愛德華生命科學 (EW) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences Corporation second-quarter 2012 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Erickson, Vice President and 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 2012 financial results. During today's call we will discuss the results included in the press release and the accompanying financial schedules and then use the remaining time for Q&A.

Our presenters on today's call our 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 aren't limited to, our expectations regarding sales and sales growth, gross profit margin, net income growth, earnings per share, SG&A, R&D, taxes, free cash flow, diluted shares outstanding and foreign currency impacts.

These statement also include our current expectations for the timing, status and expected outcomes of our clinical trials, regulatory submissions and approvals, and new product introductions, as well as expectations regarding market growth and potential impacts of supply interruptions, economic conditions and competitive products.

These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results to -- 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, 2011, 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, excluding the impact of foreign exchange and excluding special items, we are referring to non-GAAP financial measures, otherwise we are referring to our GAAP results. 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. Mike.

Thank you, David. Even in a challenging economic environment this quarter we reported strong growth in sales, driven by the continued success of our US transcatheter heart valve launch. As the number of US SAPIEN procedures grows rapidly, we are extremely pleased with the continued high procedural success rate being achieved.

During the quarter we also cleared two significant milestones -- the favorable FDA panel evaluating SAPIEN for high-risk surgical patients, and the issuance of the final NCD defining US reimbursement.

Turning to quarterly results, reported sales grew 12% to $482 million driven by the US launch of SAPIEN. Sales growth excluding the impact of foreign exchange was 16%. With the THV launch US sales grew 37% and represent a growing proportion of our total sales.

In the second quarter Surgical Heart Valve Therapy products group sales were $201 million, which included $29 million from Cardiac Surgery Systems. Surgical heart valve sales of $172 million were down 3% or 1% on an underlying basis. The sales trend in the US was comparable to last quarter, while sales growth outside the US declined. Globally our pricing remains solid.

In the US a competitor's product introduction last year continued to impact sales growth this quarter. We expect this impact to diminish in the second-half of 2012 as we pass the anniversary of that product's introduction.

In Europe the ongoing economic conditions in Southern Europe weighed more heavily on our results. In Japan the ongoing conversion of customers to our newly approved Magna Mitral Ease valve was tempered by the recent approval of a competitor's aortic valve. We expect these somewhat offsetting impacts to continue in Japan for the remainder of the year.

During the quarter we initiated a voluntary recall outside the US of specific lots of heart valves due to a problem with the packaging equipment in our European manufacturing facility. The majority of the affected products were still in our possession. We promptly communicated with customers and regulators and supply was not interrupted. And, most importantly, we are confident this did not impact patient safety.

The disposition of the affected inventory resulted in a special charge to cost of goods this quarter. We do not anticipate any additional financial impact.

Turning to our CADENCE and FOUNDATION post-approval studies studies of INTUITY, we are currently training centers and expect all of the centers to be enrolling in the fourth quarter. These studies are focused on generating data supporting the patient benefits and health economics of this new procedure compared to traditional open-heart surgery.

We are very pleased with the pace of enrollment of our TRITON trial, a CE Mark study of our next-generation INTUITY system in Europem which features enhancements to both the delivery system and the valve. We continue to expect to complete enrollment this year.

We received a CE Mark in May for Magna Ease with GLX, our new -- our next-generation tissue platform, and are continuing to gain clinical experience. GLX is a proprietary technology designed to provide additional protection for bovine pericardial tissue by enhancing anti-calcification for improved durability, and ultimately could be applied to our surgical and transcatheter heart valve platforms.

We are very excited about our US surgical valve pipeline, and pleased to have recently received two conditional IDE approvals from the FDA.

First, we received clearance to initiate the TRANSFORM trial, a prospective, multi-center study that will evaluate the INTUITY Valve System. The TRANSFORM trial which is expected to begin enrolling in the third quarter will be a single arm study that will follow standard heart valve guidance and historical controls. We expect to enroll approximately 650 patients.

In June we received approval to begin an IDE study of -- in the US of our Magna Ease surgical valve using GLX. Like the INTUITY study, the GLX study will also follow standard heart valve guidance and controls, and we expect to begin enrollment later this year.

Cardiac Surgery Systems sales for the quarter were $29 million, up 6% or 8% on an underlying basis. This quarter's growth was driven by strong sales of our MIS product line, aided by the US and European launch of our IntraClude aortic occlusion device. We spent much of the quarter upgrading existing customers to this new MIS technology.

As expected, late last month weeks we received regulatory approval in the US and Europe for our ProPlege retrograde cardioplegia device designed to protect the heart during aortic and mitral valve MIS procedures. Early clinician feedback from the limited launch has been positive and we plan to broaden the launch in the third quarter.

In summary, given our first-half performance in the Surgical Heart Valve Therapy product group, we now expect to achieve underlying sales growth for the full-year at the low end of our previous 3% to 5% range. Second-half growth rates are expected to improve as prior-year comparisons moderate.

Turning to transcatheter heart valves. Second-quarter sales were $146 million, 71% growth or 83% underlying growth over last year, driven by the US launch of SAPIEN. Transfemoral systems, which represent more than 75% of our global THV sales, continue to be lifted by the US commercial ramp, which is entirely TF, and the launch of our 29 millimeter system in Europe.

Outside the US our sales grew 6%. On an underlying basis sales grew 15%, which we estimate was also the approximate growth rate of the market. Continued strong growth in Germany was tempered by negative growth in Southern Europe and a sharp decline in procedures in the Netherlands. Product pricing remains stable and we now expect this year's market growth in Europe to be 15% to 20%.

We received the CE Mark mid-quarter and off to a strong start with our 29 millimeter SAPIEN XT valve with NovaFlex+ transfemoral delivery system. Sales were more than $7 million, including approximately $2 million of stocking.

Late in the quarter we received the CE Mark for our Ascendra+ delivery system for both the transapical and a new trans-aortic approach. These approvals will provide heart teams in Europe with an even broader array of patient options and are expected to drive stronger growth in the second-half.

Turning to the US, we are very pleased to report robust US sales of $61 million for the quarter. Commercial sales were $53 million with about 25% coming from net stocking units, which represents stocking sales less consignment. As we broaden consignment, net stocking units are expected to contribute less to sales.

Physician interest in our SAPIEN program remains very high, and with the final NCD released in May hospitals now have a better understanding of the requirements for becoming a TAVR center. From launch to the end of the second quarter we have trained more than 110 centers, and are confident we will train 150 to 250 commercial sites by the end of the first year of launch.

In June we were very pleased to receive a strong endorsement by the FDA Advisory Panel recommending approval of our SAPIEN heart valve via transfemoral and transapical delivery for high-risk patients. While we hoped for a more rapid approval, our financial guidance assumes an approval timeline for Cohort A that is comparable to the approval timeline for Cohort B last year. Upon approval we will use some of our training capacity to rapidly train our existing customers on the transapical approach.

Turning to our US PARTNER II clinical study, which is evaluating our SAPIEN XT technology, we are continuing to enroll patients in Cohort A, the surgical arm. We remain on track to complete enrollment by mid-2013. Enrollment in two of the four nested registries of PARTNER II was completed this quarter, which contributed to the clinical sales we reported.

In Europe we are making significant strides with our two important new lower profile transcatheter heart valve platforms that we believe will enable us to reach more patients and further extend our leadership position. Promising first-in-human data for CENTERA and SAPIEN 3 were presented at two major meetings during the quarter, and clinician interest is very high.

Of note were the results for SAPIEN 3, which demonstrated very high procedural success and an extremely low incidence of paravalvular leak.

Turning to our CE Mark trials, enrollment in our clinical study for our repositionable and self-expanding CENTERA valve began in June. And we continue to expect trial enrollment for our next-generation balloon expandable SAPIEN 3 to begin by year-end.

In Japan we remain on track to receive regulatory approval and reimbursement for SAPIEN XT in 2013. In May we initiated the PROTAVI trial in Europe to study the causes of stroke and evaluate our Embrella device. The initial results of this study should become available by the end of this year.

In our THV litigation we continue to expect a decision anytime now on Medtronic's appeal of the willful infringement verdict against them in 2010.

Given the strong second-quarter performance we now expect $240 million to $260 million of full-year THV sales in the US. Additionally, we now expect global THV sales in the range of $550 million to $600 million with an underlying growth rate of 80% to 90%.

Turning to Critical Care product group, total sales for the quarter were $136 million, which included $13 million from vascular products. Within this product group Critical Care sales were $123 million for the quarter, down 4% or 1% on an underlying basis.

Growth of our Advanced Technology disposable products were offset by both lower sales of hardware in the US and a reduction of distributor inventory in China. Additionally, sales were impacted by approximately $1 million due to a voluntary recall in May of certain lots of Swan-Ganz catheters. These catheters had a lumen that impeded guidewire usage, which led to clinician inconvenience, but not a patient safety concern.

We are pleased to announce that we launched globally our next-generation EV1000 monitor at the end of the quarter. This marked the full introduction of this platform in Japan where we expect it to have a significant impact.

With respect to our glucose program, we are completing product validations on our enhanced GlucoClear system and remain on track to receive a CE Mark before the end of the year.

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

Given the first-half performance, we are lowering our full-year 2012 underlying sales growth rate in the Critical Care product group to 2% to 5%. We expect improved performance from advanced monitoring in the second-half of the year lifted by the launch of our newest EV1000 platform.

And now I will turn the call over to Tom.

Thank you, Mike. This quarter our strong gross profit rate, combined with a favorable tax rate, allowed us to achieve diluted EPS of $0.57 and non-GAAP diluted EPS of $0.67, a 37% increase over the prior year. At the same time, we increased our R&D investments by 14%.

For the quarter our gross profit margin was 73.1%, and included an $8 million charge to reflect the estimated cost of our voluntary recalls of heart valves and Critical Care catheters. Excluding the impact of the charge, our gross profit margin was 74.8%, compared to 70.4% in the same period last year. This improvement was driven by the impact of foreign exchange and a favorable product mix, primarily driven by the US launch of SAPIEN.

For 2012 the continuation of these factors is expected to further strengthen our gross profit margin. For full-year 2012, excluding special items, we now expect the gross profit margin between 74% and 75%.

Second-quarter SG&A expenses were $182 million or 37.8% of sales, an increase of 12% over the prior year. This increase was driven primarily by US transcatheter launch-related investment. As a percentage of sales SG&A should trend up in the third quarter due to seasonality, and decrease to approximate 37% in the fourth quarter. For the full-year we are now narrowing the range of expected SG&A to be between 37% and 38% of sales.

R&D investments in the quarter grew 14% to $74 million, or a 15.4% of sales. This increase was primarily the result of investments in PARTNER II and new product development efforts in our transcatheter valve program. For full-year 2012 with the investments in further clinical studies we now expect R&D as a percentage of sales to be between 15% and 16%.

During the quarter we recorded a $7 million in-process R&D charge related to licensing agreements for two development stage technologies. Combined with an $8 million charge impacting our gross profit margin, special items this quarter reduced diluted EPS by $0.10.

Our reported tax rate for the quarter was 24.6%. While the rate is significantly higher than last year, it is lower than expected as a result of a more favorable regional mix than anticipated. Excluding special items, we expect our rate to be approximately 26% next quarter and drop to approximately 20% in the fourth quarter, assuming renewals of the federal R&D tax credits.

FX rates negatively impacted second-quarter sales by $14 million. Relative to our prior guidance, FX did not have a material impact on earnings in the quarter. Looking forward, at current rates foreign-exchange will have an approximate $60 million negative impact to full-year sales compared to last year.

Free cash flow generated during the quarter was $126 million. We define this as cash flow from operating activities of $147 million, less capital spending of $21 million. For full-year 2012, excluding special items, we continue to expect free cash flow to be between $240 million and $260 million.

During the quarter we spent approximately $53 million on share repurchases. For modeling purposes we now project fully diluted shares outstanding to be approximately $119 million in 2012.

Turning to our balance sheet. We had total cash and cash equivalents and short-term investments of $506 million, and total debt of $185 million. Short-term investments was $202 million, representing highly liquid bank time deposits.

Our DSO at the end of the quarter was 59 days, a 5 day improvement from the prior quarter as a result of significant payments received in Spain. Inventory turns where 2.0 compared to the first -- were comparable to the first quarter.

Turning to our 2012 sales guidance, at current exchange rates for Surgical Heart Valve Therapy we now expect sales to be between $775 million and $805 million, which includes approximately $115 million of Cardiac Surgery Systems sales.

In transcatheter heart valves we now expect sales of $550 million to $600 million. Lastly, in Critical Care we now expect sales of $550 million to $580 million, which includes approximately $50 million of vascular sales.

Given our updated projections, and the recent movement in foreign exchange rates, we now expect full-year sales of $1.9 billion to $1.97 billion, which represents an underlying growth rate of approximately 20%. Excluding special items, we now expect diluted EPS of $2.60 to $2.68, and continue to expect full-year 2012 net income growth of approximately 30%.

For the third quarter we project total sales of $465 million to $485 million and diluted EPS, excluding special items, to be between $0.57 and $0.61. And with that I will turn it back over to Mike.

Thanks, Tom. We remain on track to deliver strong sales growth and bottom-line performance this year even with a challenging global economy. We expect our transcatheter technologies to continue to drive our growth well into the future. Also, we remain enthusiastic about the potential of our robust product pipeline to benefit even more patients and strengthen our leadership position.

Before we open it up to questions, I want to encourage you to mark your calendars for Tuesday, December 4, where we will be hosting our 2012 Investor conference at our corporate headquarters here in Irvine, California. This event will include updates on our new technologies as well as our outlook for 2013. More information will be available in the next couple of months.

And with that I will turn it 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 hour. Operator, we are ready for questions please.

(Operator Instructions). Jason Mills, Canaccord Genuity.

Congrats on a great quarter on TAVI. Let's start there if you don't mind. Perhaps you could give us a bit more color on the differences in utilization early on between the PARTNER sites and the sites you have been adding.

And then reiterating your guidance for a number of centers this year -- new center adds, as you think about over the next couple of years perhaps refresh our memory as to what you expect in terms of TAVI sites in the next couple of years.

Yes, one of the things to keep in mind, I know it is something to deal with averages, and I will do -- make some generalizations, but there is a fairly large disparity between accounts, whether it is PARTNER sites or the new sites. And so there is some of those that tend to get quite large and others that are smaller.

But having said that, it is kind of interesting, we have got quite a bit of balance. There is still growth in the PARTNER sites. They're strong and growing. And having said that we have got a similar amount of growth probably from our new sites. They're ramping up and we're getting a significant contribution from them as well. Remember there is quite a few of those. So we are seeing usage ramp on both.

In terms of the number of sites, yes, right now we believe that there are 300 to 400 sites that probably qualify within the NCD. We think there are others that are interested and are working through the requirements to get there. But that is where we think we are at this point in time and so we're pleased in the way the ramp is going.

Okay, and then my follow-up is in Europe, obviously you are being impacted by the macro there as well as the currency movements. What you do see as underlying growth in Europe for TAVI for the second-half of the year? And with new competition are you willing to target a bogey for growth in 2013 with the addition of Japan coming at some point next year presumably as well?

Yes, well, let me -- let's break it into pieces. First of all in terms of what we think Europe is going to do, we think Europe might be slightly faster in the second-half than it was in the first-half. We were estimating overall growth for the year will be somewhere in the 15% to 20% range. And what that is, it is lifted by countries like Germany where the growth is strong, and pulled down by Southern Europe by comparison.

In a place like France we know there are some new sites that have been turned on right on 1 July, so that will help lift the growth rate to some extent. If we are -- now switching to our performance -- we're really not going to give projections at this point on 2013. You're correct that there will be new competition, but at the same time we have got a robust pipeline, so you're going to have to wait until we get toward the end of the year and we work through our planning process to get estimates.

Thanks, Mike. I will get back in queue.

Larry Biegelsen, Wells Fargo.

Let me just start with the gross margin which was obviously very strong in the quarter. Tom, 74% to 75% for full-year 2012, and I think you said expanding through the year. Where do you expect to exit in the fourth quarter, and how much of that can carry through to 2013?

Well, you know, that is a great question. I would say -- you know, there are a couple of factors, and we pointed to both factors continuing in the second quarter. So we will continue to see an improvement sequentially on product mix. It is up almost 50-50 between product mix. And foreign exchange is actually going to lift the rate in the second-half.

In the second quarter it was neutral to the rate. But as the rates have worsened and the hedge contracts kick in, it is actually going to lift. So it is partially responsible for the improvement for the full-year. And so that portion would be coming and going with hedges. The rest based on product mix is something that would've we would fully expect to carry into next year.

So you expect the gross margin to be higher in 2013, obviously?

Than the full-year 2012?

Michael Mussallem Yes.

And second, Mike, would you be willing to tell us a little bit more about the timing in Japan -- the first-half 2013, the second-half 2013, and any color around the approval and reimbursement process there, and then I will drop? Thanks.

Yes, as you know in our view sales don't pick up appreciably until reimbursement is in place. And reimbursement tends to trail the regulatory approval by up to six months, but a significant amount of time. So I think maybe for modeling purposes if you assume that reimbursement is not in place until the end of 2013, that is probably a fair assumption.

Thank you.

Kristen Stewart, Deutsche Bank.

I just wanted to just go back and clarify Larry's question on gross margins. Tom, I think you had said that the FX was neutral in the second quarter. Was that relative to your expectations set from back in April or are you talking year-over-year?

That is a great clarification point. It is always going to be in reference to something. So FX there is so many different ways to look at it. What I was trying to reflect there is on the quarter rate -- the rate in the quarter there is very little impact. On a year-over-year basis it is a very big difference, but it was primarily because last year was suppressed.

So as close as a quarter we're going to see is probably the quarter we just reported in terms of unaffected by foreign exchange. Does that help?

Can you maybe just quantify what the year-to-year impact was just for FX relative to product mix? Was that the 50-50 you were talking about or --?

No, no, I am sorry. Relative to product mix you would probably say, I think the total was 440, and it is probably 60/40 actually leaning favoring foreign exchange. It was a big difference. It was a big negative hedge impact (multiple speakers).

Almost 300 basis points (inaudible) FX, yes.

That mix was strong also.

Okay, perfect. And then just walking through the US sites, I think you mentioned it earlier in the prepared remarks. I am sorry I missed it, but how many centers did you say you had up and running as of today. And I think you still reaffirmed the 150 to 250 for the first full-year out?

We didn't give an update of where we are today; we gave an update at the end of the second quarter. And we said at the end of the second quarter we had trained 110 sites since the approval in November. And we said based on that trend we felt very comfortable with the 150 to 250 being trained by the one-year anniversary.

Okay, and that would be in addition to those that were already up and running as a part of PARTNER I and II, correct?

That is correct.

And then just last question, just on ASPs I think you had mentioned that they're holding up in Europe. Is that true if you look at just pure price and take away the FX component?

Yes, if you take currency out of it our pricing is very stable, very steady in Europe.

Okay, thank you very much.

Amit Bhalla, Citigroup.

I wanted to start with just a question on Europe. Can you clarify the Netherlands? You said there was a sharp falloff there in valves. And secondly on the UK, can you give us an update on how the UK is ramping with TAVI given the NICE approval?

Okay, let me break it into pieces. First of all on the Netherlands, the Netherlands has not had formal reimbursement. We were expecting -- and a matter-of-fact, the clinicians in the Netherlands were expecting that formal approval would occur at the end of Q1. That didn't happen, and it looks like it could be substantially postponed, and so we are not expecting it this year.

As a result what happened is rather than seeing a lift in the number of procedures in the Netherlands we actually sought a sharp decline. And so that is what happened in the Netherlands.

At the same time the UK is growing significantly. The UK I think is growing in the neighborhood of -- I don't know, close to 40%, but remember we are coming off a small base there.

Okay, thanks, Mike. And just -- I can't imagine the Netherlands being a big market, but can you just give us a rough idea of how big the Netherlands has been for TAVI?

And just my quick follow-up would be on the 29 millimeter valve. It looks like in the quarter it made up about 10% of your OUS sales. I know it is ramping -- where do you think the 29 millimeter valve ends up? Thank you.

Okay. So the Netherlands probably down something like $1.5 million year-over-year, if that helps calibrate you, in terms of dollars.

Yes, that is helpful.

Okay. And the other question, could you say it again, please?

Sure, the 29 millimeter valve, you said $7 million in revenue in the quarter. Overseas, TAVI is about $85 million total, so that would be about 9%, 10% of overseas revenue. Where do you think the 29 millimeter valve goes as a percentage of total?

Yes, we are not sure is the short answer. Remember, we only had the 29 millimeter in the TA position and so we know some of the volume moved over from TA to TF. We wouldn't be surprised if it is in the 15% range of total as an estimate.

Okay, thanks, Mike.

Mike Weinstein, JPMorgan.

You had this really strong quarter in SAPIEN sales in the US in particular, and globally it is a strong SAPIEN performance. And you beat -- and again you have raised your guidance in different elements.

But your third-quarter guidance is a little bit below consensus, and so I was hoping maybe you could spend just a little bit more time on the FX impact as we go into the back-half of the year, down the P&L.

And then, second, on the R&D spend, because you are increasing your planned spending on R&D for the year to a higher percentage of sales, can you just talk about where those dollars are going and how we think about returns on those investments? Thanks.

Yes, perfect, Mike, I would be happy to get into it. First of all, the Street is high on Q3, and I think it is understandable. If you go back to the slides that we presented at our Investor conference, we sort of -- we try and show you what normal seasonality is -- and we showed Q3 trending higher than Q2, and that probably was a good signal to the street.

In fact, when the Cohort A approval got delayed approximately a quarter it really took the Q3 numbers down. And when we adjusted those last quarter, but we didn't give specific quarterly guidance, and so that is really what happened in Q3.

In terms of foreign exchange, I think Tom mentioned we think it is going to have about a $60 million impact. So a growing impact based on how -- particularly how much the euro has moved for the year. Because of what has been a pretty effective hedging program, we think it will have minimal impact on our bottom line. It will be small but not significant.

To get into R&D a little bit, what you're really seeing ramp up, Mike, are clinical trials. At this point the most substantial of those is the PARTNER II trial. And the PARTNER II trial clearly is the most expensive trial that we have run. We still have the postapproval studies associated with PARTNER, and then we have got trials like PROTAVI going and starting CENTERA and SAPIEN 3. So the accumulation of those takes spending up, and that comes up and it starts peaking in Q4, Q1, if that is helpful.

That is helpful. So, Tom, the -- sorry, we were debating whether you said $60 million or not for full-year FX. So that equates to 5.5% FX headwind in the second-half of the year. But you're indicating that you have got that managed for the second-half, which means that the benefit to your gross margin line will be greater in the second-half than what we saw in the second quarter. Is that right?

That is exactly correct.

Okay. And any other thoughts (multiple speakers).

$60 million is full-year, Mike, not just the back-half.

Yes, no, understood. But the math I was doing, Mike, was I was netting out what the impact in the first-half of the year to get to the second-half, and basically it ends up being that 5.5%.

Okay, and then when we look at Europe and the macro issues in Europe are there particular countries, outside of the event that you talked about in the Netherlands, where you have incremental concerns, either about TAVI reimbursement or about the health of your underlying business, recognizing that you called out Southern Europe as it impacted the full business for Edwards.

Yes, thanks, Mike. And then probably we need to let other people get in line. But, yes, overall as we said, Southern Europe is the biggest drag. And with Spain not growing, and Italy, which is a pretty substantial country going slightly negative, that certainly is a drag on growth rates.

In terms of -- and those, we believe, are austerity driven. In terms of countries that don't have solid reimbursement in place, I think the Netherlands and Belgium sort of stand out at this point in time. We expect there to be -- we expect them to approve it, but what they have done is to make the barriers a little higher here, and we will work through them, but they're going slow.

Bruce Nudell, Credit Suisse.

Mike, a terrific launch, really. The range of sales in Europe is extraordinarily large. I think your commentary -- 310 to 340, with FX that is like for Edwards somewhere between 4% and 24% constant currency. It really just -- based on your commentary, it really doesn't sound like the low end of that range is even plausible. Could you just give some color around that?

Well, you went through some numbers that we didn't use exactly. You obviously calculated those, Bruce. No, we try to give guidance that we think is pretty realistic. And you're right, Europe is a mixed bag. You have got portions of Europe that just aren't growing. You have got other portions that are really growing fast like Germany. I don't know, can you -- maybe a more specific question, I can answer it more clearly.

Yes, I guess I am just saying that if you take the US guidance of $240 million to $260 million, subtract it from $510 million, $600 million -- or $550 million to $600 million, you wind up with $310 million and $340 million, and that results at the very low end of $310 million, you know, a pretty puny growth rate for Edwards, which just doesn't sound very plausible.

Well, again, I think our belief here is that we should do even better in the second-half of the year than we do in the first-half of the year. So depending on how you're using those ranges, whether you take the top one range and apply it to the bottom of the other, I don't know, you could decide how you want to spread the ranges and the risk around. But overall in Europe we think the second-half will be better than the first-half because of the introductions of that 29 millimeter TF and the Ascendra+ system.

Perfect. And just the other question is, if we looked at the market again, and if you could just comment on this, is that the issue of bicuspid valves is something we really didn't consider very much. I know it is not an absolute contraindication, but there is some evidence that it is a reasonably prevalent condition among people, let's say under 75, who gets aortic stenosis surgery. What is your view on where TAVI is with regards to these bicuspid valves?

You mean on whether it is -- whether it is applicable for bicuspid valves? It is a congenital condition, so it is not a big one. It is also, I would say, not a true contraindication. We have limited number -- we have a limited amount of experience there, so we probably can't say anything meaningful about how well TAVI works in bicuspid valves, so that is probably where we are right now.

It is probably not a big driver of numbers in our future. I am sure we will collect data on that, and we will get a view through things like the TVT registry and some of the registries in Europe. So it will be helpful. I think it will -- ultimately I think there is no reason to believe we shouldn't be able to treat those. We just lack data today.

Thanks so much.

Glenn Novarro, RBC Capital Markets.

I had a question on the surgical valve business, particularly in the US. It looks like the US came in a little bit lighter again. And, Mike, I know you cited competition, but I was wondering has there been any benefit yet from the SAPIEN pull-through? In other words, patients coming in for SAPIEN not eligible and then going off to surgery? And if there hasn't been a benefit yet, when should we expect to see it?

And then just a quick question on some of these early development stage products that you acquired in the quarter. Anything material, anything you can share with us, that would be great. Thanks.

Yes, in the quarter probably the US might have been ever so slightly better trends than it was in the first quarter, but we are still suffering from the fact that we haven't anniversaried on the competitor's valve.

We would like to think that we ultimately get a lift out of the transcatheter sites, but it is still early is I think the short answer to the question. Remember, we said we have trained 110 new sites. And the surgical valve business treats -- we would probably sell to 1,100 sites. So you can picture that there is more people that certainly that we are selling to that don't have transcatheter than do.

So we're going to look for that in the future. One thing for sure we think that Edwards benefits the combination of transcatheter heart valves plus our surgical heart valves certainly lift.

In terms of the deals that we talked about, we are not going into extraordinary detail, but a couple of things. One relates to some tissue technology, particularly intellectual property we acquired. And the other is some pretty interesting accessories for MIS, for minimally invasive surgery.

Okay, great. Thanks for answering my question.

David Roman, Goldman Sachs.

Mike, I was hoping you could talk in a little more detail about the impact the NCD issuance in early May might have had on your ability to open centers, and how that potentially accelerated centers? I don't know if you're willing to offer any more color. I think at the end of last quarter you had said that you had trained 60 centers in the April 24 call as of the end of Q1. I think the number you quoted today was 110, so that is --.

Of those 50 how much did the NCD help? And then maybe if you could characterize what that has done to your training backlog or your pull-through rate, and then how that influences the balance of the year?

Thanks. I'll see if I can provide a little bit of color. Although we said it certainly provided clarity and probably gave some people confidence, it also would have probably placed a hurdle out there for other people that became an obstacle.

So overall we probably could have trained a few more sites than we did. We have the capability of probably training more than 20 in a month. And you can -- you think your math is correct that we did around 50 in the quarter. So the NCD helped existing sites. It took a lot of uncertainty out, and it clarified things a lot, but it also for others it gave them a clear target that they have to achieve.

The one portion of the NCD that people are probably most targeted at trying to achieve is the structural heart requirements. That is still a little confusing to some sites. We still though believe that big picture there is 300 to 400 sites that probably meet these requirements.

Okay. And then one of the things that you referenced in your prepared remarks was, I think you said something like extraordinarily low rates of procedure complications. Can you maybe just talk about what you're seeing in terms of complication rates? And obviously your training program being fairly extensive, how successful has that been in keeping the complication rates to a minimum relative to your expectations?

What we are able to measure is the procedural success rate. And we are actually able to be at all these early procedures ourselves. And so we feel just great that the training is very effective. Remember us talking in the past about the fact we actually incent our sales force on procedural success rates. So it is really paying off.

All that investment that we put up front to make sure that we had great training and a great team that was well-trained was great. And so rather than trying to quote exact numbers, David, I will just say that it is going as well, if not better, than any of our prior experience.

Okay. And then lastly for Tom on the tax rate. I was a little bit surprised given the US is starting to comprise a larger and larger percentage of revenue the tax rate actually wouldn't be going up. Can we maybe just talk about the dynamics that are driving the tax rate in fact lower, and then how we should think about that on a sustainable basis, particularly assuming that the US over time is going to become a larger and larger piece of your business?

You're absolutely right. It is somewhat counterintuitive, but we tried to be clear here. The rate is actually higher than last year. And the projection is that it is going to be a couple hundred -- 250 basis points probably higher than last year.

So it is clearly being impacted by the US profitability. It just wasn't as high. Our model was probably conservative a little bit on where the sourcing was happening of the products and where the regional profitability was falling.

So, also, keep in mind that when I have to make an adjustment in midyear what we are doing is the adjustment looks bigger than it actually is because it has to be a retroactive effect. So I'm adjusting two quarters within one. So you pretty much cut the difference in half. And it is not that big of a difference and I would attribute it to the model -- difference in the model that I was using.

Okay, got it. Thank you.

Tom Gunderson, Piper Jaffray.

Say, Mike, last quarter on European TAVI growth for the year you were expecting 20% to 25%; now it is 15% to 20%. Other than the Netherlands and the euro is there anything else contributing to the slight adjustment there?

Yes, good question. Yes, really the euro wasn't in there. When we try and give those growth rates we try and do that on constant currency. So we really do -- we did change what we thought. We thought Europe was growing 20% to 25% -- or we thought that would be the growth rate for 2012 and now we think 15% to 20%.

We think there are two pieces of that that are somewhat similar. One is this sharp drop in the Netherlands. And part of it was the drop in the Netherlands and also that we thought it was going to rise. We thought that you actually might see an extra 100 procedures per quarter that happen in the Netherlands, and that is obviously not going to happen, instead we saw the decline.

But the other part of this, we probably saw a little further softening in Southern Europe. A little more -- we thought it would probably -- it would have bottomed, but there still looks like there is a bit more further softening, Tom.

Okay, thanks. And then, Tom, on guidance for Q3, the revenues are almost the same, with a little slack there, as Q2, but earnings a little bit lower. Other than just the revenue delta, can you break out what contributes to the difference between similar revenues but different earnings sequentially?

Yes, I would say I don't see -- you know, in our models I'm looking back to check on the revenue. I have a bit less revenue on the one hand than you may have. I think you will see the rates looking pretty similar. What typically happens is the SG&A is a percentage in that quarter. Because of the lower sales, but you're saying you're not getting that -- but obviously I am seeing a higher SG&A percentage, and the rest is pretty even.

Tax rate. And is SG&A a little higher in total dollars sequentially?

Percentage you we usually refer to. And tax rate -- tax rate a little bit higher, remember, Tom. Tom it is best -- it took a full half-year of quarter adjustment in the quarter, so we're trying to get to a full-year rate. So if you look at the first-half rate that will give you a better estimate of what we're running at in the third quarter.

Okay, thank you guys.

Raj Denhoy, Jefferies & Company.

What if I could ask about some of the information that has come out over the last several months on paravalvular leakage, and some of the data out of Europe suggesting that balloon expandable valves might have a lower rate of leakage than self-expanding. I am curious what your thoughts are around that and whether you think ultimately that could prove to be a competitive advantage for you, particularly in Europe?

Yes, the fact that there was a correlation between paravalvular leak, I think we all found interesting. And we -- being a surgical valve company we have always been focused on trying to get zero leaks with transcatheter heart valves. They are -- probably the most fortunate thing for us is the approach that we had previously taken on SAPIEN 3, which is really designed to have a dramatic improvement on paravalvular leak.

We still know that it correlates. We don't know that it is causal. And I don't know if there is good data that is out there that really gives you detailed information on self-expanding valves versus balloon expandable. We like to think so, but we just -- we don't have the comparable data on the self-expanding to be able to make that comparison cleanly.

So I guess net net you don't think there is going to be much impact in terms of market shares in Europe, for instance?

I think ultimately there will be data that will be out there. There is much more 3-D imaging going on. I think there is much better sizing going on than ever before, more use of CT scan. So the ultimately the story will be told, but I don't know there is anything that is really playing out in the present that is going to be that stark in comparison.

Okay. And then just if I could ask about physician reimbursement here in the United States. I guess the CPT code is still being worked on for next year. Do you have any current thoughts around what that updated code could mean for you. And also really how physician reimbursement is being worked right now in the United States, how are you seeing centers deal with splitting reimbursement among various clinicians right now?

Yes, I will give you my best estimate. And again we need to give other people a chance. Right now what is going on is highly variable depending on the center. Many centers work in teams. They take the income and they split it up amongst the clinicians. I can't tell you that every center is doing that.

We believe that direction the CPT codes are going in is that they should be fair. There is a process that goes on, and we think that recommendation, which we understand is a pretty fair one, has gone to CMS. They often adopt those recommendations -- not every time, but they often and generally do.

So if it goes the way that it has been teed up, we think it should be fair reimbursement, and we think that would be welcome. There is variability out there in terms of how some of the regions are paying on CPT codes. There are some that fully paid and others that -- we even know there are one or two places where they actually don't pay and they are in arrears and they would have to catch up at some point in time. So it is still a little messy in that regard.

David Lewis, Morgan Stanley.

Mike, I had sort of a strategic question for you. As Edwards transitions from more of the clinical milestones where you have been successful into more execution, I wonder if you could help us understand how you're thinking about topline growth versus leverage? And specifically it is hard to argue with the gross margins in the quarter, and obviously with better mix those margins probably turn higher, but R&D obviously was the highest we have seen in the Company.

And I wonder if you could talk about when do you think that leverage infection occurs in the business? And based on the R&D programs are you at least comfortable at this point saying that something around 15% probably does represent a peak for R&D spending at the Company?

Thanks, David. I think I know where you're going, but let's talk about it strategically. We are not sure there is any substitute for driving great sales growth. Although we, like you, want to see real leverage come through the P&L, we wouldn't want to do that at the expense of sales growth. And so we always try and strike that balance where we think we can have really bright innovations that change the way medicine is practiced and we can get rewarded for it. We obviously opt for that.

What -- your point specifically, when are you going to see leverage? We think you are already seeing some of that leverage, and I think that starts continuing. We have made a large investment in launching in the US. And although we will make continued investments in the US, particularly on the SG&A line, sales are going to grow faster than the SG&A expenses, which is the largest proportion of our expense base, it shouldn't cause our operating margin to rise.

As you correctly see here with this quarter here is that the R&D rate has risen. And I think this is just a byproduct of what it takes to really make future sales a reality. It requires clinical studies, and that is not cheap.

In terms of the high water mark, I don't know, I actually think that this rate that we gave for full=year to be between 15% and 16%, i don't know whether that is going to continue next year or not. It may be the high water mark; I hope so. With the way we expect to grow sales it should be that. But we are not going to hesitate to make the clinical investments that we need to drive the topline.

Great, so very clear. Just the second really quick question. You talked a lot about European pressure, but you talked about a little bit of Critical payer pressure in the US in the release, but not so much in the call. Was there any second-quarter capital pressure in your Critical business? And could we see that potentially rebound in the back-half of the year if what a lot of companies have reported in the second quarter was really more of a delayed capital purchasing? I wonder if you think that will come back in the back-half?

Yes, we did see our growth rate in capital decline in Critical Care. It is not as though the environment really dried up, part of it is a prior-year comparison.

We had just launched EV1000, and we were in the middle of that, and so we did quite well in Q2 2011. So some of that was a decline, just the tough comparison.

I like to think that the climate is good enough for us to be able to do better in terms of growth rate and hardware going forward, especially with our new EV1000. Again, we are not exactly the same as some of the big-box guys, because our hardware is not nearly as expensive as a robot or an MRI, but we still get affected by some of the similar trends.

Great, thank you very much.

Bob Hopkins, Bank of America.

Just two quick questions. One a little bit in the weeds and then one a little bit bigger picture. Last quarter as it related to US TAVI sales you were kind enough to break down the $41 million. And I think you said in terms of commercial revenues it was roughly $24 million and stocking revenue is $10 million, and then trial revenue about $7 million. And I was wondering if you'd be willing to do the same thing here for Q2?

Okay. Well, let's see, we said the overall -- you're talking about US in particular?

Yes, so, again, the US breakdown of that $61 million forward.

We said $61 million in the quarter. Commercial was $53 million. So that pretty much -- that gets you to what the clinical was; that is $8 million. And then we said of the $53 million, 25% were net stocking units. And net stocking units gets pretty easy this quarter because consignment was pretty much negligible, it wasn't but about $1 million -- it was about $1 million.

Okay.

So you can pretty much get yourself there, I think.

Yes. And then you trained 50 centers. Is that roughly the pace we should expect for Q3, Q4?

I think so. The one thing that changes there is the fact that when we get the approval for Cohort A we're going to need to train all the existing centers again. And that is going to be a formal training. We will actually bring people into our training center. It won't take two days like it does today, it is more like a one-day training. But it will consume some of that training capacity. So that is the one thing we wanted to alert you to.

Great. And then lastly on gross margins, just a little bit bigger picture, because right I am getting currency and product mix. But as we think longer-term about gross margin now that you are into the US launch, and obviously annualizing at a really nice rate right now, in your view would it be a mistake to suggest that Edwards thinking out longer-term -- and I am not talking about 2013, I'm just thinking about longer-term, that this can't be a 78% to 80% gross margin company?

I hesitate to get out in front of ourselves. The valve business by itself is profitable and it does have a chance to certainly lift our gross margins, but I think it is premature to talk about those numbers at this point.

Okay, and then just on the analyst day are you going to be giving longer-term -- how long-term guidance are you going to be providing?

(laughter) That's a good question. What do you think we should do?

Next five years. (laughter).

Okay, thanks for your input.

Thanks guys.

Spencer Nam, ThinkEquity.

So I just have one question. There were a lot of discussions at the beginning of the year based on some data points that myself and my peer analysts have gathered suggesting that the adoption,, particularly just with Cohort B may be a lot slower that you guys had outlined.

But it seems like you are actually blowing numbers away, at least the first couple of quarters. And also just based on the way you guys are guiding, you guys are also adjusting some those numbers yourselves or the parameters yourselves.

We are just curious kind of what things that you are learning that as you launch the product, what are some of the things that you're learning that you have not seen prior to this year? And then what are some of the things that we should be thinking about as we try to model this more properly?

It is a good question. The one big question that was out there that is always hard to understand is how many patients are on the sideline that were not being treated. And that is what we have really learned. We had some experience in Europe, but we didn't -- when we started Europe we didn't have this kind of experience. We didn't have a randomized trial under our belt. We didn't have this full reimbursement that was pretty well-defined.

And so to have all those pieces in place what we are seeing here are these untreated patients are coming and they are coming in a big way. And because procedure results are so good they are getting pretty dramatic results, which gets clinicians excited. And so it is driving real enthusiasm, which I think does help with a referral network.

So what we basically saw is probably patients that either were just too sick or wouldn't even think about surgery in the past, they are coming and getting treated, and that is probably the biggest learning.

Thank you.

All right. Thanks very much all for your continued interest in Edwards. Tom and David and I will welcome any additional questions by telephone. And go 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.

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