that's market growth and that market growth wouldn't be there if reimbursement wasn't favorable.

Okay. Also on Europe, what is the pricing environment right now for the balance in Europe? Have you seen any change?

Yes, if you want to look at pricing what you have to remember is we're about to anniversary on the introduction of the XT valve, so if you compare where we were a year ago, yes, there's a step up of 5%, 10% on pricing. But if you compare it to where we've been in the last few quarters it's pretty consistent.

Okay, and then just lastly. Maybe I missed this, but has the Cohort A data been published officially at this point?

No, it has not.

Any thoughts on when that might become available?

We know that the executive committee has plans and I really don't want to preempt them. I believe that they're working on it right now, but I really don't have anything to share specifically.

Great. Thank you.

Sure.

Thank you. Our next question is coming from the line of Ms. Joanne Wuensch with BMO Capital Markets Corporation. Your line is now open, you may proceed with your question.

Thank you very much for taking my question. You seem to be managing your SG&A very well, so as I look out through the rest of the year and your guidance for the full year, I'm looking at a ramp in -- at least on a dollar, as well as percentage of revenue basis, that I suspect is tied to hiring ahead of the launch. Could you please give us an idea of where you are in terms of staffing up for this?

Sure, I can give you a sub -- I'll give you it on a high-level basis and maybe Tom can supplement with a little bit more specific numbers. So we're -- recall, when we gave guidance on what we were going to do to staff this US launch. We were going to put a dedicated team in place and we're right on track. We're really pleased with the way that's going, we're very pleased with the quality of people that we're able to bring into that organization. I think Tom mentioned we spent around $4 million in the first quarter and then we still expect to spend $40 million for the full year, so that'll be ramping up. You're certainly going do see more for the remainder of the year and that's going to be kind of inefficient here for the next couple of quarters until we actually have the US sales.

Yes, Joanne--.

I just have a question. Can you -- have you divided out -- maybe you said this earlier -- what percentage of your sales are now traditional SAPIEN versus SAPIEN XT? Has everybody fully transitioned over?

It's slightly different numbers for TF and TA, they're not at the same place. If you remember, XT launched -- like Mike said, we're almost about to anniversary that, so I'd say we're approaching the 80% range on the TF marked and it's probably somewhere close to the 60% or 70%.

Yes. And actually the way it plays out -- it depends how differential you want to be -- in Europe it's about 100% of the TFs have already been converted and maybe 80% of the TA. If you get outside of Europe you still have some SAPIEN, so the numbers that Tom gave you are right.

That's more global. You're correct. And, Joanne, if I could jump on your question. The point of clarification on the SG&A is not to forget that. The expenses will probably in terms of leverage -- operating leverage will be the largest in Q3 as a result of the fact it's the quarter just prior -- the way we're planning the figures it's just prior to launch, so you'll see an acceleration of SG&A as a percentage up to that point and then you'll start to see an improvement as the sales kick in.

Terrific. Thank you very much.

You bet.

Thank you. Our next question is coming from the line of Mr. Thom Gunderson with Piper Jaffray. Your line is now open, you may proceed with your question.

Hi, thank you, good afternoon.

Hi, Thom.

I only -- hi. I only have one remaining question here that hasn't been asked previously and that would be, Mike, in the US, surgical heart valve therapy, I'm wondering if you could help us a little bit, thinking about how the negative impact of the economy in the past may be abating? I don't know if that's too hopeful or not, but I'm wondering if you think some of this rebound might be -- of all of the kinds of procedures that somebody could have in a hospital, I'm thinking that maybe a heart valve would be the one that would be one of the first ones to start coming back, that you can't postpone too long. Any thoughts on that?

Yes, it's a little tough, Tom, but let me -- let's try and share our thoughts here. Because we are the market share leader, in many ways we mirror the market and although we tend to gain a little bit of share, the market tends to be important to us. We felt like we saw a step down in procedures in the second half of last year versus the first half of last year and it feels like in Q1 it stepped back up to the levels that were more like the first half. We don't have that with a high level of precision, but that's true. I think it's also fair to say that our procedures are not nearly as discretionary as many of the other elective procedures are, so in general you've got a dampened effect compared to, I'd say procedures or elective procedures in general, and so it probably just tends to be less profound. Does that get at your question, Thom?

It does, it helps. I'm wondering from your answer, do you think this number is the normal number, or is it a little higher?

Yes. Well, the short answer is we just don't know.

Okay. That is it for me. Thanks, Mike.

Thanks.

Thanks, Thom.

Thank you. Our next question is coming from the line of Mr. Paul Choi with Caris & Company. Your line is now open, you may proceed with your question.

Thanks for taking the question. Tom, in terms of a little clarification on the growth margin guidance, if we think about it being at the low end in the next couple of quarters, as you mentioned, and then rebounding in Q4, how should we think about that affecting the overall profitability of the THV, business? I think you said last quarter as you were exiting last year that it was pretty close to breakeven or slightly positive. How does that affect your outlook for that business, perhaps for the full year, with this gross margin update you're providing?

How does the margin change affect the specific THV profitability?

Yes.

I think what you're saying, Paul, is a good assumption here. That once we have the US launch then clearly it changes that profitability picture. If you were to take the THV, businesses in aggregate, we have continued to be an aggressive investor, both in R&D and these launch expenses in advance of the launch. So it would have postponed this or slowed down the breakeven point, but once we launch that completely flips.

Okay, that's helpful. And then, second, Mike, can you -- I know it has only been a few months since you got the approval, but could you maybe provide an update on how Cohort B of PARTNER II the enrollment is proceeding and what you've seen so far? Thank you.

What I can say is that there's several accounts that are enrolling at this point and we're not going to necessarily try and keep score on all that, Paul. But I can tell you that we do feel confident by year end that we'll have Cohort B enrolled, or at least that's clearly our goal.

Okay, great. Thank you.

Thank you. Our next question is coming from the line of Spencer Nam with Madison Williams and Company. Your line is now open, you may proceed with your question.

Good afternoon, thanks for taking my questions. Just a couple of quick follow-up questions here. First of all, coming out of ACC there was some questions about Cohort A data on stroke, people wondering whether the one-year data is sufficient. Clearly, I think the PI's responses were, yes, they would be. I'm curious whether you've had any opportunity to get some additional feedback from physicians -- a broader set of physicians and what kind of feedback you were getting in terms of your stroke data for Cohort A?

Well, overall, if we -- just reflecting on Cohort A, we're very pleased that we met our endpoint and we felt like we have received a very positive reception from clinicians. Again, this whole field is evolving very quickly. We will look forward to even a deeper dive on the stroke issue so that we can understand it. But the fact that it's equal to stroke, or equivalent -- I mean equivalent to surgery at this point in time, we think, is simply remarkable. I don't know if that's answering your question, Spencer. Is there more to it?

Yes. Well, I think that the overall reception to the data that was presented seems to be very positive. I do think there was some questions whether -- if you could extend it out to, say, 18 months to two years on stroke data that whether the SAPIEN could eclipse surgery and show a worse outcome. And I think, at least on the Street side, there's some thoughts on that brewing, and I was curious whether some of the physicians that you have interacted with since ACC have indicated any thoughts on that question? If that has any effect at all?

Yes, in terms of how that trial is powered, I would say that it's only really powered to give you any meaningful data at one year, so we speculate when we get beyond it. What you would tend to think, though, that within the one year or even the 30-day data, you would get the effect of the procedure itself, and I don't know that there's any reason to believe that a transcatheter valve or surgical heart valve necessarily has any difference on a long-term basis as it relates to stroke. And so still something we're learning about. It's tough to be able to drew any big conclusions, but overall, we feel like what you see you're going to see early.

Great, that's helpful. And then, Tom, just a quick follow-up question on guidance. You guys raised the numbers after essentially one quarter of a performance. I'm assuming that that meant that the previous ranges were somewhat conservative and that you guys gave yourselves a little bit of room. After one quarter you obviously did really well this quarter and you're seeing some changes. What are some of the factors that you were not seeing, say, three to four months ago and now you're seeing that led you to this update on guidance? And also, based on that, how should we think about this new set of numbers? Is it -- where does this fall? Is there -- is there a possibility that your numbers could get better?

Okay, good question. Keep in mind that we did have an outstanding quarter on many levels. A couple I pointed out was transactions helped us a couple of cents in Q1. We also -- if you put together a couple of the one-time stocking order phenomena, probably another couple of pennies. So the $0.12 -- when I look at mid point, as someone previously defined it, it was probably an $0.08 beat and you might even have $0.01 of FX in there. So strong business. I think it was really good and I think it's very solid. Now in the back half of the year we did have -- we've added expenses in the form of Embrella, which is going to put a bit of a drag going forward. So base businesses did really, really well in this quarter, but we're looking -- we're sticking with our guidance. We've still yet to see new competition in a couple of key markets that's coming. So we always try to get it to where we think it's the mid point of our expectations. So in this case we beat the number, but it doesn't -- it didn't change dramatically the remainder of the year.

Great, thanks much.

You bet.

Thank you. Ladies and gentlemen, our final question of this question-and-answer session will be coming from the line of Bruce Jackson with Morgan Joseph TriArtisan. Your line is now open, you may proceed with your question.

Hi, thanks for taking the question. Last quarter we talked about how you were going to attempt to expand the high-risk patient population in the PARTNER II Cohort A trial, I was wondering if you'd made any progress and if you've settled upon a definition for that population yet?

Yes, thanks, Bruce. Well, I'll put it this way. If we would have agreed to have the same high-risk definition as we had in the PARTNER trial we probably would not still be in discussions with FDA right now because this is the key point of the discussion. We really believe and we think that the Cohort A data supports moving to a population that goes beyond the current definition of high risk, and that really is what fundamentally is being discussed today. We're optimistic that we'll get a decision, and hopeful that that happens this quarter but we really don't have anything to report at this point.

Okay, thank you.

Sure.

Ladies and gentlemen, this does conclude our question-and-answer session. I would turn the floor back over to management for any closing comments.

Okay. Well, thanks very much for your continued interest in Edwards. Tom and David and I will be -- welcome any additional questions by telephone. Back to you, David.

Thank you for joining us on today's call. The reconciliation between GAAP and non-GAAP numbers mentioned during this call, which include underlining growth rates and amounts adjusted for special items are included in today's press release and can also be found in the investor relations section of our website at Edwards.com. If you missed any portion of today's call a telephonic replay will be available for 72 hours. To access this please dial 877-660-6853, or 201-612-7415, and use account number 2995, and passcode number 368959. I'll repeat those numbers. Dial 877-660-6853, or 201-612-7415. The account number is 2995, and the passcode is 368959. Finally, an audio replay will be archived on the investor relation section of our website. Thank you.

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