愛德華生命科學 (EW) 2011 Q2 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation second-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, 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 second-quarter 2011 financial results. During today's call we will discuss the results included in the press release and the accompanying financial schedules, and then we'll 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 would like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions and projections.

These statements include, but are not 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, SG&A, R&D, tax rates and free cash flow, share repurchases, and other financial expectations, including our assumptions regarding the timing and extent of the US approval, launch and reimbursement for the SAPIEN transcatheter heart valve, which are critical elements to our 2011 projections.

These statements also include our current expectations for regulatory submissions and approvals related to a variety of new products and indications, as well as the timing and expected outcomes of new or currently ongoing clinical trials, the expected impact of new product introductions, 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 were made, and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements.

Information concerning factors that could cause these differences may be found in our press release, our Annual Report on Form 10-K for the year ended December 31, 2010, and our other SEC filings, which are available on our website at Edwards.com.

Also, as 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 included in today's press release.

Now I will turn the call over to Mike Mussallem.

Thank you, David. We are very pleased to report second-quarter results that reflect continued strength in our Heart Valve Therapy and Critical Care product lines. Again, this quarter the demand for less invasive options to treat high-risk aortic stenosis patients drove strong sales of our safety and technology.

Before we go deeper into this quarter's results, I would like to comment on yesterday's advisory panel. The FDA panel extensively explored a number of questions regarding the therapy's complications and introduction pace, and we take their concerns seriously. We are encouraged that after considering all the risks and benefits, the panel strongly recommended approval of SAPIEN. As such, we remain confident about our US launch revenue and timing assumptions, as well as our long-term outlook.

On a reported basis second-quarter sales grew 18% to $431 million, while on an underlying basis sales were up 11%. Sales outside the US grew 27%, and now represent 65% of our total sales.

Turning to product line results, second-quarter reported Heart Valve Therapy sales grew 23% to $263 million. This included $85 million from transcatheter heart valves, which grew 60% or 46% on an underlying basis. Surgical heart valves grew 10% or 4.2% on an underlying basis, with our newest products continuing to drive the growth.

In the US we believe our 2% growth rate was tempered somewhat by slower procedure growth than last quarter. Outside the US tissue valve growth was particularly strong in Asia. In Japan we saw modest share gains in surgeries continued to be performed at normal levels.

Although pricing was stable in each region, strong emerging market growth led to a global average that was slightly lower than a year ago.

As expected, we received regulatory clearance for our Physio tricuspid ring during the quarter in both the US and Europe, and have initiated our launch. This product, which has been designed to offer a more physiologic tricuspid repair, has received favorable initial feedback.

In Japan, just last week, we received an earlier than expected approval for our Magna Ease aortic valve, and will begin to introduce this product immediately. Additionally, we have converted more than half our customers in Japan to our recently approved mitral valve with ThermaFix.

We continue to make progress on our Edwards INTUITY rapid deployment aortic valve system. During the second quarter we received additional questions from European regulators, and we have submitted our response. We now believe that we would receive a CE Mark in the fourth quarter.

Interim data from the TRITON trial continues to demonstrate encouraging results and potential. To support INTUITY's reimbursement we will focus our initial commercial efforts on a select group of centers to collect clinical outcome measures, as well as economic and quality-of-life data. And in the US we continue to expect IDE approval this year.

In summary, based on our first-half performance we remain confident in achieving the top of our 3% to 5% underlying sales growth guidance for surgical valves.

Turning to transcatheter heart valves. Strong procedure growth and continued adoption of our new 29 millimeter SAPIEN XT valve in Europe helped drive sales of $85 million this quarter. Transfemoral sales remain strong and consist almost exclusively of the SAPIEN XT valve, which was introduced in Europe one year ago.

Transapical sales, aided by our new 29 millimeter SAPIEN XT, grew an impressive 50% this quarter. Overall, commercial sales of TF are somewhat higher than TA.

In May, at the EuroPCR meeting, we introduced our new eSheath expandable sheath technology and NovaFlex+ delivery system to our European customers. We have received very positive feedback about the product's ease-of-use benefit, and we are continuing to convert customers to this enhanced transfemoral delivery system.

While the new delivery system had little impact on this quarter's results, we expect to have -- it to be a larger contributor starting in the third quarter.

The integration of our recently acquired Embrella deflection device is proceeding according to plan. In the fourth quarter we expect to begin a new European multicenter clinical study of our Embrella technology to better understand its impact on procedural outcomes.

Yesterday the FDA held its advisory panel meeting on Cohort B of the PARTNER trial as part of the PMA approval process of SAPIEN in inoperable patients. The panel's strong recommendation for approval represents another important step on the path to FDA approval of SAPIEN.

As I indicated earlier, we remain optimistic as ever about the THV opportunity.

In April we submitted our PMA for Cohort A, the surgical arm of PARTNER. Based on clearly meeting the trial endpoints we assume a second-quarter 2012 PMA approval.

The formation of our US THV field organization is proceeding on schedule, and we have developed a comprehensive and proven clinical training program. Additionally, we are evaluating the initial hospital's best position to treat patients with inoperable aortic stenosis.

Production is going well, and we have sufficient SAPIEN inventory to support our US launch. We continue to expect $20 million to $25 million in SAPIEN sales in our first quarter of US commercialization and $150 million to $250 million in the first full year. As we have previously stated, we plan to set the pace of the launch based on maintaining a high level of procedural success.

From a US reimbursement standpoint, our discussion with CMS are proceeding well. In March CMS indicated that the aortic valve replacement codes are proper for reimbursement of TAVR procedures until the permanent codes take effect on October 1, 2011. In June the new procedure codes were formally approved, and we expect those codes to be aligned to payment codes in the August IPPS final rule. We continue to believe that the reimbursement available today will be available upon US approval.

Turning to our US PARTNER II clinical study, trial sites for Cohort B have been completing their IRB process and are rapidly screening patients. At the end of the quarter more than 100 inoperable patients have been enrolled, with half enrolled just in the month of June. We continue to have a high degree of confidence that enrollment will be completed by the end of this year.

For Cohort A, the surgical arm, we have made a great deal of progress with the FDA to optimize a trial design that broadens the inclusion criteria beyond the PARTNER high-risk definition. Accordingly, we expect IDE approval by the end of August.

In Japan we completed enrollment in our PREVAIL trial of SAPIEN XT and are collecting follow-up data. We continue to anticipate regulatory approval as early as 2013.

In June we announced the successful first implants of SAPIEN XT valves in China. These transfemoral implantations were performed as special access cases under a joint educational and training program between Edwards and the the Second Military Medical University. We hope to gain the necessary approvals to launch in China as early as 2013.

Given current exchange rates and our strong first-half performance, we now project global transcatheter heart valve sales for a full year of $330 million to $360 million, which includes $20 million to $25 million of commercial US THV sales.

Turning to Critical Care. Sales were $128 million for the quarter, up 16% on a reported basis and up 9% on an underlying basis. Growth was strong across most geographies and product lines. In Japan underlying sales were flat as prior-year period included the discontinued Somanetics product line, and customers worked down the inventory that they added last quarter in reaction to the disaster.

Sales of our advanced monitoring products once again generated strong results this quarter, and global pressure monitoring sales drove growth in our legacy product category. In our advanced monitoring portfolio late in the quarter we received US regulatory clearance for our EV1000 monitor. Clinician feedback is very positive and we expect it to become the best-in-class device to boost Critical Care growth over the next couple of years.

With regard to our in-hospital glucose monitoring program, the development of our second-generation product is nearing completion. We still anticipate obtaining CE Mark for this device by the end of this year and expect to begin European sales in 2012.

In the US we have met with the FDA to clarify the regulatory pathway. We plan to submit an IDE and begin a US trial early in 2012.

In summary, with our strong year-to-date results we remain confident in our outlook for Critical Care. Even though we are discontinuing certain nonstrategic products as previously discussed, we continue to believe 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 were $27 million, up 3% on a reported basis and down 2% on an underlying basis. These results were due primarily to a voluntary recall in June of an externally supplied introducer sheath, a minor yet integral component in our MIS product line. The issue has been resolved and the product is available.

Growth in our core cannula business continued at its typical rate. We now expect full-year CSS sales to be in the middle of our guidance range of $105 million to $115 million, with an underlying growth rate of approximately 6% to 8%.

Total reported vascular sales, which is comprised of our Fogarty products, was approximately $13 million this quarter, down slightly from the prior year.

Now I will turn the call over to Tom.

Thanks, Mike. This quarter we achieve diluted EPS of $0.48 and non-GAAP diluted EPS of $0.49, which was a 7% increase versus prior year. At the same time we increased our R&D investment by 28% and continued to ramp our spending in preparation for our US THV launch. And while we are investing heavily to prepare for that launch, excluding special items, we are still projecting double-digit earnings growth for 2011.

For the quarter our gross profit margin was 70.4% compared to 72.5% in the same period last year. This decrease was driven predominantly by a 180 basis point impact from foreign exchange. At current rates this negative effect is expected to increase, resulting in a third-quarter gross profit margin of approximately 70%.

With the lift from existing FX contracts in the fourth quarter, and the expected launch of SAPIEN in the US, we expect to exit the year at approximately 73%.

Second-quarter SG&A expenses were $163 million or 37.8% of sales, an increase of $23 million over the prior year. This increase was driven primarily by the impact of foreign exchange plus $8 million of US transcatheter heart valve launch-related investment. For full-year 2011 we continue to expect SG&A to be between 37% and 39% of sales.

R&D expenses in the quarter were $65 million or 15.1% of sales, an increase of $14 million over the prior year. This increase was primarily the result of additional investments in clinical studies and development efforts in our transcatheter valve program.

Also included in this quarter's figure was a $2 million in-process R&D charge pertaining to the acquisition of mitral valve technology. 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 $4 million charge to reflect the increased collection risk associated with our receivables in Greece. Additionally, we recorded a $2.5 million income tax benefit resulting from the partial settlement of a European tax audit. The net impact of these items reduced diluted earnings per share by $0.01.

Our reported tax rate for the second quarter was 20.2%. Excluding special items this rate was 22.9%. For the full year 2011 we now expect our rate to be approximately 24%, excluding special items.

FX rates positively impacted second-quarter sales by approximately $23 million and our bottom line by $0.01 compared to the prior year. Relative to our prior guidance, there was no FX impact to our bottom line in the quarter.

Looking forward, at current rates we continue to expect $40 million to $50 million positive impact of 2011 full-year sales versus prior year.

Free cash flow generated during the second quarter was $42 million. We define this as cash flow from operating activities of $59 million, less capital spending of $17 million. For 2011, excluding special items, we continue to expect free cash flow to be between $190 million to $200 million.

During the quarter we repurchased approximately 970,000 shares for $83.2 million. We continue to project diluted shares outstanding to be approximately 120 million shares for the remainder of the year.

Our balance sheet -- on our balance sheet we ended the quarter with a net cash position of $293 million. Total cash of $468 million exceeded our total debt of $175 million.

Our DSO at the end of the quarter was 69 days, a small increase from the prior quarter. Inventory turns were 2.2, relatively unchanged from prior quarter.

Turning to our 2011 sales guidance. For Heart Valve Therapy we continue to expect sales to be between $1.01 billion and $1.05 billion, with an underlying growth rate at the upper end of our 16% to 20% range.

In Critical Care we continue to expect sales to be at the top of our $470 million to $500 million range, and underlying growth at the top of our 5% to 8% range.

In Cardiac Surgery Systems we now expect to be in the middle of our previously stated $105 million to $115 million range, with an underlying sales growth of 6% to 8%.

For vascular we continue to expect sales of $50 million to $60 million. For the full year, as before, we expect total sales to be in the range of $1.66 billion to $1.74 billion.

For the third quarter 2011 we project total sales of $395 million to $415 million, and diluted EPS of $0.37 to $0.39, excluding special items. We continue to expect full-year net income growth of 11% to 13% and diluted EPS in the range of $2.01 to $2.07, excluding special items.

With that, I will turn it back over to Mike.

Thank you, Tom. In closing, not only do we believe that Edwards' leading product lines are well-positioned globally to continue to contribute to our long-term success, we remain optimistic for the potential of transcatheter valve technologies to drive accelerating revenue growth and expanding operating margins. We look forward to making this therapy more available to US patients suffering from severe aortic stenosis, who currently have limited treatment options.

Before we open up to questions, I would encourage you to mark your calendars for Friday, December 9, when we will host our 2011 Investor conference in New York. This event will include updates on our new technologies, as well as our outlook for 2012. And more information will be made available in the next couple of months.

With that, I will turn the call back over to David.

Thank you, Mike. 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 reenter the queue and we will answer as many as we can during the remainder of the call.

Operator, we are ready to take questions please.

We will now be conducting a question and answer session. (Operator Instructions). Amit Bhalla, Citigroup.

Mike, I had a question in terms of the launch trajectory that you are assuming for SAPIEN. At your analyst meeting last year you talked about 200 to 400 initial trained sites, but yesterday at the panel, I believe Larry Wood was talking about 150 to 250 sites. So can you talk a little bit about why the change in the number of initial sites?

You are correct. That is a change. We updated our launch plans to include 150 to 250 centers in the first year -- newly trained centers. We continue to be very confident in the $150 million to $250 million range in year one. We made the change more in collaboration with the societies in response to their concerns that the rollout be measured, and actually it is very consistent with our models.

We have more sophisticated models at this point than what we had at that time, and we are very comfortable. What it really means is that you're going to see more patients per center as a result of this change.

Then, just to follow up, Mike, you mentioned that the US procedure volumes for surgical valves were a little bit weaker. But can you comment on what kind of impact maybe there is from competitive trialing of a new tissue valve on the market, is that having an impact?

Of course. Broadly what we noted was that, although we saw procedure volumes we feel like really tick up in Q1 compared to where they were in the second half, that they seem like they retreated some in the second quarter compared to the first.

Yes, there was a launch of a competitive product in April, and we did feel that to some extent, but that is in the numbers. I think -- we think there was probably a bigger impact from the procedural change then there was actually from the competitive activity this quarter.

Thanks.

Jason Mills.

Mike, can you help us out with respect to the profile of your customer base there? Really what I am trying to get at, as you talk to Amit's question about the utilization rate seemingly being higher in fewer number of centers, could you help us understand in Europe over the last 12 months as revenue has continued to climb, what the -- how should we characterize the mix between those high-volume centers and sort of middle-volume, low-volume centers?

And at the top end was that 20% or 30% of the centers? And what sort of utilization rates are you seeing them track to?

Let me try and help you. I am not sure that I can land you exactly on that -- on those comparisons. One of the things that we clearly saw here is as we introduced the 29 millimeter valve there were patients that we feel like were not treated that we are now treating today.

So our growth, and this continued growth, and growth in the market is probably not necessarily come from more centers, but it has come from patients flowing into existing centers. So XT was helpful, and this 29 millimeter valve was helpful. Does that help you?

It does. I am just trying to get a sense for utilization rates. I mean, clearly you are seeing strong rates OUS. Is that populated primarily in the top 20%, 30%, 40%? I am just trying to get a sense of the dichotomy in Europe.

So, for example, we are adding centers in other geographies outside Europe. That is supplementing growth. But we would say the growth was in Europe. And existing centers is probably the larger driver of the overall growth.

Okay, great. The second question is just there was a slide that you put up yesterday with respect to the early CAP experience that surprised some panelists. That said, I think most of us are waiting for a broader swath of the continued access protocol with more patients, and we would expect, I think, over time for the results to mirror more of the pivotal trial data.

Could you speak to whether or not that is something that is maybe governing your current guidance with respect to new center adds, such that you train centers very well based on the experience you had early on in CAP?

Let me comment a little bit about the continued access question. I think in an effort to answer questions that were raised by panelists yesterday, we responded pretty hastily and probably did some speculation. We shouldn't have done that.

This group is really a subset. And you have to remember what was really in front of the panel was there was a data lock, and we have done deep and extensive analysis of the group before this, so really we haven't done that kind of analysis on the continued access group.

We really expect that this continued access to have very much the same outcomes that are reflective of the PARTNER trial when it gets aggregated and totaled.

Great. I will get back in queue. Thanks, Mike.

Raj Denhoy, Jefferies & Co.

I wonder if I could -- just a little bit. I think you mentioned that your expectation now is for an approval of the Cohort A population by April -- sorry, by the second quarter of 2012. I am curious, is that new, and is that based upon any discussions with the FDA or any potential timing of the panel that you understand at this point?

We don't have any particular insight on a panel date, so, no, there is nothing there. No, this is more consistent with our original assumptions. We said that we actually made that submission some time ago. This was back in April of this year that we submitted this.

We say -- we think that given the importance of this technology that it would have approximately a one year approval timing. So that really lands us in something -- and we are saying nothing has really happened recently that caused us to feel any differently about that timing.

Then just as another follow-up to the panel yesterday, I think one of the things that -- the panel seems to have stoked some fears amongst folks with the concern the FDA maybe expressed over the neurologic risk that the trial demonstrated. Nothing was really new, but do you think that the agency's focus on that might have some bearing on the approval of Cohort A? Do you think it puts [that at] any more risk, just given what we learned yesterday from the FDA's comments and their concern?

It is a good point. And, obviously, it was focused on very, very heavily. There is no doubt that stroke is an issue, and it is a very important issue. No one is more committed to trying to resolve those issues than we are.

But, I guess, as it relates to the approval of Cohort A, in the final analysis after an awful lot of discussion, the panel even agreed that the benefits outweigh the risk for Cohort B. And we think that will continue to be the case for Cohort A. Remember, Cohort A clearly met its endpoints, and that data has been out there and available for some time.

Okay, thank you.

Kristen Stewart, Deutsche Bank.

Mike, I guess in your prepared remarks you had mentioned about the coding for the valvev. And I was wondering if you could just maybe go over that a little bit? I know there was some discussion in March to try to separate out for the ICD-9 codes specifically for transcatheter valves, and you had said that -- I missed that a little bit -- but did you say that they had formally approved separate codes and that they will map under the surgical or that they will just continue to flow under the surgical codes?

Let me repeat this and see if it is clear, and if not, come back. We said in March CMS indicated that the aortic valve replacement codes are proper for the reimbursement of TAVR procedures until the permanent codes take effect on October 1.

And that in June the new procedural codes were formally approved. We expect those codes to be aligned to the payment codes in the August -- at the IPPS final rule.

So I now we are sort of getting into the weeds a little bit, but we thought as we were getting closer that we wanted to give you a little bit more detail on what is going on and what to anticipate. Is that helpful?

Yes, in March, as I recall, was that they felt that the surgical replacement codes were proper. Is that correct?

That is correct. That is what I'm trying to indicate. There are surgical codes that are currently designated for patients that are severe and complicated cases, and those are the codes that we expect to map to.

Right, and they explained -- I know that there was some discussion back then that there might be separate codes specific for transcatheter, but that will not be done this year (multiple speakers).

You are into a broader subject on whether there is going to be new codes and national coverage decisions and so forth, and that is more difficult to ascertain.

Okay, that was going to be my next question. Just in terms of CMS reimbursement, one of the things that came up yesterday at the panel was the notion that there should be some form of registry. To what level could there be some sort of linkage between reimbursement and a registry by way of a like coverage evidence development, like we have seen with some other technologies?

Yes, you correctly noted that there is a strong desire amongst the physicians and the societies in particular to have a registry. They would love to track all patients for a new transformative technology like this.

What we believe will be the case, and we have continued to stay on is that CMS will reimburse to the label and to the labeling. So we are -- the evolution to a registry, that would be great if that happened. There is a lot to be done between where we are right now and a registry that would really accomplish all the goals.

We are currently working with the FDA on a postapproval study, and the registry really doesn't exist yet. But big picture we really think that CMS is going to continue to reimburse the label.

And your guidance is based on that view of just (multiple speakers).

Our guidance is based on the view that CMS will reimburse the label.

Okay, perfect. Thank you.

David Lewis, Morgan Stanley.

Mike, I appreciate the updated timing on PARTNER IIa. Is it safe to assume at this time when the IDE gets formalized that we are going to see two-year follow-up data as part of that IDE?

That is a great question. The [PIIa] is not final yet. We said that we would expect that we would get that finalized and approved by the end of August. There has been questions raised and we are in discussion right now on whether there should be longer follow-up and how many patients. I would just summarize to say we would be pleased to have a longer follow-up period if it enables us to study a broader patient population. Okay? We are in those exact discussions with them today.

Again, not final, but we think that is a very good trade off for patients and the Company.

Okay, very helpful. Mike, at a recent clinical meeting there was some discussion about whether there should be a more direct study comparing transapical versus traditional aortic valve surgery. There was some discussion that perhaps Edwards was thinking of funding such a study, perhaps in Europe. Is Edwards thinking of funding such a study? Do you think a study is necessary or would you like to see a study like that be funded?

We have not taken a position on that one. I could tell you this by going through our prioritized list this has not floated to the top of the list. We are more interested in getting these technologies and next-generation technologies available to patients. And so I don't see us necessarily sponsoring that.

Okay, thanks.

There may be some small studies, but again, I don't think you're going to see anything very profound coming from us.

Great, thank you.

Larry Biegelsen, Wells Fargo Investments.

On the centers in year one, just a clarification, 150 to 250 new centers, so that is on top of existing centers, is that correct, Mike?

Yes.

And do you think that CMS or FDA will play a role in certifying centers or do you think they will leave it up to the Company?

It is a good question. I think that is not clear at this point. I think the societies believe that they can play a very useful role. And you can see that the ACC and SDS have stepped forward and talked about their views. You may have heard a little bit yesterday about the fact that four societies, two cardiology and two surgery societies, are working collaboratively to write guidelines.

So I think you'll see an evolution of that. And I think it would increase their collective confidence that this is going to be done in a high integrity fashion.

Whether that exactly happens or not, I don't know. I don't think it changes a lot from our perspective, because I think we are largely on the exact same page as the societies in terms of what kind of centers would be qualified to do this and what kind of patients this would be appropriate. We continue to be on the same page of it is the right patients, right technology for them, and trying to drive very high outcomes.

So you're confident in the 150 to 250 centers that everybody will be on the same page? And I had a follow-up.

I think so. I tell you, we do -- we reiterated our confidence $150 million to $250 million. We believe that is very much doable within this 150 to 250 additional training centers.

Mike, on the transapical arm for Cohort A after 12 months we saw the mortality rate become higher for transapical versus surgery. Do you have -- could you talk a little bit to that? Are you going to have more follow-up data beyond 12 months when you present at panel?

There is obviously -- there is some concern in the investment community about the approvability of transapical in Cohort A. Is there any light you can shed on that that would ease people's concerns?

I guess I will say this. I don't know that we saw a lot different in the PARTNER results than we have seen in Europe with our source registry. I don't know whether you took note of the comment of how well and how strong the demand is for transapical in Europe.

So this is where they actually have the availability of SAPIEN XT, and here we have almost as high a TA volume as we have TF, and is is a market where everything is available.

I think that should be quite a signal to people. The other thing to know that as we try and preserve this heart team, the opportunity -- TA becomes essential for high-level of engagement by surgeons. So we really think, yes, of course, there will be more data analyzed on TA. But remember, that is a much sicker patient population. They have performed, we think, very consistently with expectations, and so we are not overly concerned about that.

It is also the only way that a patient with a small vessel gets access to the technology. So you have to keep in mind that there are folks that the TF procedure is not the best choice for them. So that they are very high-risk patients, and this is something that without TA they don't have a solution. So it is very critical to us.

Thank you.

Mike Weinstein, JPMorgan Chase.

It is Chris Pasquale here for Mike. I just want to follow up on the question about the pace of center startups in the US. Mike, has your view changed on the way the market will play out long-term with more concentrated volumes at large centers, or are you just paring back your initial rollout plans with the idea that eventually the technology will be disseminated broadly?

I would say broadly. At this point our view has not really changed in the long-term in terms of what we are going to see. There is a lot of questions have been raised about Regional Centers of Excellence, and that is, I think, an important consideration along the way.

We are are the beneficiary of an awful lot of experience outside the US. It is just not large surgical centers that necessarily equal great success with transcatheter heart valves. There are many factors involved. And we think over time this is a technology that actually can be useful in more than just a few centers. We don't expect this to be restricted the way that you might see some of the other more complicated technologies restricted.

Okay, and then on Embrella, when can we expect results from that European study? I would assume the follow-up there is going to be pretty short. How are you thinking about the potential to include cerebral protection in PARTNER II?

At this point it is premature to talk to you about Embrella in PARTNER II. We want to gain some first-hand experience. What we tried to relate here is that we are in the process of bringing Embrella into Edwards right now. This means run it through all of Edwards' quality systems and make sure that it is bulletproof.

We are going to be in a position to start a clinical trial in the fourth quarter to really take a look at that thoroughly in multiple centers. You're right, we don't need a lot of follow-up, because we are really going to be most focused on the more acute success.

So we would think probably early in 2012 we will start to get some kind of signal. I don't know if it is going to be a strong enough signal to make decisions at that point, but we will start learning at that point.

Okay, thanks.

Bruce Nudell, Credit Suisse.

Mike, you had mentioned that the data set for transapical in PARTNER Ia is likely to be augmented. To what extent? And what is the data source that will be randomized apple-to-apple? How large of an augmentation might we expect?

Thanks Bruce. I don't know, if I send that signal I didn't mean to send that signal that we are going to augment the data set in Cohort A. We think it is a really robust data set that is based on a very strong randomized clinical trial. You saw that the results were even published in the New England Journal of Medicine.

So we think we've got some pretty strong data. There will be longer follow-up, of course, that goes on, because that is going to be available at that time. But if I sent a signal that there is going to be supplemental data, I didn't mean to.

Okay, and just one follow-up just conceptually. When you think about the evolution of the market, and you think of the ultimate split between inoperable and operable in the next five years or so, do you think there will be like heavy recruitment of people who currently don't even get referred for a surgical consult but are rejected, like people who doctors just don't even think are even worthy of forwarding on?

I guess our best way to be able to talk about that is to relate a little bit to our experience outside the US. We have consistently seen that there are more patients that come into the system than came into the system when it was only surgery that was an option.

Of course, when those patients come in, some of those will be good candidates for transcatheter heart valves, but in other cases, they are going to be good surgical candidates. And in some cases they're going to be so far gone that they are just not good candidates for either one of these therapies.

But it is no doubt that when there is an option like transcatheter heart valves available that it stimulates more patient demand. And there is a percentage that goes each way, overall it is net growth.

Thanks so much.

Glen Novarro, RBC Capital Markets.

Two questions for Mike and then a question for Tom. Mike, can you just remind us how many centers in the US are currently trained to do the TAVI procedure?

In the US today we have -- it is really the PARTNER sites. It is in the neighborhood of 25 sites, so that gives you a sense for it.

So is 25 plus the 150 to 250 in year one, that is the right math, correct?

Yes.

Then are you still confident of an October approval?

We still feel good about that. Obviously, when you're trying to predict something like this it becomes nearly impossible. You all have a chance to see a lot of companies that go through this process. But given that we have already been through the power of the results, what we feel like was a strong panel yesterday, we continue to feel that is a pretty reasonable estimate.

Okay, great. For Tom, in the $0.49 that you delivered on an adjusted basis, you said there was a $2 million in-process R&D charge. A lot of companies would exclude that from the adjusted numbers. I'm just curious why that was included.

Thanks for acknowledging that. We felt that when it was as small of an item as it was that it was fair to actually talk about it, identify it, but to include it in our figures.

Because when I plug it in my number it looks like it took $0.01 or $0.02 out of the results. Am I off there?

No, absolutely, it is slightly over $0.01.

Okay, because on the surface people are going to say you missed your EPS number relative to consensus. So if you excluded that like a lot of companies do you would have been in-line to slightly better. Is that fair to say?

That is absolutely correct.

Okay, thank you.

David Roman, Goldman Sachs.

I wanted to follow up on some of the questions others have asked regarding stroke. On the last call going into the AATS meeting I think there was some suggestion that when we saw the data that further stratified the patients in PARTNER A we may be able to derive a more specific conclusion about which patients are most at risk for stroke to try to better get a handle on which patients might be excluded, or at least viewed as less likely to be in the PARTNER A population.

Was there anything you guys saw in that data that would better help articulate the PARTNER A population most at risk for stroke, and how we should think about that?

You all had a chance -- and thanks for the question, but you all had a chance to hear that discussion yesterday and look at it. You could see that there was a strong desire by the FDA, certainly a strong desire on the part of our own CEC and executive committee, to get much deeper on stroke and was ever anticipated when we started the trial.

So, remember, part of what was noted is -- gee, when we went into the trial we just were ready to talk all stroke, and now we want to get much deeper and cut this so that we can learn more about it.

We know a few things as it relates to PARTNER A. The TA patients by their nature, have a higher risk of stroke. So these are patients because they have peripheral vascular disease in most cases, are going to automatically put them in it.

Broadly though this field is still relatively new. I think there is a strong belief on the part of those that are practicing that antiplatelet therapy is going to be important. And so that standard is still being sharpened, and moving it from simply a guideline to a requirement we think will be important. And we are working closely with the clinical communities to define this more clearly.

As you work through some of those details and whether it is defining antiplatelet therapy or other measures that physicians have to undertake upon adoption of this procedure, are these measures that you anticipate will be fully defined before you gain approval, and hence included in the label, or things that will sort of evolve over time and we would see modifications to treatment paradigms as the product gets rolled out commercially?

We will -- those are being defined for PARTNER II. I don't think you're going to see those in a label. There is no real way of of enforcing that. That is really left to clinicians to use their judgment. I wouldn't be surprised if many clinicians moved to what is believed as best practice. But, no, I think guidelines are going to evolve more slowly over time based on clinical results.

Tom, very quickly, on the P&L, gross margins, I just want to clarify [something]. 180 basis point headwind related to currency, and assuming rates stay at current levels, you would be similar to where you were this quarter in the third quarter?

The FX impact increases pretty significantly. That is one of the reasons why I tried to give you a specific number for Q3. So I would say stick close to that.

Okay, then the 73% exiting the year, that is entirely driven by product mix?

No, no. What we tried to do -- there're two components. So there is a big improvement in FX. In fact, it almost has no impact on the margin in the fourth quarter. So it is that FX improvement, plus the introduction, the assumed introduction of SAPIEN, so two factors get us to the 73%.

Got it. Thank you very much.

Ben Andrew, William Blair.

Mike, maybe talk a little bit more about the CAP data and when we could see a broader set that you sort of referred to earlier in the call?

No, I don't really know. We probably got into a discussion that I am not sure that we really belonged in to get into this continued access population. I am sure it is going to be analyzed at some point. Our view is that it is not going to be material to FDA as they evaluate whether they should go forward on PARTNER B, but we will obviously do any kind of analysis that they like.

But to continue this -- continue to access population that really deserves careful looking at. Because you had the group that was discussed yesterday, which those that are still randomized. Then you had a broader group after randomization. Now that group goes up to, I think, 400 plus patients and growing. And so this gets substantial. We have to take into account some of these patients actually start crossing over.

And so the PAS are going to follow, just like all pivotal trials do, it will follow and have analysis in the long run, but probably not in the near term.

One thing that you probably heard, we are committed to follow these patients for five years.

Right. Then just thinking about the existing centers, the 25 that you mentioned from PARTNER I versus the new centers you bring on, how do you think about the mix of patients between those two groups say in the first quarter versus say the first year in terms of where the patients are going to be treated?

Well, I think there's no doubt for those centers that already have some referral networks developed, like those that are partner sites, you're going to see them do many more cases. Now the other side of that is brand-new centers will make -- will do some stocking orders. So you will also see quite a bit come from them.

So the combination of those two, we said, will generate between $20 million and $25 million in the first quarter.

Okay, thank you.

Spencer Nam, Madison Williams.

Just a couple of quick questions here. So this 150 to 250 sites that you guys are talking about, what scenario do you end up with 150 versus 250? How should we think about -- because to me those two numbers, there is a big gap between them. And I was curious how you guys think about two different outcomes there?

Clearly, if we were at the lower end of that that would affect our ultimate sales for the first year.

Got it, that is helpful. Then on the reimbursement, I am interested in finding out what you guys -- in terms of your conversations with CMS and other private payers kind of getting ready for this launch, what you guys think about their willingness to pay?

Clearly, there are some established guidelines from surgical site and all that, but given that this is a new procedure, what is the risk of the reimbursement community squeezing the reimbursement guidelines a little bit more than maybe you guys anticipated? How comfortable are you guys are thinking that you guys will get a fair shake in terms of reimbursement?

We believe that we will. It is impossible to be able to predict the future on this, of course. But we believe that CMS is going to continue -- will stay true to their standard of reimbursing to labeling. This will be a well-vetted procedure that is backed up with randomized clinical trials, an awful lot of discussion, deep engagement by the societies. And we think that in the final analysis this judgment that the benefits outweigh the risks are going to carry over to reimbursement policy as well.

Thanks, Mike.

Sara Michelmore, Brean Murray.

Mike, I just thought I would change the subject to INTUITY if I could. You mentioned a little bit about reimbursement in Europe following a CE Mark late in the year. But just if you could just provide us with just a little bit more color in terms of how that would work. If you actually would need formal reimbursement to get the procedure going in Europe, or just general thoughts would be helpful?

Thanks, Sara, that is helpful. What we said was that our initial focus of our commercial efforts is to go to a select group of centers and collect that clinical outcome measures and economic data and quality-of-life data.

What we meant is we will have a CE Mark. It gives us the ability to go out and sell, but we don't think we want to go through a broad launch at this point, because what we would like to do is to have INTUITY's value established before we go to launch.

So, I guess, maybe -- and I am guessing now what is underneath your question here. That would probably mean that you wouldn't anticipate a lot of INTUITY sales while we are still collecting this data because we think there is a much bigger picture, a much more important one that we need to develop.

So we are taking a long run view there. We said let's collect the data that is necessary. We believe all the signals are there that would allow us to demonstrate that this has high economic value, and thta that is in place before a broad launch.

Understood. Then in terms of the US clinical trial, I don't think you have shared much in terms of the details there. I understand you are in front of the FDA with an IDE submission. But just in general terms, what do you have to demonstrate for that clinical trial? Is it a large undertaking? Is it a control versus standard of care, standard surgery. Could you just give us -- just a big picture would be helpful.

Well, we are still in discussions. We sure don't think it is going to be bigger than PARTNER, but -- and this valve can be interpreted either as a surgical valve or something very novel. We are in those discussions. I don't have any specifics to share with you at this point.

Okay, so it is not determined right now what the scope of that trial would be it sounds like. Okay. (multiple speakers). Then in terms of XT in Japan, you are on schedule, I guess, for a 2013 approval potentially. But where does that stand in terms of reimbursement for the valve? How will that work in the Japanese market? Thanks.

There is kind of a two-step process in Japan in general. We pursue regulatory approval, and we are well down that path. So the regulators pointed us towards some specific clinical data that they would like to see generated in Japan. And as we say, that trial is enrolled at this point. So it is going through its time period.

Once that data is analyzed and so forth, and we expect it to be a favorable result. Again, I will remind you this is SAPIEN XT that we are going for in Japan. Then we make a separate petition to the Ministry of Health and Welfare for reimbursement.

Our intention would be to have reimbursement in place before we launch.

Okay, then just one last one on Magna Ease Magna Ease that approval in Japan was, I guess, a quarter earlier than I think you had told us you were planning for. Can you just remind us what the opportunity is for that valve in that market? Thanks.

Sure, thanks. This probably needs to be the last one. Thanks, Sara, though for your diligence. Yes, we were pleased. We weren't expecting the Magna Ease aortic valve this soon. So we were very pleased to get that approval. This has become our number one selling valve in the world. So we are very excited about bringing that in Japan.

You may know that we have a very strong market position in Japan, so this is going to be an opportunity for us to move our customers to this lower profile. It is particularly going to be helpful for these smaller patients.

So not only will it be a bit of an upgrade for those that are already buying Edwards products, but we think it is going to bring some patients that are small today that might get mechanical valves, over to a tissue valve.

Great, thanks so much, Mike.

Matthew Taylor, Barclays Capital.

Just a couple questions about the panel yesterday. I am curious to know whether you thought the feedback from the panel was consistent from the feedback that you have gotten from clinicians throughout the progress of doing the PARTNER trials? And if there is anything that surprised you about the panel or the feedback from the clinicians or the FDA?

Well, I would say broadly nothing really new. Probably a bit of a difference in tone, Matt, was there. It is clear that this panel is not nearly as close as many of the clinicians that we deal with where this has become a big part of their life's work. So we end up having more detailed conversations. And in a way this is a chance for us to step back and have some experts review this that aren't so deep in our technology and don't know so much about these patients and this disease.

So we feel like that we probably even need to do a better job of explaining to this group where we are. I don't know if that gets at your question.

That is very helpful. Thank you.

Suraj Kalia, Rodman & Renshaw.

Michael, first and foremost, congrats on the panel decision. Everything I've heard on the quarterly calls, Michael, suggest that the US market dynamics are going to be dot-for-dot what we have seen in Europe.

You look at the consensus numbers, everything, it seems like it is mapping out -- people are mapping out pretty closely. The question I have is I am curious, our checks in Europe suggests that 60% to 70% of these valves are being put off label. And I'm curious in your assessment, one, related to the stroke rates that we are seeing currently, admittedly it is a higher profile -- larger profile device, but I'm just interested how do we -- how should we look at the market dynamics in the US, especially related to what is happening in Europe and how that will flow through into the US?

Well, you know, let's start from the top. We absolutely do not agree that 60% to 70% of the valves are being used off label. We think a high, high percentage of these valves that are being used on label. I think label actually calls for more than a [euro] score of 15% or 20%, and we are tracking in the 25% range. The first registry showed 27%, I think we are around 25% today. So we're very, very comfortably in terms of some very high-risk patients that are being treated.

Now, I can't speak to whether competitors are also following that, but, certainly, we know we are a big part of the people that are serving that -- those patients in Europe. And that we are very rigorous about helping people stay on label. We don't think it has -- there was just recently a circulation paper that was published, I think it was Dr. Martin Thomas that actually authored that. And he had a quote that was in that that says there is not an indication creep.

Again, I don't have his words exactly right, but I would encourage you to go back and review that. I think it was just published in the last few weeks.

In fact, he repeated that at the panel -- his testimony at the panel also yesterday.

Well, okay. Final question, Michael, one of the things that caught our attention in the panel yesterday was the switch of definition of stroke from old stroke to major stroke. I am sure there are legitimate clinical arguments, Marty Leon and the Edwards team has made, but just fast forward looking at Cohort A, can something trip us in terms of this old stroke versus -- I mean, if memory serves me right, at one year I think transfemoral was like 5% or so, and I forget, but the control was 2 or something. I'm just curious -- and it said major stroke, I remember that.

But when you look at old stroke, could the FDA throw a wrench in this whole process again, or how should we look upon that?

Thanks for the question, Suraj, and I think it is a good one. I think stroke is key on everybody's mind, because when you think about complications, here is probably the most serious complication. And actually we look forward to tackling the stroke issue, because if we can get this one on managed we think there is substantial upside.

But you have to remember, when we went into this thing and the trial was designed sometime ago, it was indeed indicated that we were going to measure all stroke. That is what was prespecified. And what FDA reminded us is that the pure science is to stay with those prespecified measures.

Along the way it became apparent that stroke was becoming an important complication that needed to be understood. So it wasn't just Marty Leon, but our Clinical Events Committee, our Executive Committee that said they really valued deeper analysis. And so they started cutting it not only by major stroke and minor stroke, but many other ways.

We -- I want to remind you -- we continue to provide all the data exactly the way the FDA wanted it. In other words, by all stroke. But we supplemented it with this additional analysis. This was all under the banner of trying to understand it better. We recognize that for Cohort A, hey, there is a 2% to 4% higher level of stroke in these patients, but again, this is a very sick group.

Perfect. Thanks, guys.

Kristen Stewart, Deutsche Bank.

One of the things that came up yesterday was also the valve-in-valve, I guess the lack of preclinical data. I am just wondering to the extent that the FDA wants that, I guess what are your thoughts that the FDA would want that before approval, and to what extent could you get them data to get them comfortable, if that is the case?

Since we are not seeking that as an indication, we didn't feel any reason that we needed to [prep] data. We certainly understand exactly where FDA is coming from, because some clinicians in an effort to save patients lives, in many cases where there aren't options, aren't going to want to use our valve.

And I think where this ultimately landed is that FDA will probably put some kind of warning in that reminds people that we don't have any data on valve-in-valve. But we don't think that that is going to constrain the approval of the product.

Okay, great. Then we had discussed already the coding from a hospital perspective. Any color that you have on how physicians will be reimbursed for these procedures? Will they map also to the surgical code or will they map to some other code, perhaps more of an interventional code?

Yes, we don't have clear definition of that. It is going to happen after FDA approval, and we will know more. At that point we are going to make our application for those codes, and so that is really one step away. So we don't have any specifics to add. It will be a specifically new code.

And the cost effectiveness of Cohort A, is that still this fall? (technical difficulty).

Thanks, Kristen.

Eric Toubin, Bank of America Merrill Lynch.

I think, Mike, one of the takeaways from the panel yesterday was that the assessment of stroke in TAVI trials going forward needs to be much more rigorous. There is even discussion about potentially including neurological evaluations by neurologists for all patients in these trials.

I was wondering if you could speak to any component of the PARTNER II protocol that specifically addressed that issue?

I think that is a great observation. In fact, in our PARTNER II discussions there have been specific discussions about doing neural assessments, and we are in agreement with doing that. We are all committed to learning together. This is going to be evaluated much more thoroughly in the future.

So is that being incorporated into the ongoing PARTNER II trial now or is there any -- do you guys have a reason to believe FDA may want you to actually pause the study and revise the protocol?

Well, I need to go back and check, but my understanding is that it would be incorporated into PARTNER IIa. I don't know for a fact that it is incorporated in PARTNER IIb.

All right, thank you very much.

Bruce Jackson.

Thanks for taking my question. Getting back to the valve-in-valve are you collecting any clinical data? And would you comment on your long-term regulatory strategy for valve-in-valve?

Well, thanks for that. I probably haven't done a very good job of explaining it. When you listened to the panelists yesterday, it is why the heck why don't you generate some valve-in-valve data? The short answer is it is not that simple to analyze.

So there is a few things that you could evaluate. In other words, you need to do specific studies within specific valves. And so when you start thinking about failing tissue valves there aren't that many that are out there.

So being able to do the appropriate tests and get the appropriate models for failing tissue valves and fulfill regulatory requirements for doing it, it is difficult and challenging to do. And you're probably going after some very small numbers in the final analysis.

So it is -- that probably is more meaningful. Obviously, it is meaningful to patients. It is probably not a big driver in terms of number of patients that are going to get valve-in-valve in total. Does that help clarify it or do you have a more specific question, Bruce?

No, that helps. Thank you very much.

Mike Weinstein, JPMorgan Chase.

Mike, I apologize, I might have missed this earlier. But two quick questions. Will we see further follow-up from Cohort A at TCT? And part of the reason I am asking, Mike, was on the discussion on the transapical subset, in particular there was -- as the numbers got very small as we went out beyond 12 months there was some question as to where the curves were heading -- the mortality curves for the transapical arm versus the control arm. And I was wondering if we actually would see a larger end out 18 months or more?

You know, the real specific answer is, I don't know exactly what is going to be presented at TCT. You know there's going to be a strong desire to see more data. I think -- there is -- I specifically don't know the answer, so I maybe I will just -- I will leave it there.

Not a problem. I wanted to make sure I got the bounce back of what you said earlier in regard to CMS. I just wanted to make sure your thought process there hasn't changed. Your expectation is still that CMS will not issue a national coverage decision or not open one up at least prior to the FDA approval?

Yes, at this point we are not sure of the timing of a national coverage decision. At one time we would have thought that it was some ways off. There is more discussion today, more engagement by societies, and it is possible that a national coverage decision could be sooner than we originally thought.

Big picture, we continue to believe that CMS is going to reimburse to label. As long as that is the case, we really don't think there is any changes to our models.

Okay, great. Thank you very much.

There are no further questions at this time. I would like to turn the floor back over to you for closing comments.

Great, thank you. And thanks for your continued interest in Edwards. Tom and David and I are going to welcome any other additional questions by telephone. Let me turn it back over 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.

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