愛德華生命科學 (EW) 2012 Q4 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences Corporation fourth quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Erickson, Vice President of 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 third fourth quarter 2012 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, earnings per share, SG&A, R&D, taxes, free cash flow, diluted shares outstanding and foreign currency impacts. These statements also include our current expectations for the timing, status and expected outcomes of our clinical trials, regulatory submissions and approvals, reimbursement conditions, as well as expectations regarding the US launch of SAPIEN, other new product introductions, and our pipeline.

These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements. Information concerning factors that could cause these differences may be found in our press release, our annual report on Form 10-K for the year ended December 31, 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, excluding special items, and adjusted for special items we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release.

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

Thank you, David.

Our fourth quarter capped the year of significant progress as we introduced our innovative SAPIEN technology to the US. We're very proud that more than 5,000 patients in the US have been treated with our transcatheter valve since launch, and we're aggressively investing to expand the availability of this important therapy.

In spite of a difficult economic environment, underlying sales were up 16% in 2012, driven by a strong finish in each of our product lines. During the year we continued to invest in new technologies to treat even more patients in the future. The significant increase in R&D investments in 2012 helped fuel important progress in our transcatheter and surgical valve therapy programs, as well as our critical care technologies.

In the fourth quarter, we also adjusted for a couple of special items. Tom will explain our treatment of the R&D tax credit during his comments. Separately, I wanted to mention the realignment charge. We think that one of the keys to remaining an innovative company is to constantly adapt. From time to time we reallocate our resources to better align with our strategy, which helps minimize the need for larger corrections in the future.

Now, turning to the quarterly results, reported sales grew 19% to $511 million. Sales growth excluding the impact of foreign exchange was 21%. Total US sales grew 46% and represent a growing proportion of our total sales.

In transcatheter heart valves, fourth quarter sales of $161 million grew 77% excluding the impact of foreign exchange, driven by the ongoing US launch of SAPIEN. In the US, THV sales were $81 million for the quarter, which included clinical sales of $7 million and net stocking sales of $16 million. As a reminder, the net stocking figure also includes the offsetting impact of qualified hospitals transitioning to consignment status. Transapical systems comprised nearly 45% of US THV sales. Quarterly THV sales grew 46% sequentially, driven primarily by the October approval of Cohort A.

At the end of 2012, 150 sites were trained on the transapical approach, which reflects the high level of interest among heart teams to offer this important alternate delivery approach to the large number of patients who can't be treated with our current transfemoral device. We believe a significant number of the TA patients who are on the sidelines were treated during this quarter. Clinicians continue to maintain a very high procedural success rate during the introduction of the TA system.

Today more than 200 sites commercially offer SAPIEN, and we expect to train an additional 200 new sites over the next two years. As we train centers, we will continue to require a stocking order, yet at the same time, we expect the impact of consignment to grow in existing centers. As a result, in 2013, we anticipate the impact to reported sales from net stocking to trend from positive to a negative. In 2014, we expect reported sales to begin tracking procedures performed.

Outside the US, THV sales grew 6%, or 10% excluding the impact of foreign exchange. In Europe, we believe the market grew approximately 10%. We estimate our share position increased slightly while the implementation of volume discounts and country mix resulted in an overall lower ASP. Growth was strongest again in Germany, while ongoing austerity measures resulted in negative growth in Southern Europe. Transfemoral units outside the US grew by more than 35%, while non-transfemoral units declined again this quarter, driven by heart teams to continue to employ a transfemoral first approach. We estimate that competitive transapical products continued to be of minimal impact in the quarter.

Turning to our US Partner II clinical study, which is evaluating our SAPIEN XT technology, we're continuing to enroll patients in Cohort A, the surgical arm, and we continue to expect to complete enrollment by mid-year. Early next month, one-year data from Partner II Cohort B, as well as three-year Partner Cohort A data, are scheduled to be presented as lat- breaking clinical trials at ACC. We're continuing to work toward a mid-year PMA submission for Partner II Cohort B, which we anticipate leads to an approval of SAPIEN XT in the US next year.

We're pleased we've begun enrollment in January for the CE Mark trial of our pioneering SAPIEN 3 valve, which is delivered through a 14 French E-Sheath and designed to reduce paravalvular leak. This keeps us on track to receive a CE Mark and launch this product in Europe by year end. Later this year in Europe, we expect to complete enrollment for both our novel self-expanding CENTERA valve trial and our PROTAVI study, which is evaluating the causes of stroke, and our Embrella device. In Japan we continue to expect to receive both regulatory approval and reimbursement for our SAPIEN XT valve by year-end, which positions us to have the first commercially available transcatheter valve in that country.

In summary, we are pleased with the progress of the US launch, which drove total THV sales of $552 million for 2012. We continue to expect underlying transcatheter heart valve sales to grow 30% to 45% in 2013. This would result in global sales of $710 million to $790 million, which includes $390 million to $440 million of sales in the US.

Turning to the surgical heart valve therapy product group, sales for the quarter were $198 million, which included $29 million from cardiac surgery systems. Surgical heart valves grew 3% over last year, or 5% excluding the impact of foreign exchange. In the US, sales grew 2.5% this quarter. Growth outside the US was up 7% excluding the impact of foreign exchange, highlighted by the strong adoption of Magna Mitral Ease valve in Japan and the double-digit sales growth in emerging markets. In November, we received approval and launched our micro-pericardial valve in China. Our pricing was stable in each region, although our global ASP declined slightly, due to the faster growth in emerging markets.

We continue to make progress on our key milestones with INTUITY. In the US, our TRANSFORM trial remains on schedule. Enrollment is complete in CADENCE MIS in Germany, and our other INTUITY trials in Europe are progressing. Earlier this year, we began enrollment in our US IDE trial called Commence, using our GLX tissue platform on our Magna Ease aortic surgical valve. Late in the fourth quarter, we received additional clearance to include our Magna Mitral Ease valve in this study.

In cardiac surgery systems, sales for the quarter were $29 million, up 7% on a reported basis, or 8% excluding the impact of foreign exchange. These results were due primarily to the growth of MIS products which include the launch of our ProPlege retrograde cardioplegia device. In 2013, we continue to expect underlying sales growth in the surgical heart valve therapy product group to be 4% to 6%. We expect our sales growth to ramp up during the year, driven primarily by the commercialization of INTUITY, the diminishing impact of competitive products in the US, and new MIS launches.

Turning to the critical care product group, total sales for the quarter were $152 million, which included $14 million from vascular products. Within this product group, critical care sales were $138 million for the quarter, growing 4%, or 6% excluding the impact of foreign exchange. Growth was driven primarily by our advanced monitoring products in Japan and the US.

We're pleased to report that our integration of BMI is going smoothly and the incorporation of its non-invasive monitoring technology into our EV1000 platform is on track. While this technology has long-term potential, sales were negligible in the fourth quarter and will remain moderate until 2014 when we introduce the integrated platform.

We are pleased to announce that our GlucoClear system has a CE Mark. While we don't expect significant sales this year, we expect 2013 to be a pivotal year as we complete additional accuracy studies in Europe and obtain greater clarity on the pathway toward US approval. We remain enthusiastic about the significant breakout opportunity represented by this technology.

Total reported vascular sales, which are comprised primarily of our Fogarty products, were $14 million this quarter, up slightly from the prior year. For 2013, we continue to expect full-year underlying sales growth in critical care product group of 4% to 6%, driven primarily by continued growth in our advanced monitoring products.

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

Thank you, Mike.

Before I get into the financial results, I would like to explain how we accounted for the retroactive portion of the federal R&D tax credit that was passed in January. For comparison purposes, we reflected the benefit in the fourth quarter 2012. Specifically, in our non-GAAP results for the quarter, we included an $8.4 million tax benefit equaling $0.07 per share, which represents the full year 2012 credits. As required, we will record the benefits in our first-quarter 2013 GAAP results. But we'll exclude it from non-GAAP results. This, combined with the $9 million realignment charge that Mike mentioned, reduced GAAP earnings per share by $0.13.

Turning to our results, while we fell short of our original goals for the year, we still achieved 16% underlying sales growth and recorded strong bottom line growth, even as we increased our R&D investment to 18%. For the quarter, we achieved diluted EPS of $0.77 and non-GAAP diluted EPS of $0.90, a 45% growth rate over last year.

For the quarter, our gross profit margin was 75.4% compared to 72.2% in the same period last year. This improvement was driven primarily by a more profitable product mix and the favorable impact from foreign exchange. For 2013, we expect our gross profit margin to benefit from a more favorable product mix. However, at today's exchange rates, we do not expect the FX lift we experienced in the second half of 2012. We continue to expect full-year gross profit, excluding special items, to be between 74% and 76%.

Fourth quarter SG&A expenses of $178 million, or 35% of sales, benefited from disciplined spending and lower sales-related incentive expenses. Fourth quarter expenses increased $14 million over the prior year, driven primarily by US transcatheter launch-related investments. We continue to expect SG&A expenses to be between 36% and 37% of sales for the full year 2013, including the impact of the medical device tax. R&D investments in the quarter grew 23% to $75 million, or 15% of sales. This increase was a result of additional investments in clinical studies and new product development efforts in all of our product lines. For the full year 2013, we continue to expect R&D as a percentage of sales to be between 14% and 16%.

Our reported tax rate for the fourth quarter was 25.5%. Adjusting for the global realignment charge and the benefit from the R&D tax credit renewal, our rate was 19%. Excluding the benefit of the R&D, 2012 R&D credit, we continue to expect our 2013 tax rate to be between 23% and 24%. FX rates negatively impacted fourth quarter sales by approximately $9 million compared to the prior year. Compared to our recent guidance, FX did not have a material impact on the quarter's earnings. Looking forward at current rates, we now expect a $20 million negative impact to 2013 full-year sales when compared to 2012 rates.

Free cash flow generated during the fourth quarter was $71 million. We define this as cash flow from operating activities of $127 million, less capital spending of $56 million. This resulted in full-year free cash flow of $253 million, which is our strongest performance to date. During the quarter we spent approximately $187 million on share repurchases. For the full year, we repurchased approximately 4 million shares for $353 million. For modeling purposes, we now project diluted shares outstanding to be approximately 117 million in 2013.

Turning to our balance sheet, we had total cash and cash equivalents and short-term investments of $521 million and total debt of $189 million. Our DSO at the end of the quarter was 58 days, a reduction of 6 days from the prior quarter, driven primarily from improvements in Europe. Inventory turns were 1.8.

Turning to our 2013 sales guidance, our product line sales guidance remains unchanged from our December investor conference. For surgical heart valve therapy, we expect sales to be between $800 million and $840 million. In transcatheter heart valves, we expect sales to be between $710 million and $790 million; and clinical care, we expect sales of $560 million to $600 million. We continue to expect full-year sales of $2.1 billion to $2.2 billion excluding special items.

We also remain comfortable with our previously stated guidance of free cash flow between $300 million and $340 million and earnings per diluted share of $3.21 to $3.31. For first quarter 2013, we project total sales of $505 million to $530 million and expect first quarter diluted EPS, excluding the $0.07 benefit from the 2012 R&D tax credit and other special items, to be $0.74 to $0.78.

With that, I'll hand it back to Mike.

Thanks, Tom. We expect another exciting year for Edwards Lifesciences with continued strong sales growth, greater operating leverage, and progress on a number of important clinical milestones. We also plan to continue investing substantially in the development of transcatheter valves and other structural heart disease therapies, as well as in critical care technologies. We believe our patient-focused innovation strategy, global presence, and strong financial footing uniquely positions us for sustainable competitive advantage.

With that, I'll 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 re-enter the queue and we'll answer as many as we can during the remainder of the hour. Operator, we're ready for questions, please.

Thank you.

(Operator Instructions)

Larry Biegelsen, Wells Fargo.

Congratulations on a nice quarter. Let me start with a question on the US launch. $16 million in stocking in Q4. Mike, on the last call you said you expected a few million dollars in stocking. Am I thinking about this right?

If you had come in -- stock just a few million dollars, you would have fallen below the 230 to 240 in your US SAPIEN guidance. Is that fair or am I doing the math right? Maybe you can talk a little bit about the difference in the stocking versus your expectations.

Yes. The stocking clearly was more than we expected, Larry. I think we thought it was going to be a lower number. So you're right, there is a real impact here. The $16 million of stocking lifted us but I think you need to look at a little bit of a broader picture here.

There was such a rush for -- to be trained on transapical that we trained an awful lot of accounts, more than we expected to train in the quarter. And with that came the stocking orders. At the same time, there was a pretty tremendous queue of transapical patients that had been collected by hospitals. And these are patients that could not have been treated with the transfemoral system. And in particular here with the SAPIEN valve and it's large delivery profile, it probably exacerbated that number.

And so what we believe happened here is a triaging effect where there was a real rush to be able to treat these transapical patients. And part of that drove more training -- more transapical training than we anticipated. Probably held down some of the transfemoral numbers in the quarter. We heard at least anecdotally that a number of our accounts, for example, only had one day a week that were dedicated to the TAVR procedure. And so for the fourth quarter in many cases, those were exclusively transapical procedures. Hopefully that helps.

That helps. Let me use my second question on Partner IIB at ACC. If you can talk about your expectations a little bit based on some of the registry data we've seen from Europe? Will we see any of the nested registries also at ACC and just lastly do you expect a panel for XT? Thanks.

Okay. Let me see if I can get them. First of all, Larry, in terms of what we expect to see out of ACC, we really don't have any insight to share on that one. You know how we feel about the SAPIEN XT valve. We think that's very good therapy but no real heads up here in terms of what to expect to see out of that trial. Your second question, Larry -- want to make sure --

Nested registries, Mike. Any nested registries --

I don't expect to have anything published on the -- anything is possible, Larry, but I'm not expecting that. Finally, you asked about whether we thought there would be a panel on Partner II on XT?

We think it's probably unlikely. When we gave you estimates on what to expect, we said that we would have a submission of the Partner II Cohort B by mid-year and there would be about a 365 day review process. Again, that is just an estimate on our part. That would be our estimate of how this thing would go. It anticipates that it is unlikely there's a panel, but FDA really hasn't weighed in on that, so we don't know. We would say it would be very likely that there would be a panel on Partner IIA since that's a different group of patients.

Thanks for taking the questions.

Bruce Nudell, Credit Suisse.

Mike, next year, your guidance is in the US, is $390 million to $440 million. If I heard you right, it sounds like it's going to be kind of a clean number, devoid of stocking and probably not heavily influenced by clinical trials. In your minds eye, where do you think that -- what do think that would represent in terms of penetration of the Partner I opportunity, at least in the shorter-term before you could maybe recruit people who are not referred today?

Yes, thanks, Bruce. Probably two very different points here. One is that in the 390 to 440, those are reported results so we would indeed see a little bit of lift from clinical units particularly in the first half of the year while we're still finishing up Partner II.

And then actually stocking is going to go from being a little lift in the first half to being a drag in the back half. It's probably actually a drag on reported sales for the year in total. At last that's the we've modeled it. We never know exactly how this is going to turn out. So that's what's in the number.

In terms of how deeply will we penetrate? We think there's an awful lot of patients out there, Bruce, that are not treated. Whatever kind of results we would have in 2013, we think doesn't come close to even getting after the potential population.

Glenn Novarro, RBC Capital Markets.

Two questions. First, as you think about the first quarter for 2013, US SAPIEN sales, do we get another $14 million or $16 million in stocking or will that trend a little bit lower? And then how should we be thinking about overall US SAPIEN sales for the first quarter? Should we be thinking $90 million to $100 million? Then I had a follow-up.

Okay. Well, first of all, probably wouldn't be surprising to see clinical sales be similar, but probably stocking is going to be a little bit less. We'll still have stocking, but it will certainly be helpful if -- it will be the biggest positive of the year will come in the first quarter. I'm not sure that we have a first quarter estimate.

I would put in the range of 10 to 15. Less than we saw in Q4 but that's not as solid to be able to predict that.

The only reason I was talking about a bigger 1Q number -- it seems like 1Q and 2Q will be a little bit stronger than the back end of the year because you've got all that stocking lift. Or is the back end going to be significantly stronger because we get a hell of a lot more commercial sales?

Yes. So clearly, during the year, the actual number of procedures we expect to step up. And that will be increasing throughout the year. It's this net stocking impact that we're trying to provide some guidance on. Net stocking is a lift in Q1. That will be the biggest lift of the year.

Not so much in Q2. It's harder for us to estimate, but it may or may not be a lift. In the back half, we are pretty convinced that consignment's going to be bigger than stocking. It will actually pull-down reported results even though procedures are going up.

Okay. That's actually great color. One thing -- one question on the EPS guidance, you really had a strong fourth quarter here where you beat consensus by $0.12, $0.13. Where is the spend going to be in 2013 that holds you back from raising EPS guidance?

Glenn, if you look at our history, Q4 is typically, on an EPS basis, our strongest quarter. So to take and draw parallels from there is a little bit -- you've got to be careful. We are going to continue to invest in the business. In absolute dollars, that's for sure. We also have the medical device tax.

If you remember one of the things that's going to step us up, I think I said was about 90 basis points. We'll probably have a percentage point or close to that. For that, you also have Japan investment that we are putting in and that's probably another 50 to 60 basis points. So if you are looking particularly at SG&A, those are some of the comparisons. And also, we were very disappointed on our spending in Q4 so I think the quarter was strong. No doubt it was strong. Obviously the R&D tax credit was all loaded in that quarter but if you peel it back, I think the guidance still makes a lot of sense and still shows nice growth.

Great. Thank you.

Mike Weinstein, JPMorgan.

Just to follow-up on Glenn's question to make sure we're clear, despite the 4Q upside, you think that the range you gave a month and a half ago at the analyst meeting is still the right range for 2013?

Correct.

Okay. Maybe to clarify a couple items from your prepared remarks, how many centers did you end 2012 with in the US in planning SAPIEN?

It was approximately 200 centers, Mike. And that includes the partner centers.

Okay. And help us -- one of the challenges we've had on the modeling side is to think about the impact of these nested registries you have which are obviously opening up some different patient populations than you could treat otherwise. Can you share with us your plans for additional registries in 2013 so we can get some sense of some additional opportunity for the Company?

Yes. I don't think that we have anything to report at this, Mike, in terms of additional nested registries. There may turn out to be other items we'd study and we will fill you in as those become apparent. But at this point, I would say the nested registries we already have are probably pretty well enrolled. There is probably still a few patients enrolled in some of these but they're mostly in -- there's nothing -- this is really up to FDA if we would get additional nested registries.

Okay. Last one, Mike, any thoughts on the pick up in the underlying surgical heart valve business? Sounded like most of that was coming from emerging markets, but you did see some incremental strength in both the US and Europe relative to the way the prior few quarters -- any insight there?

Yes. The US indeed did step up. Some of that just may be that the market grew a little bit faster. Some of it may be a diminishing impact from competition. We think those are probably the primary factors. Outside the US, we saw some particular -- both Japan was valuable and grew for us and also emerging markets were drivers. So overall, those were both a little stronger than they had been earlier in the year.

Okay. Great. Thanks, guys.

David Roman, Goldman Sachs.

I wanted to clarify something on the guidance ranges, Tom. Maybe you could remind us on currency -- there actually are quite a number of moving parts since you last reported. The Japanese yen has been on a tear. The euro has also strengthened a little bit. Could you remind us about how FX flows through your P&L and any considerations we should have on the impact of currency moves since you last spoke to us?

Sure, David. When we looked at it, interestingly enough, they tend to offset. Just maybe the way you are balanced between regions and businesses -- I didn't see a significant change. Maybe 10 basis points overall for us on any line. So did not see that as a big factor.

Obviously sales are directly affected. What we have is, is we have our hedge contracts which are designed to offset those movements. Those are generally in cost of goods sold. The rest of it is expenses -- operational expenses that are in the foreign currencies. And we hope that a combination between the hedge and the natural hedges, the hedges we buy and the natural hedges, end up getting us covered to say approximately about 90% of the risk.

That's helpful. And then maybe, Mike, strategically you obviously bought back some stock this quarter. There was naturally some dislocation in October around the Q3 results. Maybe you could help us think about what you're going to do with the cash balance as it continues to grow and maybe comment on share repurchases. Is this the type of thing we should think of that you will do selectively as there are outside moves in the stock to the downside or is it something more consistent that we can expect going forward?

I think it's fair to say, David, that we're more aggressive purchasers of the stock when we think there are opportunities there. And so we do moderate our buying patterns based on price. Overall, we continue to like share repurchases only in the absence of where we see really good strategic investments. If we found something close to home, whether it is in structural heart disease or critical care technologies that we thought really spelled growth for the Company in the future, that would be our first call on cash. We don't have anything to talk about at this point. In the absence of that, we would selectively do share repurchase.

Okay. And then maybe lastly, back on the margin side, Tom, I know you talked about the impact of FX on the gross margin not having as pronounced an impact as it did in the second half of the year. But how should we think about the underlying change in the gross profit margin to isolate the mix impact in transcatheter valves to your year? It was a pretty big year-over-year improvement but I assume that second half of '11 was a little bit depressed due to FX, so if you think about the drivers of the year-over-year change in gross margin, how would you help us do an underlying profit growth move?

Sure. It was clearly a year '11 -- we had pretty negative impact from foreign exchange. So a good portion of the boost was what would happen in '11. As the full year, David, probably the best way to think of it is we said it still remains to be the case, as we said back at investor conference, probably the full-year rate of 74.4 has maybe 50, 60 basis points of help.

So the underlying rate, I would put it just under 74. Our guidance for next year being 74 to 76 implies we'll probably get 100 to 120 product mix is the way it looks right now. The vast majority of that would come from the growth in transcatheter. Just for (Inaudible).

Okay. That's very helpful. Thank you.

Kristen Stewart, Deutsche Bank.

Mike, I was wondering if you could shed a little bit more details on the global realignment, what exactly you're doing differently in light of the environment?

Yes. Thanks, Kristen. What we routinely do is take a look at our portfolio. We take a look at the products that we're selling, we take a look at where we're making the products and so forth. And where the growth is going to be in the future. When we make our additions, whether they are in R&D or SG&A, we really try to move resources to where the opportunities are and in many cases that means we move it away from other opportunities.

And so particularly in this case, our biggest expense item is obviously employees. So we had just under 100 employees that actually we didn't have jobs for going forward. We tried to handle them with a great deal of respect. And they moved out of the Company, and that's what drove the charge that you saw this quarter. We're fortunate still to be a growing company. We added in that same quarter probably more than 200 jobs for a net increase of more than 100 jobs because of the opportunities that Edwards had, but that was the nature of the realignment.

Which businesses were those employees coming from?

It was a mixture of some of our core businesses, both critical care and surgical heart valves.

Okay. And can you comment on the environment in Europe? I know with transcatheter valves you talked about pricing being a little bit under pressure. I think you mentioned volume discounts but maybe if you could shed a little bit more light on that and how you feel about pricing going forward in 2013 now that we have a couple new competitors on the market?

Sure. We're fortunate that we are a market leader. So we try not to have our pricing driven by some new competitor and we've got a very strong market position, so we're quite disciplined on that. Having said that, for our big customers that achieved substantial volumes we give them discounts and also, we find in some cases that we have more growth in countries that have more attractive pricing. The combination of that probably had a 2% to 3% impact year-over-year in 2012 versus 2011.

Okay. Thank you. And what are your expectations for growth next year? Or 2013, are you still anticipating high single-digit or 10% growth in Europe?

In Europe, yes. We feel pretty much the same as we spoke about at the investor conference, Kristen, which is we think the market may grow around 10% for the year and we think we might grow at half that rate because of the new competition that's coming.

Thanks very much.

Raj Denhoy, Jefferies.

Thank you. Just wondering if I could follow-up a little bit on that last question. In your remarks you commented that you're still not seeing much in terms of impact from competition in Europe but I think you also noted that your TA business was down in Europe. So I'm curious what gives you confidence at this point that it's not competition that's impacting that business?

Yes. It's a good question. Our competition tends to be pretty concentrated primarily in Germany. We saw a tremendous growth in our transfemoral business, actually about 35% growth in transfemoral on a year-over-year basis. And so net-net we feel pretty good about actually what's going on from an overall share perspective. Just because we're out there and we're in these accounts, we think we have a pretty good handle on what the competition is introducing. And our sense is they are just not very big numbers.

Primarily -- transfemoral first --

The bigger impact that we really hear, what the phenomenon that's happening out there is this more of a transfemoral first approach is what's causing the transfemoral numbers to go up and transapical to go down.

Okay. Maybe just one follow-up, the TA training number in the US, I think you noted there was 150 centers that were TA trained. I think you commented in the past that there was a stocking requirement of eight valves for every center that got trained on the TA approach and understanding there were some of those that were partner sites you would still suggest a stocking number that would be even above the number you guys did in the quarter. I understand also there's some consignment offsetting that. Was there some mistake in that calculation in terms of what the requirements for were for TA trained sites?

No, Raj, you're circling around it pretty well. The bulk of that $16 million of stocking was probably really net that resulted in transapical. And as you're right, transapical probably got pulled down a little bit by some consignment and the transfemoral in the quarter, although it got a lift from stocking, also we had the beginning of some significant movement to consignment as well. So the bulk of that $16 million is really transapical stocking but as you correctly point out, consignment does detract from that.

Raj, if you are working with the math you also have to remember one of the things we said is that some of the larger centers came in for TA, that if they were close to earning consignment, that we probably would not go through with the second stocking order that they would go straight into consignment. So it's smaller than you would think if you try to match that up to the number of centers. It's quite a bit less. And that's a big piece of the tory, quite a few of those guys that came in first, we did not book a stocking order.

Okay. It all sounds like with the 200 centers in total at the end of the year that perhaps the training rate on new centers may have slowed a little bit as you started training more TA centers?

As you can imagine, Raj, training the number of TA centers really consumed a tremendous amount of capacity. We were some very busy folks during the fourth quarter, training people in the transapical approach.

Okay. Great. Thanks.

Danielle Antalffy, Leerink Swann.

Congrats on a great quarter. I was hoping that maybe you could give some more color on TA versus TF in the US in the quarter just -- you mentioned in response to a question earlier that the high level of TA activity could have pressured TF and just wondering if you could give us some direction there and maybe quantify that a little bit. I assume you feel like you've worked through the bolus now and we would return to more normal activity going forward from here on out?

Good question, Danielle. What we said is from a pure sales perspective, about 45% of what was sold in the US in the quarter was transapical. Because there was quite a bit of stocking, actually that number was probably from a procedure point of view, that probably accounted for more like 25% to 30% of the actual procedures, may have been transapical.

And although we don't have accurate data on how much of the bolus we worked off, we believe that a large part of the bolus probably was worked off during the quarter. But again, this is one of these determinations that's made by the heart team. And so there's other factors involved often, that's the strength of the surgical program of the cardiology program that will drive it one way or the other.

Okay. That's helpful. To follow-up on that, are you seeing, especially at the higher volume centers, are you seeing any change in activity on their end or in infrastructure I should say on their end, or adding the docs at your analyst meeting mentioned they were working to hire more surgeons? What are you seeing out there as far as that goes to sort of handle the higher volume of patients now that you have TA approved and --

It's a good question, Danielle. We hear anecdotally that there is some movement in the large centers to add a second team for example, but it's difficult for us to generalize. I think broadly we'd say the increases that we're seeing right now are coming from new centers as opposed to additions in the existing big centers.

Okay. That's helpful. Thanks so much.

Jason Mills, Canaccord Genuity.

Back to TAVI in the US real quick, just trying to calibrate our models entering 2013 here a bit better. I apologize if I haven't got it yet but if you equalize for your comments on stocking, both in the fourth quarter and your thoughts for the first half of the year, it looks like from a procedural standpoint, there needs to be an uptick in growth sequentially that's fairly meaningful, 30%, 40%. Assuming, let's say a linear sales figure to the midpoint of your US guidance for the year, because you've got a drag on stocking in the second half, if we just arbitrarily assume linear amount of $100 million or $110 million you kind of get to that number. It assumes a fairly significant ramp in procedural volume and actual implant rates Q4 to Q1. Can you help us out quantitatively as to whether or not I'm in the right ballpark there in terms of what we need to see?

Well, we do expect it to be a ramp, Jason, that's for sure. We expect to see a little of our seasonality of course in the third quarter but overall, a ramp throughout the year. I'm not sure I've run specific numbers on sequential quarter over quarter's, but there must be more of a doubling of procedures from 2012 to 2013. There's just a lot more procedures in the year as this launch progresses.

Okay. That's helpful. Secondly for me, you saw it a little bit in Europe when TAVI was launched in the subsequent couple years with respect to the halo effect on your surgical valve platform. In this quarter, that part of your business was just a tad bit better than what we expected. Are we starting to see a similar halo effect as we see a higher number of severe symptomatic aortic valve patients entering the queue, some of whom unfortunately not TAVI candidates ending up on the table with a cardiac surgeon. Are you starting to see the benefit of that?

We look for that, Jason. We can't say at this point that we've really seen the uptick in the surgical business as a result of transfemoral. Part of the theory that we have is this was more likely the track, the advent of transapical cases. And as you know, it just started here late in October. And so as that starts to become part of their practice, we think it's more likely to see this kind of halo show up and we'll be looking closely for it and be glad to share that with you.

Thanks. Lastly, real quick, transaortic, anecdotally that TA number was strong even from a procedure standpoint. Do you have any evidence that transaortic's catching on here in the US and what is the update on reimbursement for evidence development there?

Yes. Clearly there's interest in transaortic. And we're seeing it across Europe as well, and certainly in the US. Right now the NCD does not provide for the reimbursement of a transaortic delivery. So that's probably -- has a very real impact on how often it's done.

We actually thought that this special protocol that would be approved by CMS would be done at this point. It's still not quite done. It's at the final throes. I think the societies that are actually running these registries decided to take it through FDA first and to have an approved protocol and approved IDE and they pretty much cleared that hurdle. So now we think there's just the final hurdle to get through, CMS. So that should be around the corner for us. At that time, we'll get a better handle on TAL.

Thanks, Mike.

Amit Bhalla, Citigroup.

This is actually Adam in for Amit. I wanted to go back to Europe TAVI for a question and then just talk about the reimbursement landscape there and any significant changes you've seen in the quarter, expectations of new reimbursement to come online in the first quarter?

Yes. Not a substantial change in reimbursement during the quarter. We did see probably a little uptick in France in terms of the number of centers, but no real change. For example, we've been anticipating some improvements in the UK. No real changes yet.

All right. Thank you.

Rick Wise, Stifel Nicolaus.

It's [Mira Slava] for Rick today. If I could go back to the US volumes, it sounds like you are anticipating quite a dramatic uptick in 2013. But TA volumes -- if the bolus is already done, those should be leveling off. Maybe help us think through what are the drivers behind your acceleration? I appreciate there is another probably 100 centers or so coming online but those would probably not be the higher volume sites. What drives your confidence that you see volumes accelerating to that extent in 2013?

Well, we -- broadly we think there's a lot of centers just getting going, Mira, so we think there's going to be a substantial lift in 2013. Given that it is only the real second full year of launch, we don't think it's unusual to have this kind of a growth rate.

As it relates to TA, that gets to be a little bit tricky business. I'm not sure your question exactly but it's tough to know exactly what the TA percentages are going to do. Remember, this is the SAPIEN technology. And we historically saw higher TA percentages with SAPIEN because of the larger profile during introduction and that drifts down. At the same time, you've got this under current of a TF first approach, so we're not certain exactly where that goes. But in terms of what's going to happen to the 2013 numbers, we just think the underlying demand is substantial across-the-board and that these heart teams are going to continue to be treated and they gained their confidence and -- as we say, there's 200 centers that are trained as we exited the year.

Okay. Great. Thank you. Maybe secondarily, as competitors trials ramp up and as more competitors start their trials, both in Europe and in the US in the second half of the year, have you accounted for that in your guidance?

Yes. We think we have. We've factored that into some extent. If it turns out to be unusual, then we would be affected by it but we believe that's in our numbers. And we certainly model that.

Okay. Great. Thanks. My final one is on Mitral. Any final color as to when my see anything from your Mitral program, like first in line experience or any details on the device?

You can be certain that as soon as we have something meaningful to announce that we'll get it out there. No real change to what we said at our investor conference, which is we thought our first demand was likely in 2013.

Great. Thank you very much.

Bob Hopkins, Bank of America Merrill Lynch.

Just a couple quick ones. Tom, by my calculation, fourth quarter gross margin excluding currency was probably somewhere in the 74.5 or greater range. Is that roughly correct?

Actually, the boost from currency in the -- specifically in the fourth quarter was bigger than that, Bob. Probably closer to 200 basis points.

Great. That's helpful. Thank you. Back on the number of centers, I think at the analyst day, Mike, you said you thought you might train 100 or greater centers in 2013. Is that still a good number for US centers to be trained in 2013?

We think that's a reasonable number, Bob, yes. We said 200 in total over two years and most likely that it will split pretty evenly.

Okay. And then you've got a lot of questions on the call about the stocking disclosures you make and the trial revenues. I was wondering if, for the sake of simplicity, you might be willing to give us for the full year 2013 what you think the combined stocking plus trial, clinical trial revenue might be for you guys in the United States?

If we could predict that with a great deal of precision, we'd probably try and get it out there, Bob. That's a difficult one for us to predict accurately. So we more or less try and share what we think is going to happen from a trend and direction point of view.

Okay. And lastly, Mike, there's a bunch of questions about Europe but I'm not sure if anyone really got your views on what you saw in the fourth quarter in Europe specifically. Did it feel like the market got better? Obviously over the course of 2012, things fell off pretty rapidly from Q2 to Q1 and Q3 to Q2 but did you see -- just some comments on Europe generally in Q4? Obviously the numbers -- the growth rate is a little bit better and is that market -- how did that feel in the fourth quarter?

I think we've talked pretty extensively about TF and TA. Maybe from a country mix point of view, we saw Germany continue to be a strong grower. You're talking about -- depending on whether you're talking about procedures or sales, something in the 10% to 20% range and France helped a little bit too. I think the biggest difference is we didn't have as big declines in the fourth quarter out of southern Europe as we had seen a little bit earlier. They were negative but not nearly as negative as they had been previously. I think it was maybe literally single digit declines for the first time that we haven't seen for a while.

Great. Thank you. Very helpful color. Appreciate it.

David Lewis, Morgan Stanley.

It's Steve Beuchaw for David. Thanks for taking the questions. I wanted to ask about Europe first of all from a different direction, yet still on transcatheter valves.

Mike, I wonder if you could spend a few minutes giving us a sense of what you're seeing there on the clinical environment with some of the data that we've seen like the GARY and the PRAGMATIC registries and now we have a new set of valve guidelines. Given the data that we have there, in 2013 can we be spending a little bit more time talking about the differences in clinical outcomes between SAPIEN and other products? Should we be thinking, given the data that we have about expanding the use of transcatheter valves relative to surgery just on the basis of that data?

Yes. Well, you're absolutely correct, Steve. There's going to be a lot more data that becomes apparent because of these registries. The SAPIEN platform already has a tremendous amount of data. And we feel like it's a best in class system.

We haven't spent a lot of time trying to differentiate ourselves versus our competitors. We've spent far more time trying to make sure that these patients that have been untreated get treated and we feel like we've made some headway there. Is there some chance here that patients that aren't as sick get treated? I suppose there could be some left but we think the more fundamental lift will come actually when the Partner II data that measures these -- or evaluates these patients with FPS scores down to 4 becomes available.

Thanks. That's really helpful. I wanted to follow-up on a question that was asked earlier on surgical valves. Some of the strength there, this halo effect concept.

We saw good numbers in cardiac surgery, vascular picked up a little bit more than we might have expected. Is it possible that there are other fluid dynamics there, maybe tenders, maybe getting into new centers more broadly, and lastly could there be any selling day issues that you would point to? Thanks so much.

Say it again, you're talking about what would be the reason for the lift in surgical valves in the fourth quarter? Is that what you're asking?

Outside of surgical valves, cardiac surgery strong, vascular pretty strong. That suggests there might be something more broad than a halo effect in the thoracic surgery suite.

Well, I think when it comes to sales data, I think there was an extra sales day in the US and that may have been the case outside the US as well. When it's not really profound we normally don't talk about it, but I think that clearly was the case. It's very difficult for us to say with one quarter of data what's happening in the environment. I'd love to say something in general about the market, but it's too soon.

Thanks, Mike.

Spencer Nam, Janney Capital.

Thanks for taking my questions. Mine are very quick. First question is on the cost of TAVI program and potential impact of this on centers signing up for the program. You guys still sound like there's a pent-up demand for the centers trying to join the TAVI program here, but I'm curious whether you guys are feeling any sort of push back from some of the centers out there because of the economics potentially impacting -- making this more of a broad-based program for these centers?

Yes. I think it's certainly true that some of the new centers are challenged from an economic perspective. Probably the best data on this was the partner data. And that showed that it was cost effective but nonetheless, we know that it certainly is more profitable for some of the large academic centers in the East versus what it might be in some of the smaller centers or those in more rural areas. So that is a comment.

Broadly, though, when we think about cost effectiveness, the more that the procedure gets refined and the more we're able to reduce complications and get people out of the hospital faster -- we feel like that is improving every day -- that really improve the economics. And so although there is some consternation on the part of some of the new accounts, we think the trend is going in the right direction and we feel pretty good about the cost effectiveness of the technology overall.

Are you guys sharing some data with hospitals, new hospitals and you have these discussions on the lowering trend of average day of stay or the lowering costs of procedure costs associated with increasing number of patients and so forth? Are these data points being shared or how does the discussion play out here?

As part of their training, we have a lot of open discussion. We certainly try and support them as they think about starting their program. We share the available data that's available and the total impact that it might have on the hospital. And so they come with a number of their own questions. We try and be as helpful as possible.

Put in one quick question, on the XT approval timeline, if the panel is not going to happen, why would you guys feel that it may take more than six, seven months for approval? Thanks.

It sounds exactly like what we say to FDA. Of course, we will ask for faster approval timelines. You guys know the history of this. We probably don't have much better estimate than you may have. We feel like this estimate of 365 days is certainly faster than the averages that FDA typically has in this space. So that's more than 500 days. We're going to stay with our estimate at this point, Spencer, though. Thanks for the question.

That is all the time we have for questions today. I would now like to turn the floor back over to management for closing comments.

Thanks for your continued interest in Edwards. Tom and David and I welcome any additional questions via telephone. With that, back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the call which include underlying growth rates, sales results excluding currency impacts and amounts adjusted for special items are included in today's press release and can be found in the Investor Relations section of our website at Edwards.com.

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