愛德華生命科學 (EW) 2011 Q3 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation third-quarter 2011 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Erickson, Vice President of Investor Relations for Edwards Lifesciences. Thank you, Mr. Erickson, you may begin.

Welcome and thank you for joining us today. Just after the close of regular trading, we released our third-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 like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to, our expectations regarding sales and sales growth, gross profit margin, net income and net income growth, earnings per share and earnings per share growth, SG&A, R&D, tax rates and free cash flow outstanding, foreign currency impacts, product mix, shares 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.

These statements also include our expectations for regulatory submissions and approvals related to a variety of new products and indications, as well as the timing, status, and expected outcomes of new or currently ongoing clinical trials, the expected impact, ramp up, and benefits of new product introductions and potential impacts of economic conditions and competitive products. 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, 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. And now, I'll turn the call over to Mike Mussallem. Mike?

Thank you, David. We're pleased to report strong third quarter sales growth of 18%, highlighted by increased demand for transcatheter heart valves and sustained strength in critical care. And on our fourth anniversary of commercial sales outside the US, it's gratifying to see our transcatheter heart valves addressing the large unmet patient need and driving strong growth. The FDA approval, which we expect any day, will allow SAPIEN to reach many inoperable patients in the US suffering from severe aortic stenosis. First, on a reported basis, third quarter sales were $413 million, an underlying growth rate of 11%. Sales outside the US grew 26% on a reported basis and represent nearly two-thirds of our total sales. Now turning to product line results. For the third quarter, we reported Heart Valve Therapy sales of $246 million, which included $83 million from transcatheter heart valves.

On a reported basis, global Heart Valve Therapy grew 23%. Surgical heart valves grew 8% over last year or 1.5% on an underlying basis. Overall, we believe surgical valve procedures in the third quarter were moderated by slower economic conditions. New competition in our core markets also affected our growth rate, as previously projected. Although pricing remains stable in each geography, strong growth in emerging markets changed the country mix, which slightly lowered our global average price. Our premium products are representing an increasingly greater portion of our sales, which we expect to continue with the growing adoption of our recently approved Magna Ease aortic valve in Japan. We continue to make progress on our Edwards INTUITY rapid deployment aortic valve system and clinician interest is building. Presentations at the recent EACTS meeting reinforced earlier data regarding the safety and efficacy of INTUITY and the benefits of faster, less invasive procedures. In the fourth quarter, we continue to expect a CE Mark and remain hopeful for a US IDE approval. In summary, based on our year-to-date performance, we now expect surgical heart valves to achieve underlying sales growth between 3% and 5%.

Now turning to transcatheter heart valves -- sales of $83 million were up 69% over last year and 50% on an underlying basis. Strong procedure growth was the primary driver of these results, which was also assisted by our recently enhanced product portfolio. Transapical sales, aided by our 29 millimeter SAPIEN XT still comprised nearly half of our total commercial THV revenue. We continue to receive positive feedback on our new eSheath and NovaFlex+ delivery systems and to date, nearly all of our European customers have adopted these advancements.

In the fourth quarter, we expect to begin a new European multi-center neurological assessment study to increase the understanding of opportunities for improving clinical outcomes. The results of this study, which will include our Embrella technology, should be available beginning in 2012.

We are fully prepared to begin US launch of SAPIEN for inoperable patients and expect FDA approval any day. Leveraging our experience in Europe, we have built a world-class training program to educate US clinical teams. The heart teams will undergo comprehensive trainings which include lectures, case studies, and hands-on simulator experience. Then they will perform their first procedures overseen by experienced proctors. As we have previously stated, achieving and maintaining a high level of procedural success, as we have outside the US, is our first priority and will drive the pace of our launch.

In September, CMS initiated a national coverage analysis for TAVR, which will likely result in a national coverage determination, or NCD, in mid-year 2012. We believe a well-written NCD that ensures adequate patient access would be a positive for patients and physicians. The NCD is currently in a 30-day public comment period where all stakeholders can provide their input. We are actively engaged in preparing our detailed comments. CMS expects to issue a proposed decision memo in March of 2012 and to complete its NCD by June. As anticipated, the permanent TAVR codes, which were aligned with the surgical AVR payment codes, took effect on October 1. We continue to believe that reimbursement will be available on a regional basis until CMS completes its national coverage determination.

We continue to expect a second quarter 2012 PMA approval for cohort A of PARTNER, which will be preceded by an FDA advisory panel. We remain confident that the trial results clearly demonstrate the effectiveness of both TA and TF as less invasive treatment options for high-risk surgical patients. At TCT next month, data from our PARTNER trial will be presented on Thursday, November 10, including quality of life and cost effectiveness for cohort A and 2-year data from cohort B. Later that afternoon, we'll host an informal reception for analysts and additional details about this event will be available shortly.

Turning to our PARTNER II clinical study, we continue to enroll patients in cohort B, studying up to 600 patients with severe symptomatic aortic stenosis. To date, we've enrolled over 350 patients and expect to be close to completing enrollment by the end of the year. For cohort A, the surgical arm, we plan to study a lower-risk patient population. We believe we have fully responded to FDA's questions regarding trial design and now expect IDE approval during the fourth quarter.

In Japan, we are collecting follow-up data from our PREVAIL trial of SAPIEN XT and continue to anticipate regulatory approval as early as 2013. In summary, we still expect US SAPIEN sales of $20 million to $25 million in the first 3 months of launch and $150 million to $250 million in the first full year. While we had modeled an early October FDA approval, our year-to-date performance outside the US has been strong. Therefore, we continue to expect transcatheter heart valve sales for the full year of 2011 of $330 million to $360 million.

Turning to Critical Care, sales were $127 million for the quarter, up 14% on a reported basis and up 7% on an underlying basis. Share gains and broader product adoption in the US and Asia were the strongest contributors to growth. Sales of our advanced monitoring products once again produced strong results and global pressure monitoring continued to drive market share in our legacy products.

In our advanced monitoring portfolio, FloTrac's robust sales again drove the majority of growth and sales of our new EV1000 monitor continue to ramp up in line with our expectations. Clinician feedback on the EV1000 continues to be very positive and we remain confident that it will become a best in class device contributing to Critical Care's future growth. With regard to our in-hospital glucose monitoring program, recent design enhancements to our [Gen2] system now require a more extensive regulatory review in Europe. We now anticipate obtaining CE Mark in the second half of 2012. In summary, with our strong year-to-date results, we remain confident in our outlook for Critical Care. Led by strong growth in our pressure monitoring and advanced monitoring products, 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 13% on a reported basis and 8% on an underlying basis.

These results were due primarily to growth in our MIS business and our core cannula business, which is growing at its historical rate. We continue to expect to full year CSS sales between $105 million and $115 million, with an underlying growth rate of approximately 6% to 8%. Total reported Vascular sales, which is comprised of our Fogarty products was $13 million this quarter, down slightly from the prior year. And now, I'll turn the call over to Tom.

Thank you, Mike. This quarter, we achieved diluted earnings per share of $0.43 and non-GAAP diluted earnings per share of $0.38, which was a 12% decrease versus prior year. This decrease was driven by the planned investment in our US THV launch and the impact of foreign exchange. As a result of this pre-launch investment, and a projected improvement in the foreign exchange impact, we look forward to much stronger operating leverage beginning in Q4.

For the quarter, our gross profit margin was 69.6% compared to 72.5% in the same period last year. This decrease was primarily driven by a 350 basis point impact from foreign exchange. At current rates, we expect this negative FX impact to diminish in the fourth quarter and we remain on track to exit the year at approximately 73%.

Third quarter SG&A expenses were $166 million, or 40% of sales, an increase of $32 million over the prior year. This increase was driven primarily by $11 million of US transcatheter launch-related investments and a $10 million impact from foreign exchange. For full year 2011, we continue to expect SG&A as a percentage of sales to be between 37% and 39%.

R&D expenses in the quarter were $62 million, or 15% of sales, an increase of $9 million over the prior year. This increase was primarily the result of additional investments in clinical studies and new product development efforts in our transcatheter valve programs. 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 $6.9 million income tax benefit resulting from a favorable ruling pertaining to the 2009 sale of our hemofiltration product line. Other expense of $2.3 million in the quarter consisted primarily of balance sheet-related foreign exchange losses of $3.1 million and a $1.4 million gain from the sale of an investment. Recall that other income of $3 million in the prior-year quarter included a foreign exchange gain of $1.7 million.

Our reported tax rate for the third quarter was 10.4%; excluding special items, this rate was 22.4%. Based on our projected geographic mix of income, we now expect full-year rate to be approximately 23% to 24%, excluding special items. FX rates positively impacted third quarter sales by approximately $24 million compared to the prior year. On a year-over-year basis, foreign exchange movements negatively impacted earnings by $0.05, which includes an unexpected $0.02 due to FX losses on inter-company balances driven by the weakening of the euro in September. At current rates, we expect an approximate $50 million positive impact to 2011 full-year sales versus prior year.

Free cash flow generated during the third quarter was $78 million. We define this as cash flow from operating activities of $97 million less capital spending of $19 million. For 2011, excluding the cash impact of special items, we continue to expect free cash flow to be between $190 million and $200 million. During the quarter, we repurchased approximately 1.4 million shares for $104 million. With our recently authorized share repurchase program, we had $638 million available for share repurchase at the end of the third quarter. We now project diluted shares outstanding to be approximately 118 million for the fourth quarter.

On the balance sheet, we ended the quarter with net cash position of $276 million. Total cash of $451 million exceeded our total debt of $175 million. Our DSO at the end of the quarter was 70 days, a 1 day increase from the prior quarter. Inventory turns were 2.0, relatively unchanged from the 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 of 16% to 20%. In Critical Care, we now expect sales to be between $505 million to $515 million, an underlying growth at the top of our 5% to 8% range. In Cardiac Surgery Systems, we expect sales in 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. Given our strong year-to-date performance, we are tightening our previous range of full-year sales to $1.68 billion to $1.72 billion and now expect to achieve net income growth of 7% to 10%, excluding special items. For the fourth quarter 2011, we project total sales of $430 million to $470 million. We now expect 2011 diluted earnings per share, excluding special items, of $1.97 to $2.02. For the fourth quarter 2011, we project diluted EPS, excluding special items, of $0.57 to $0.62. And with that, I'll turn it back over to Mike.

Thanks, Tom. We believe our leading products and extensive product pipeline position us well for long-term success. In particular, TAVR is gaining momentum as a treatment option for high-risk and inoperable patients fueled by the growing body of impressive clinical results. And with further geographic expansion, broader indications and technology enhancements, we expect accelerated revenue growth. While even a minor shift in timing of the US approval of SAPIEN affects the fourth quarter earnings, the value to Edwards in 2012 and beyond remains compelling. With that, I'll turn it back over to David.

Thank you, Mike. Before we open it up to questions, I'd like to remind you about our 2011 Investor Conference, which will be held in New York on Friday, December 9. At this event, we will provide an update on our new technologies, our US commercialization plans for SAPIEN and a detailed financial outlook for 2012. We've also lined up leading clinicians who will share their experiences with our Edwards INTUITY and transcatheter valve technologies. Additional details will be sent out shortly.

Operator, we're ready for questions please.

(Operator Instructions) Larry Biegelsen, Wells Fargo.

Just 2 questions -- first, I think there's some confusion on who will approve new sites. Do you think that FDA or CMS is going to approve new sites in the United States, or if not, who will approve new sites?

We think the order of site training and so forth is something that's going to be conducted by Edwards Lifesciences.

You don't think FDA or CMS is going to need to sign off on that?

We're not anticipating that.

And then one more question, Mike, there's been a lot of discussion about the long-term opportunity for TAVI, given that the PARTNER II Cohort A has been delayed and you'll have NCD sooner than you expected. Should we expect a slope or the uptake to be less steep? In other words, the slides you presented at your analyst meeting last year on the opportunity through 2016, would it look different today? It would be helpful to hear your thoughts, Mike, on this before the December analyst meeting?

Sure. There's a couple of parts to your question, Larry, and I appreciate it. First, as it relates to CMS, we think CMS is going to cover consistent with the patients that were studied in the PARTNER trial and I don't expect that to be limiting, I expect that slope to be exactly what we thought. As it relates to PARTNER II A, we are indeed in discussions with the FDA about studying a broader patient population, lower risk if you will, and as part of that discussion, and part of this is just because the PARTNER A results have been so good, we're talking about that going farther than we anticipated when we gave that guidance last year. So we indeed may end up with a higher peak, but because of the way FDA would like us to study it, we may end up studying more patients and for a longer period of time. So there may be some impact to that, but when we run the numbers on that, Larry, it's very good economic value.

Thanks, Mike.

Tom Gunderson, Piper Jaffray.

Mike, is there any way to give us color around expect any day now for the FDA approval? Does it feel to you like everything's said and done? We're just waiting for a final signature? What makes you put the language of any day now?

Very fair question, I've been waiting for this one. We really do believe that there aren't any outstanding questions at this point. We believe all issues have been resolved. We've been in extensive discussions with the FDA and we really believe that we're at the end of the line here and that's why we gave the indication of any day now.

Okay. Thanks. And then for the follow-up, could you talk a little bit more about the Embrella trial or that neuro-assessment trial as far as size and timing and maybe some of the primary outcome measurements?

Yes. I can tell you more about the intent than the absolute details. We do plan to start it this quarter, meaning Q4. Because the signals are pretty small as it relates to neurological events, what we would do is use an MRI signal to actually measure hits, and what we would want to do is to measure that as an opportunity to do a lot of learning in this space. The PARTNER trial, although it generated some data, it wasn't really designed to be able to do a detailed analysis of this. This way we can analyze different anticoagulation regimes, we can analyze the propensity of different parts of the trial, and we can analyze the ability, potentially, of the Embrella device to mitigate this. So we expect to learn a lot in that and because it doesn't necessarily take long-term follow-up, we ought to be able to start seeing results in 2012.

Sorry, just for clarification, I wanted to get a sense of size. Are we talking 10 sites, 100 sites, I'm just looking for scope from a standpoint of modeling those.

I know it's a multi-centered, Tom, but I don't know the number of sites and so I'm going to have to get back to you on that.

Okay. Thank you.

David Roman, Goldman Sachs.

Tom, I was hoping you could go into a little bit more detail on the guidance for the full year. Looks like at the midpoint of the earning range, numbers went down by about $0.04, but the midpoint of the sales guidance is unchanged. Obviously there's been some modest slippage here in SAPIEN. So I'm wondering if the dynamic's influencing the change in earnings guidance relative to the no change in sales guidance. Is that product mix, is it other expenses that's currency-related, can you maybe help us just walk through those details?

Sure, David. You're pretty close. I'd say part of the story has to do with the third quarter in that we overachieved sales. But because of the contracts in place, we really didn't deliver a better bottom line with that. So that was an upside where we've got a little bit of a softening on the approval here so that those 2 sales-wise doesn't make a huge difference. We reflected that difference, though obviously the second piece has an impact on earnings.

Okay. And then, I assume the contracts you're referencing are the forward contracts on foreign exchange.

Right.

Can you just remind us how those are locked in and as the euro has weakened versus the dollar, what the impact is on a go-forward basis?

Sure. In fact, we've talked about this and what we like to do is try to lock in a rate 1 year in advance, so that when we're comparing back to the year prior, we have effective rate, essentially, at that time. If you look at back to a year ago, the difference was probably the biggest in Q3. The euro was about $1.26 versus the average we had during this year was $1.44. So big difference, big payback on those contracts. But back at that time, you were trying to protect yourself against a even weaker euro. All of that changes pretty dramatically as you move into Q4 where the rates, I believe, are something like $1.40 versus $1.44. They're coming into a much tighter range very quickly and that's going to help the margin.

Okay.

It (multiple speakers) the quarter.

And then the last question, maybe just on operating leverage, you referenced in your prepared remarks that you thought Q4 you could start to see some operating leverage. The SG&A numbers, over the course of the year, have generally come in somewhat higher than what the street had comp contemplated. Do you feel thought, as a percent of revenue I guess that is, are we at a point right now where you've pulled forward some of the advanced spending such that once SAPIEN gets launched in the US, a switch flips where SAPIEN goes from a P&L negative to a P&L positive pretty quickly?

Yes. If you remember, what's going on here is you've got your fixed investment, particularly the largest occurs in the third quarter without any help from sales whatsoever. So we've been on track with our investment for the preparation, and therefore, the ratios look probably the worst they will look in a long time in the third quarter. All of that starts to change in Q4, even just the GP release. I'm looking at 350 basis points we're giving up, that gets much better, so that helps the operating margin. And then any sales coming from THV are going to be an add-on to what is a fixed base, while it's growing, it's going to significantly give us leverage.

Got it. Thank you very much.

Bruce Nudell, Credit Suisse.

Mike, we built our model conservatively per PARTNER I based on the people who get surgery today and the people who are referred today and turned away. We came with around $500 million market potential, but what we don't capture is who all is out there that's not being referred today, for whatever reason, that TAVI may bring in. Could you just scale where you think on-label PARTNER I is when mature and what gives you confidence that this is latent demand that we just don't see today?

Sure. I think you bring up a really good point, Bruce. It's a little tough to give exact numbers because it's tough to know the number of people that are out there that are not in the system today. And acknowledge, I know when many people do their surveys they can see the people in the system, but aren't clear who's out. When we're able to do that analysis and we analyze the number of people in the US from a prevalence perspective, we believe that there are 500,000 Americans with severe aortic stenosis, and that 0.5 of those, around 250,000 have symptoms. Which would be a clear indication from guideline that they should be treated and we all know that there's only about one-third of those that get treated today.

So there's a pretty substantial population that's out there that you ask natural question that said, will they come into the system? We believe that there's strong evidence of that when there is an alternative to surgery that people come into the system. Maybe the best proof statement is to just watch what's going on in Europe to date. Again, we're very close to our fourth anniversary, and here we are still growing at approximately a 50% rate after all this time and that's really with very little share gain. That's probably all new procedures coming into the system, probably new patients coming into the system.

Okay. My follow-on question is, is it safe to assume that when PARTNER II B is approved on the back of SAPIEN XT, that it will effectively become the commercial product in the United States?

Can you elaborate? When you say the commercial product, Bruce, what do you mean by that?

That it'll essentially displace SAPIEN. That SAPIEN will become obsolete as it did in Europe.

Yes. I very much believe that. All indications are and you correctly tracked what happened in Europe. As soon as SAPIEN XT was available, SAPIEN was replaced very quickly. I think it all happened in a matter of a quarter or close to that.

Thanks so much.

Amit Bhalla, Citigroup.

Mike, I want to come back to PARTNER II Cohort A, you talked about studying a lower-risk population and extending the length of the trial, but getting that approval continues to be a hurdle every quarter. So maybe could you just talk a little bit more about how the FDA is thinking about evaluating stroke?

Yes, clearly, it's one of the things that's on the radar screen. I think they, like us, like the clinician community all came away a little dissatisfied that there's not more information about stroke. So I think going into PARTNER II, they'd like to understand much more about it. Without getting into what's in there, there have been discussions about pre- and post neuro-assessments as part of PARTNER II. So I think we would find this to be something that would be thoroughly studied. Is that the essence of the question? Or is there more to it?

Just a little bit more to it would be how close are you to coming to an agreement on the structure of this trial?

Yes, frankly, we would have hoped that we would had agreement already at this point, and we're disappointed we don't. We've been wrong about that. We have gotten a series of questions from FDA and we believe we have fully answered all of those questions. We think we're close, we think that clinicians that are part of this discussion are very supportive of the direction that we're going in.

Okay. And then my second question just is on the surgical valve business, you talked about an impact this quarter from both competition, as well as weaker volumes. Can you tease out the impact from the 2 of those, which was the bigger hit?

Yes, it's a good question, Amit. Frankly, we have a tougher time really getting a firm handle on procedure numbers. So, we don't know that. The competition primarily came from one competitor that also reported earnings today, so we could probably circle around that one and get pretty close. Based on the quick analysis that our team has done, the impact from the competitors is very consistent with what we expected and anticipated. So when we gave that estimate of sales growth for heart valve therapy at the beginning of the year of 3% to 5%, we're going to, frankly, end there. Obviously had higher growth rate in the first part of the year and lower now when we have the more brunt of the competition, but at some point here, we expect that to mitigate.

Okay. Thank you.

Glenn Novarro, RBC Capital Markets.

First, Mike, I wonder if we can address again the number of centers that you will go into for 2012. Back at the FDA panel and on your 3Q call, you said you're thinking now more 150 to 200 centers, but to Larry Biegelsen's question, you said that you didn't think the FDA or CMS would be regulating the number of centers and where you go. So I'm wondering, is 150 to 200 centers next year a conservative question? That's my first and I'll add a follow-up. Thanks.

No, you're right, Glenn. At the time of panel, we indicated that we would be targeting 150 to 250 centers in the first year, and we thought that was a number that, frankly, made the societies and the regulators more comfortable. What I guess I wanted to indicate is we don't have any reason to believe that it would be constrained beyond that. Frankly, when you really talk about number of centers, what a regulator would do would be try and talk about the qualifications of those centers or a criteria of what makes a qualified center and what doesn't. So it's kind of tough to triangulate to a specific number of accounts. It's going to speak more to their level of experience, the level of teamwork and partnership, the quality of their facility, and so forth. So what we hold in paramount importance is the access for patients, but I think that we will stay disciplined within this 150 to 250 additional centers.

Okay. And then as a follow-up, on pricing, can you give a sense of how pricing is holding up in Europe in light of austerity measures there? Then are you still thinking for the US, a $30,000 price tag for SAPIEN? Thanks.

Yes. So Glenn, I didn't know if there was a specific product line or you want me to walk around Edwards and hit the highlights?

No, just strictly on SAPIEN.

Okay. Yes. The pricing has been very stable in Europe. It's been pretty much rock solid here during the course of 2011. What we believe, in the US, is the number that we've been suggesting they use for modeling is around $30,000. We think that's still a good number. Our list price will be a little higher than that, but we still think $30,000 is a good number and a good value. There's obviously going to be opportunities for discounts for people that do higher volumes.

Okay. Thank you, Mike.

Michael Weinstein, JPMorgan.

Mike, first question -- around the CMS process, we get to middle of 2012 and they issue a national coverage decision, should we assume that, that NCD is basically what stays in place until you would get a labeling for PARTNER II and then CMS would then act on a new request for opening up that NCD?

Yes, it's a good question, Mike. I think there is some novel thinking that's going on, on the part of the societies, and I don't know how CMS is going to react to it. But I think the belief is that the societies would like to see the NCD written in such a way that it has a certain amount of flexibility in that it adapts with the approved indications from FDA, such that there wouldn't be a new NCD that would go into place. So I think their vision would be that you'd have an NCD that went into place for Cohort B, that, that could still be useful for Cohort A and potentially evolve into next generation products, as well. But again, this remains to be played out by CMS.

Okay. Help me with that. Has CMS done that before? Basically they create this adaptive model for an NCD that a new clinical trial comes out and then the coverage automatically adjusts?

I don't know that, Mike.

Okay.

That might be novel, yes.

Honestly, I don't think I care that much about this, but on the timing of the approval here, are you basically planning for TCT as if you'll have the approval in place and that will be your big launch?

I haven't done a great job of predicting exactly approvals, Mike, so I don't want to go out and be precise on a day. We said we expect it any day. That's probably about as close as I want to get.

Okay. And then last question maybe you can help me out with, if I understand correctly, there's one payment for the physicians, but obviously we're setting up here where there's going to be a collaboration between interventional cardiologists and surgeons where you'll need to have surgeon participation in each procedure. How will the economics work between them? Is that something every hospital is going to have to work out where there will be the physician payment and that'll have to get split by some formula in each hospital?

That's a good observation, Mike. Today, I don't think there's a lot of practice out there for splitting up these kind of fees. We think ultimately when this gets evaluated, there will be payment provisions for multiple physicians. But right now, you're correct. One physician gets it. In the more progressive hospitals, what they actually do is to pool that payment and have the hospital actually split it up amongst the procedures and amongst the physicians that are participating in the procedure. But right now, that's sort of up to the hospital to do that, to make that heart team work, to put the dollars to work in the right way for the heart team. But in the longer term, we would think that the actual payment scheme that would come from CMS would accommodate the heart team.

But for the time being, they're kind of stuck with getting what was being paid previously to the surgeon for an SAVR, the interventional cardiologist and the surgeon are having to split, at least temporarily, for TAVI.

That's right.

Thanks. That's helpful. Appreciate it.

Imron Zafar, Jefferies.

I want to focus my questions on Europe. Can you talk about European market share trends in 2 context? First, relative to core valve, what's your sense on where shares are trending the past quarter? Then second, as you look ahead, we have 2 new transapical products approved in Europe. Can you just talk about what impact you see from those new products? Thanks.

Sure. As you're aware, in Europe, we have been the only one with a transapical procedure, so we have been 100% of that market share and as I indicated, that's nearly 0.5 of our volume. So the new competitors that are in place there will try and compete for that. These new competitors, although they're interesting products, they still have very, very limited experience. Here we are with thousands and thousands of patients and many of those that are captured within randomized controlled trials or registries and they have a lot less than that. With our experience in heart valves and the fact that, frankly, our system is a smaller [french size] than the competitors [french size], that we've got next generations coming.

We think we're going to be able to handle that competition pretty well. On the trans-femoral side, core valve had a larger share substantially before the introduction of XT and since the introduction of XT, we have clearly had some share gains there. We're still pretty close to splitting the market. There probably is still some advantage to them, but that's closing.

Okay. And with respect to European reimbursement, can you just give us the latest lay of the land there in terms of some of the key markets where you're still trying to establish reimbursement? And is there any risk of the macro headwinds stymieing that process? Thanks.

Yes. Well, you can see just by the way that sales are growing at 50% that reimbursement's in pretty good shape in Europe. We're not expecting any kind of a reset here between now and the investor conference and in the investor conference, we'll try and give you a little clearer picture of what that looks like. The big countries where we're doing a lot of procedures like Germany and France, that seems pretty stable and we'll give you an update when we get there. We're still working our way through the UK and we think that there's been some nice progress there and we're looking forward to some favorable progress in the not-too-distant future. But it's a complex process that's difficult to explain in a one-liner.

Okay. And then one more quick question on PARTNER II A, is an inclusion criteria, STS score of 4 to 8, is that in line with what you're hearing from FDA?

We hesitate to comment on that until we actually get it. We have some pretty clear things in our mind and as I've said, we think the negotiation is far along. But rather than to get out there and speculate where we land, we're hopefully not very far away here, that this quarter we'll get an approval and be able to give you the exact numbers.

Great. Thank you very much.

David Lewis, Morgan Stanley.

Tom, one question I had on financial outlook, the one thing Edwards' been very consistent on this year has been the $150 million to $250 million that's sort of been a 12-month target that hasn't changed. As you head into next year that target hasn't changed, but the number of centers that you're targeting has changed and obviously the NCD has come a little earlier. So as you think about the $150 million to $250 million heading into 2012, the amount of operating expenses that you're going to need to support that level of sales, has that also not changed over the last 12 months?

Yes, I would say David, I'm trying to think of a reason that, that would change. If anything, maybe a little bit more efficient, but we weren't projecting anything different.

Okay. Very helpful. And then, Mike, just on Cohort A, should we expect 2-year follow-up in Spring at ACC or do you have another date we could get any type of follow-up past 1 year on Cohort A?

Yes, I think you're in the right neighborhood here, David. We had 1-year data at the ACC, and right around that same timing this next year, you would expect that we would have 2-year data that would be available. That's a very reasonable assumption.

Great. Thank you very much.

Kristen Stewart, Deutsche Bank.

Just on what's coming out at TCP in terms of the Cohort B data, I know it's 2 years, but will there be any stroke data that comes out of that or is that just simply going to be the mortality end points?

I don't know in particular whether there's going to be anything there. Of course, there's always a possibility there is some kind of late-breaking data that could be limited, but I think the Cohort B data is going to be largely like what you've seen before in the previous TCT, this will just be extended out to 2 years.

Okay. So previous data did have some level of stroke so it would be safe to assume --

Yes. I would think that would still be there to the extent that they have the ability to get a statistical analysis.

Okay. And then just circling back around the centers, how would your expectations change should an NCD be implemented that requires you to have some sort of certification before getting approval or a registry requirement?

Yes, no, I hear you. I think at this point, we've pretty much come to understand that there's probably going to be some kind of a registry in the future, and we're in agreement with the societies and the regulators, for that matter, that, that concept is a good one. It's difficult for me to go through a hypothetical in terms of what might be coming within an NCD and try and project from that, Kristen, so we'll have to see how the process works out. We continue to feel good that CMS is going to reimburse the label and make this accessible for patients.

And the 150 to 250, that was just for the Cohort B indication, as I recall from the investor day last year? Or is that first full sales of SAPIEN including potentially Cohort A indications as well?

Well, what we were triggering, what were the number of sites that we would train, and again, that would be Cohort B --

I'm sorry, the sales level.

The sales level, included both A and B and anticipated that A was going to trail B by a period of time, here, whatever that is, 6 to 9 months.

Okay, so 150 to 250 in sales includes A and B first year?

That's correct.

Okay. Thanks.

Bob Hopkins, Bank of America.

Most of my questions have been answered. I just want to follow up on a couple of timing questions. David was asking about 2-year data relating to PARTNER A and you were talking maybe around ACC. I'm sorry if I missed this at the beginning of your call, but did you talk about your updated expectations for a panel meeting for the PARTNER A?

Yes, we would expect that it would proceed partner A. We didn't give detail on it, but I think it's reasonable to assume a Q1 panel.

And would the 2-year data be available and presented at that panel meeting? Is there a chance that, that panel moves forward without the 2-year data?

I don't know exactly what will be available. They would be hard-pressed to have a complete set of 2-year data. Frankly, it wouldn't be required for that panel because they should be considering the 1-year data. But I'm sure they'll take whatever they can get and whatever is available, but I'd be surprised if they could have a complete set of 2-year data.

Okay. On the same sort of issue, in terms of thinking longer-term and the stroke rates, especially in the transapical arm, is there anything you can point us to, to give us confidence that you feel those stroke rates won't get worse over time in the transapical arm in the PARTNER A study. I just want to gauge your confidence and your comfort level that stroke rates won't get worse over time in that specific cohort of patients.

Yes, we don't have any clear data that suggests that stroke rates get worse. I think some people refer to a little bit of data that was presented that was not statistically significant that had some of this in there. And they can get confused I think, by whatever signal they thought they saw on latent stroke. We don't believe that it's there. There's an awful lot of experience in Europe, and you can tell the way that transcatheter is growing and the way the transapical is growing how clinicians in the Europe feel about it, and I think that's probably a pretty good indicator. So we're not walking around thinking that there's a late stroke issue.

Great. Mike, thanks very much. Appreciate it.

Jason Mills, Canaccord.

Back to the PARTNER 2 Cohort A, the difference maybe push you a little bit on, just broadly speaking, the difference relative to PARTNER 1 Cohort A in terms of the patient population study. What I'm really getting at is, overall, what does it imply, perhaps, for the expansion of the applicable target patient population when you're looking at a less sick patient population in PARTNER II?

Yes, the PARTNER A patient population was pretty small. It probably accounted for, maybe 10% to 20% of the surgical patients that were, frankly, studied. Matter of fact, I might be wrong, actually it might be under 10% that was studied in the PARTNER trial. So what we're talking about doing here is opening this up pretty significantly, but still only moving into medium-risk patients. So it's a broader group. We're not trying to capture it all, I would call it moderate risk. But again, I don't want to get in front of ourselves, Jason, and anticipate what's actually going to be approved by FDA.

Okay. That's fair. Follow-up question for me is, as you think about the Cohort A PARTNER II has been delayed a little bit and relative to PARTNER II Cohort B as we roll forward a couple of years and look at an approval, PARTNER II Cohort B probably gets approved months, if not quarters ahead of Cohort A, but yet you're going to have an approval for SAPIEN I for both populations. I'm just wondering, as we think about longer-term and get to that time period, how you think that sort of conundrum will be managed by the company?

Yes. I think that's really going to be managed by clinicians. They're going to have an indication and label, and so we think that's where the decisions will actually be made, right? So we'll be selling both devices at that point, and one will be indicated for non-surgical patients, and others on the SAPIEN device would be indicated for high-risk surgical. We're going to trust the clinicians use their judgment on how to execute that.

I understand. Do you expect that CMS will play a role in that in terms of how it's reimbursed? Clearly what we've seen in Europe is XT cannibalize SAPIEN I almost completely, I think you've said on a couple of conference calls now. So that sort of dynamic has been in place in other geographies already. How should we think about that?

I don't know. I have no reason to believe that CMS can or will execute something around that. I think one of the reasons why the societies and the regulators like a registry is the idea that they can actually watch these trends and watch how it can goes. I think if they found something that was really getting out of balance, that they would have the ability to go in there and really examine it, understand it and do something about it.

Okay. Thanks.

Matt Taylor, Barclays Capital.

My first question is on the centers, but it's a little different than some of the other questions. I'm wondering if you have 150 to 250 in the launch, when do you think you can expand that out to a broader population? If it ends up being 150 to 250 for a longer period of time, how does that limit the market size or how much volume can you drive through that many centers at a max level?

Yes. We're not anticipating that, that becomes a top end. Let me just put it this way, Matt. The key thing that's going to be driving us every step of the way is going to be a very high level of acute procedural success and we're not going to want to go fast unless we're getting great outcomes. If we are getting great outcomes, we're going to presume that we can keep going and continued to train centers and that, that will grow and that, that won't be limited. If it were limited to a lower number of centers, that could have impact on our volume, indeed, but it would be tough for me to speculate on exactly what that would be.

Just a follow-up on a previous question, I know you said it would be reasonable to assume a panel in the first quarter and I can see why you would say that. But have you had communication from the FDA or is there something else you're basing that assumption on?

No. That's not based on communication from FDA. That's just purely an estimate on our part.

All right. Thank you very much.

Joanne Wuensch, BMO Capital Markets.

One, your SG&A over the last 2 quarters has been ramping up fairly quickly as you prepare for this launch. How fast can you pull that back? Or should I think of that as a continued ramp up as you push or expand the product and launch it further into the US?

Yes, Joanne, this is Mike. Thanks for the question. We're not in the mode of wanting to pull back. We're very excited about this opportunity and we're in full go mode. So we have built this organization to deploy in the US with the idea that this is going to be very successful. We are on a ramp and spending in the fourth quarter is going to be higher than spending in the third quarter. The fact that this is a little delayed, could have a moderate impact on spending? It's possible but it'll be minor and it really doesn't change our strategy.

And then switching to the glucose monitoring product in Europe, if I heard you right that's been pushed back from second half '11 to second half '12? And then why is that? Does that change your view towards what this product may eventually contribute? Thank you.

Yes. We continue to be very bullish about glucose monitoring and have a long-term view there. As we went out to evaluate our second generation system, part of the system, Joanne, included some heparin in the bag. As we got out there with our European customers, we found that was a real ease-of-use issue, it would limit them, and it would limit the ability for this to be a broadly adopted. So that drove a design change on our side so that we could put an anticoagulant on the device itself.

When we put that on the device itself, it kicked the device into a more difficult and longer regulatory process. We reasoned that, that was worth it. And so that's what really pushed this significant delay in CE Mark. In other words, instead of self-certifying, we'll have to generate some data first. But we're bullish and we feel like it's worth it.

Thank you.

Suraj Kalia, Rodman and Renshaw.

Michael, if I remember correctly, this was the first time I've heard you put a metric and specifically, I was talking about you said PARTNER Cohort A population was less than 10% of the total surgical AVR. Correct me if I misheard that. If I use that ratio, would you care to give me, based on your 4 years experience in Europe, what you think Cohort B ratio would look like?

Let me try and talk about that a little bit, Suraj, because I know how people can get caught up in the numbers. The STS runs a database in which they collect, to the best of their ability, these valve surgeries. Based on the cutoff of the STS score, if you were to take a look at that STS population, that's what falls into just less than 10% of the population is where the cutoff was for the PARTNER trial. When you try and use that same sort of logic to talk about how many people are going to be treated with transcatheter valves, it kind of falls apart. Because especially for Cohort B, remember these are non-operable patients, so there would be zero of those patients, so it would be captured within the STS database. These are new patients that are today untreated, not getting surgery, that are coming into the system.

Okay. As stated differently, Michael, do you guys have an internal number on what the ratio of TAVI to surgery is looking like in Europe? Maybe not a precise number, but just ranges of what you think the ratio is headed to in Europe, currently?

I don't know what it is broadly in Europe. I think there's some early German registry data that suggest that it's somewhere in the 20% range, last time I saw it, if that's helpful.

Fair enough. Michael, one last thing. For the PARTNER 2 Cohort A, if I it heard correctly, it's a longer timeframe, medium-risk patients, again, understanding you guys are in discussions with the FDA and I appreciate you cannot say a lot of things, what should we be looking at the goal post? Is it going to be survival? Stroke? [Mace]? A composite? I'm curious given that this will be a new patient subset and based on the STS outcomes, just trying to triangulate how to risk adjust PARTNER 2 for, let's say, medium-risk patients. Thank you for taking my questions.

Thanks, Suraj. That will have to be the end of it. I really don't want to get into precisely what is in PARTNER 2, but I think a presumption that this will be a composite end point is a pretty good assumption and you can proceed on that basis, if that's helpful. So, everybody, thanks very much for your continued interest in Edwards. Tom and David and I are going to welcome any additional questions by telephone. With that, let me kick it back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying growth rates and amounts adjusted for special items, are included in today's press release and can also be found in the investor relations section of our website at Edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415. Use account number 2995 and passcode 380466. Additionally, an audio replay will be archived in the investor relations section of our website. Thank you very much.

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