愛德華生命科學 (EW) 2013 Q2 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation second-quarter 2013 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

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

Welcome and thank you for joining us today. Just after the close of regular trading, we released our second-quarter 2013 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 are Mike Mussallem, Chairman and CEO, and Tom Abate, CFO. Before I turn the call over to Mike, I would like to remind you 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 milestones and trials, regulatory approvals, regulatory compliance and reimbursement, as well as expectations regarding market opportunities, the US launch of SAPIEN, new product introductions, competitive conditions, and the impact of patent litigation.

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, 2012, 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 impact of foreign exchange, constant currency, and excluding special items, we are referring to non-GAAP financial measures. Otherwise we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release. And now I will turn the call over to Mike Mussallem. Mike?

Thank you, David. We're pleased to report solid second-quarter results, driven by strong sales of transcatheter and surgical heart valves in both the US and Europe. Our SAPIEN launch in the US continues to be highlighted by the very high procedural success rates, and we are gratified to see this therapy changing the lives of so many patients. The growing body of positive clinical data reinforces our conviction that transcatheter valve technology offers a compelling treatment option for a large and growing patient population. During the quarter, we received the approval of SAPIEN XT in Japan, setting the stage for our launch there next year. And more recently, a German court found a competitor infringes our intellectual property and issued an injunction order against them. Now turning to our quarterly results.

Reported sales grew 7% to $517 million. Sales growth excluding the impact of foreign exchange was 10%. Strong transcatheter and surgical heart valves helped drive 16% sales growth in the United States. THV and surgical valves were also strong contributors to growth in Europe. In transcatheter heart valves, second-quarter sales of $182 million were driven by the ongoing US SAPIEN launch and improved growth in Europe. In the US, THV sales were $90 million for the quarter, which included clinical sales of $10 million. Reorder sales this quarter more than doubled from a year ago. Clinical sales were a bit higher sequentially, lifted by enrollment in our expanded nested registries. We anticipate registry enrollment to continue in the third quarter, which will facilitate efforts to expand SAPIEN XT's indication to include these important patient subgroups.

This quarter's results also included $1 million of net stocking sales. As we previously indicated, as more sites move through the consignment conversion process, the impact of consignment should exceed stocking sales in the second half of 2013. We continue to expect reported sales in 2014 to more closely track procedures performed. At June 30, approximately 250 sites in the US offered SAPIEN to their patients. Almost 220 sites met our qualifications and were trained to begin transapical delivery. Importantly, as the number of sites has increased and the TA approach has become more broadly adopted, clinicians have continued to maintain very high procedural success rates. Overall, we continue to believe that TAVR economics and hospital capacities are not yet optimized at most sites and there remains significant opportunity for improvement. Our US team is now focused on educating sites on appropriate TAVR reimbursement and improving lengths of stay. The nearly 12,000 patients in the US whose lives have been transformed by SAPIEN in the past two years are a constant reminder of the impact and benefits of this therapy.

Outside the US, THV sales grew 9% in the quarter, or 10% excluding the impact of foreign exchange. Unit sales grew approximately 11% and pricing declined slightly. Sales in Southern Europe grew for the first time in over a year. Transfemoral units grew approximately 20% and represented approximately 70% of sales, consistent with last quarter. We estimate new companies entering the TAVR space sold less than 10% of commercial units in the quarter, mostly concentrated in Germany. We expect this rate to increase with anticipated fourth-quarter competitive approvals. At the recent EuroPCR and TBT meetings, our SAPIEN platform was featured prominently in numerous live cases and data presentations. Of particular note was one-year data from SOURCE XT registry that studied our lower profile SAPIEN XT valve. These data, which showed a one-year survival estimate of 85% for TF patients and low incidence of procedural complications and stroke, confirming that positive real-world TAVR provides patients a quality of life and heart function that's improved. At both meetings, clinician interest in our newest technologies was very strong. And while there are new competitive offerings in development, we remain confident that the strength and breadth of our pipeline will enable us to solidify our leadership position.

Now updating our clinical and product development milestones, as we indicated in our last quarterly call, we submitted our PMA for Cohort B of PARTNER II, in late April. While we are working with the FDA to expedite approval, we still project a mid-2014 approval followed by a rapid introduction. We are nearing completion of enrollment of Cohort A, the surgical arm of PARTNER II, designed to expand the indication into more moderate patients. Enrollment in other valve trials, including our own nested registries, has impacted the pace of enrollment in Cohort A, and we now expect to finish in October. In Europe, we remain on track to receive a CE mark and to launch our advanced SAPIEN 3 valve by the end of the year. We believe that SAPIEN 3, which is delivered through a 14-French eSheath and designed to reduce paravalvular leaks, will quickly become the best-in-class transcatheter valve in Europe. We are also continuing to enroll our self-expanding CENTERA valve trial.

During the quarter, as expected, we received regulatory approval for SAPIEN XT in Japan, which makes us the first commercially available transcatheter valve in that country. We continue to expect reimbursement to be established by year-end. And we believe the transcatheter technology will be particularly attractive to Japanese patients and its introduction should represent meaningful sales growth beginning next year. Our lead mitral transcatheter program is a valve replacement, and we continue to believe a first-in-human experience is likely in 2013. Treating mitral disease with transcatheter technology is a very large opportunity and as one of the pioneers of mitral valve therapies, we believe Edwards is well-positioned to be successful in this area. We are continuing to invest broadly in structural heart disease solutions and have dedicated teams working on additional approaches.

Since last quarter, there have been two developments in our IP litigation in Germany against Medtronic. In the first case, which asserted infringement of one of our Cribier patents, the German court found that Medtronic had not infringed and we are appealing that decision. A hearing in Germany pertaining to the infringement of a second Cribier patent is scheduled for December. Earlier this month, the German court found that Medtronic infringes our Spenser patent, which describes multiple TAVR designs including a goblet-shaped device sized to minimize extension of the device into the left ventricle. The court granted an injunction prohibiting the sales of CoreValve and Evolut in that country, as well a recall of these products and accounting for past damages. We are in the process of posting a bond, which is required before we can enforce the injunction in Germany.

The Spenser patent is being contested in Europe in a separate action. The patent, which expires in 2022, is also in place in numerous other European countries including France, Italy, and Spain. Spenser patents have also been issued in the United States. The first was filed in 2001, and they expire 2021. Our sales in Germany for first half of 2013 were approximately $25 million, and we estimate -- I'm sorry, were approximately $65 million. Our sales in the first half of 2013 were approximately $65 million, and we estimate total TAVR sales for all companies in Germany to be between $200 million and $240 million this year. We're still developing plans to implement the German injunction. As this process unfolds, most importantly, we will be proactively working to ensure that all patient have access to the necessary therapy.

In the event that Edwards' products is not suitable, we will encourage use of an alternative product. In our US case involving the Andersen patent, after the appellate court affirmed the judgement of willful infringement late last year, the Delaware trial court was instruct to reconsider Edwards' motion for permanent injunction. We have also asked for damages since early 2010. We are awaiting the decision of the judge and no timing has yet been established. In parallel, Medtronic has filed a petition asking the US Supreme Court to hear the case, which we have opposed. This fall we expect a decision as to whether it will hear the case. In summary, we are reiterating our guidance for 2013 transcatheter heart valve sales which excludes any favorable impact from the German injunction. We continue to expect global sales to grow 25% to 30% on an underlying basis. This would result in sales of $670 million to $750 million, which includes $350 million to $400 million of sales in the US. As a reminder, there was a pronounced seasonality in the third quarter of last year.

Now turning to Surgical Heart Valve Therapy group, reported sales increased 2% over last year to $204 million. Excluding the impact of foreign exchange, sales grew 5% compared to last year. This quarter's growth rate reflected strong global performance, particularly in the US and Europe. Our global ASP declined slightly primarily due to geographic mix. Valve pricing was stable in the US and was lifted in Europe due to the growing contribution to sales of our INTUITY valve. In the US, sales grew 4.4%. We believe there was an uptick in the heart valve procedures performed in the second quarter compared to the first quarter and we also believe we gained share. The recall of minimally invasive Cannula produced in the Draper facility detracted from the surgical valve product line's growth rate.

In the quarter, new long-term PERIMOUNT data was presented at meetings, demonstrating unprecedented durability results for tissue valves. For aortic valves, the data demonstrated an expected durability of 17 years in patients age 60 or younger, which represents the long the longest follow-up series in younger patients. For mitral valves, the average patient age was 68 and the data demonstrated expected durability of more than 16 years, which represents the longest follow-up series for a mitral tissue valve. During the quarter, INTUITY sales in Europe added approximately 1% to our overall growth rate, and we continue to make progress on our key milestones with this innovative valve system. We continue to expect to see [e-mark] in the near future for INTUITY Elite, our next-generation platform with a lower profile, designed to further enable small incisions. In the US, enrollment of our TRANSFORM IDE trial remains on track and we are in the process of upgrading all sites to INTUITY Elite.

Also in the US, we are continuing to enroll patients in our [Commence] IDE trial. This trial, which includes both our market-leading aortic and mitral valves is studying the GLX tissue on our Magna Ease platform. As we disclosed in May, we received a warning letter from the FDA whose observations focused on our Cardiac Surgery Systems manufacturings operations in Draper, Utah. We've made this matter a top priority and are focused on resolving it as quickly as possible. We have promptly responded to each of the specific issues addressed in the letter and are implementing the necessary actions. We do not expect this matter to have a material impact on our 2013 financial guidance. We continue to expect underlying sales growth in Surgical Heart Valve Therapy product group to be between 2% and 5% in 2013, aided by the commercialization of INTUITY.

Turning to the Critical Care product group, total sales of $131 million for the quarter declined 4% over last year. Excluding the impact of foreign exchange, sales increased 2% driven by strong growth of advanced monitoring products, tempered again this quarter by a reduction of distributor inventories in China and the ongoing exit of our [Access] product line. The integration of our non-invasive monitoring technology is on track to be incorporated into our EV1000 platform next year. Sales this quarter were encouraging but will remain moderate until 2014 when we plan to introduce the integrated platform. We remain enthusiastic about the significant opportunity represented by our GlucoClear system and are encouraged by the progress on our 2013 goals.

We continue to expect 2013 to be pivotal as we complete enrollment in our ICU accuracy study in Europe by the end of the year and gain further insight on the pathway toward US approval. We continue to expect full-year 2013 underlying sales growth of 2% to 4% in the Critical Care product group, driven by continued growth in our advanced monitoring products and as distributor inventories in China reach target levels. Before I turn the call over to Tom, I would like to provide a brief update on our search for his replacement. As you know, Tom recently announced his decision to retire from Edwards later this year. Since the announcement, we've received interest from a number of highly-qualified candidates, which are -- and we are presently conducting interviews. We're making good progress and expect to identify his successor in the next several months. And now, I will turn the call over to Tom.

Thank you, Mike. I'd like the add to what Mike shared by saying it's truly been a pleasure to work with the team here at Edwards for many years. While I'm looking forward to retirement, I will remain with the Company until my successor is on board and I'm committed to a smooth transition. Turning to the financials, this quarter, our solid sales results combined with strong leverage allowed us to achieve diluted EPS of $0.82. Excluding special items from the prior year, our diluted EPS grew 22%. During the quarter, we approved a new $750 million share repurchase program and we substantially completed our existing repurchase authorization of $500 million. In the quarter, we repurchased approximately 2 million shares, and now project fully diluted shares outstanding in the second half of 2013, to be approximately 114 million. For the quarter, our gross profit margin was 75.8% compared to 73.1% in the same period last year. Last year's rate was 74.8%, excluding the impact of special charge. The improvement was driven by a more profitable product mix and a favorable impact from foreign exchange, partially offset by manufacturing inefficiencies. Excluding special items for the second half of 2013, our gross profit margin should be between 74% and 75%, driven primarily by a reduced benefit from FX and near-term inefficiencies, as we prepare for multiple THV product introductions in 2014.

Second-quarter SG&A expenses were $189 million, or 36.6% of sales, an increase of 4% over the prior year. This increase was driven primarily by the US medical device tax and US transcatheter valve expenses. Partially offset by FX and lower incentive compensation expenses. As a percentage of sales, SG&A should trend up in the third quarter due to seasonality, then decrease in the fourth quarter. For the full year, we expect the SG&A to be between 36% and 37% of sales. We continue to aggressively invest in R&D, and spending in quarter grew 9% to $81 million or 15.6% of sales. This increase was primarily the result of additional investments in a number of heart valve clinical studies and new transcatheter valve development efforts. We expect R&D to increase in the third quarter as we continue our investments in clinical studies. For the full year, we expect R&D to be approximately 16% of sales.

Our reported tax rate for the quarter was 22.7%, down from 24.6% in the prior year, due primarily to the absence of the federal R&D tax credit last year, and a favorable reserve adjustment this year. We continue to expect our full-year tax rate, excluding special items, to be at the low end of our 23% to 24% range. FX negatively impacted second-quarter sales by $14 million compared to the prior year. Primarily as a result of the yen. Compared to our recent guidance, FX rates negatively impacted EPS by $0.01. Looking forward, we now expect a $55 million negative impact to full-year sales. Free cash flow generated during the quarter was $99 million. We define this as cash flow from operating activities of $127 million less capital spending of $28 million. For 2013, excluding special items, we continue to expect free cash flow to be between $270 million and $310 million. Turning to our balance sheet, at the end of the quarter, we had cash, cash equivalents, and short-term investments of $575 million. Total debt was $227 million. Our DSO at the end of the quarter was 58 days, a 2 day increase from the prior quarter. Inventory turns were 1.7, consistent with the prior quarter.

Turning to our sales and earnings guidance. Since we are still estimating the potential impact of the injunction in Germany, we are not including it in our 2013 guidance at this time. Given multiple variables, we assume that the injunction isn't likely to have much impact on our third-quarter results. We plan to provide an estimate of the injunction's future impact when we release our third-quarter results in October. We are maintaining our sales guidance, even though the dollar has recently strengthened moderately. At current exchange rates for the Surgical Heart Valve Therapy product group, we continue to expect sales of $770 million to $810 million. In Transcatheter Heart Valves, we continue to expect sales of $670 million to $750 million. And in Critical Care product group, we continue to expect sales of $530 million to $570 million. We continue to expect full-year sales of $2 billion to $2.1 billion, and earnings per diluted share excluding special items of $3 to $3.10, resulting in a growth rate of approximately 14%. For the third quarter of 2013, which is typically our seasonally lowest quarter, we project total sales of $475 million to $505 million and third-quarter diluted EPS, excluding special items, to be between $0.63 and $0.67. And with that, I'll hand it back to Mike.

Thanks, Tom. Our second-quarter results have increased our confidence in achieving our sales and earnings guidance, and we remain enthusiastic about 2014 as we prepare for important transcatheter product launches next year in the US, Europe, and Japan. We plan to continue investing substantially in the development of novel heart valves and other structural heart disease therapies, as well as critical care technologies. We believe that our steadfast commitment to innovation will enable us to broaden our leadership position and create value for patients, clinicians, and our shareholders. And with that, I will turn it back over to David.

Thank you, Mike. Before we open it up for questions, I would encourage you to mark your calendars for Monday, December 9, when we will be hosting our 2013 Investor Conference in New York. This event will include updates on our new technologies as well as our outlook for 2014. More information will be available in the next couple of months. 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'll answer as many as we can during the rest of our time. Operator, we're ready for questions.

Thank you. We will now be conducting a question-and-answer session.

(Operator Instructions)

David Roman, Goldman Sachs.

I wanted to come back to the US transcatheter business and try to better understand the commercial, stocking, clinical breakout -- can you maybe just help us understanding what's going on with net stocking. Was the $1 million number you reported this quarter, was a reflection of fewer centers trained than expected or faster conversion to consignment? Can you maybe help us think about how that progresses through the balance of the year?

Yes, David. Thanks for the question. We trained approximately 25 centers in the quarter, which is very consistent with our expectation. As we indicated right along here, consignment is on the rise. And so what you are seeing is that, that is starting to equalize, where stocking and consignment are nearly the same.

And do you still see that net stocking number -- does that turn negative in Q3 going forward and any change in your thinking on how the balance of the year looks?

No, the balance of the year is going to look much like we signaled right along. So we expect that the consignment should exceed stocking sales in the second half of the year and that's going to -- that will end in 2014 where in '14, the actual results will track closely with the procedures performed.

Okay. And then maybe lastly, just to understand the earnings progression here, and Tom, your comment around the gross margin, it looks like for the third quarter, based on revenue guidance versus your earnings guidance you're taking a pretty big margin hit, and understandably SG&A ticks up on a ratio basis, given seasonality but in the gross margin line, how long does that ramp up take and those manufacturing inefficiencies take place? Is that something that snaps back in 2014? Or is it something that might take longer to get back to that 75% to 76% gross margin level?

David, the difference is a little bit of phasing. This quarter, Q2, was a bit stronger than I would have thought, and we give a piece of that back, or some of that back in the third quarter. The difference between Q2 and going forward, Q3 and 4, is we lose some of the benefit on the year-over-year comparison due to FX. First half, I had $100 million to $150 million of help. That pretty much dissipates in the back half. We still get benefit but not in comparison to last year. In terms of the manufacturing inefficiencies, if -- we could see that they will probably affect Q3 and potentially, we're thinking that near term -- I can't predict exact phase-out, the way that would work, but remember, it's somewhat related to all of the products that are coming in the beginning of '14. So we're trying to get ready for XT launches in the US. You've got S3, Europe, and those things, so production right now, we're balancing a lot of things at the same time, and we also had a big adjustment we took to China in the first half, which affected the volumes in Critical Care. And that's probably run through the system by the end of this year.

Okay. Thank you very much.

Larry Biegelsen, Wells Fargo.

So I wanted to start on Germany. Can you guys talk about when you are going to post the bond and when CoreValve would be off the market there, and when do you expect a ruling on the validity of the Spenser patent? And then I had a follow-up?

Yes, Larry. The first thing that has to happen is the court has to issue their formal judgment, and once that formal judgment is in place, it puts us in a position to post the bond, and we're going to be in a position to do it very quickly once that is done. So we're expecting that is quite imminent. There's a number of factors in terms of when the injunction might exactly go into place. I'm not sure of the second part of your question?

So ruling the validity of the Spenser patent, that's separate, ongoing litigation?

Yes, our estimate that it could be somewhere -- anywhere in the two to six-month range before we get that decision.

Okay, great. And then I wanted to ask a question, Mike, on SAPIEN 3. Should we -- so basically, I'd be interested to hear your view on that product because the checks we're doing on that suggest a very high level of enthusiasm for the product. And given the low rate of paravalvular leaks and the 14-French delivery system. So a couple of questions of SAPIEN 3 -- one, should we expect any stocking effect when that's approved? Do you think you can actually take back some share with that product? And that lastly, the CE mark trial has 100 immediate risk patients. How do you expect that data to help you? Could you actually get an indication and reimbursement for intermediate risk patients?

Sure. We're very enthusiastic about SAPIEN 3. It really looks great, we're excited about it. We think it's got the potential to be the leading product very quickly. In terms of what it might do to -- one of your questions was what it might do to product shares. It's a little bit hard to predict. Though your first question was to stocking. Most of the product that we have in Europe is already on a consignment basis. And so I don't expect stocking to have a significant impact as we roll that out. And it is going to be difficult to predict exactly the impact that it has on competition at this point. We think that it is going to open up the indication but right now it's likely to have the same indication as we have today.

Thanks for taking the questions.

Jason Mills, Canaccord Genuity.

Congrats on a nice result this quarter. With respect to your guidance you reiterated in the US, I was wondering if you could give us a bit more color, quantifiably speaking, with respect to the polar ends of the guidance, clearly centers, utilization are important contributors to that guidance as are the stocking trial revenue. Could you give us a sense specifically on numbers of centers and utilization rates that you're using on both ends of that guidance to give us a little bit of a sense for probability of either one?

Yes. Well, in terms of adding centers, we are going to continue to add centers during the course of the year. I don't know if we will have as many centers added in the second half as we do in the first half of the year. In the third quarter, that -- normally the training of centers goes slightly slower, but overall you've got the same kind of trends probably continuing throughout the course of the year, Jason. I don't expect a dramatic change from what you have seen earlier. Sites are continuing to clear their capacity. They're continuing to make some improvements on economics and so there's a gradual, but I don't expect an abrupt change and much change in the overall trajectory until we get to an XT introduction next year.

Okay so just asked a different way, does the lower part of your US guidance assume that utilization trends decelerate a bit and the higher end assumes perhaps that they accelerate? Is that the way to think about?

Yes, that's fair. I'd say based on what we've already done, it's not clear -- we could actually fall a little bit below the mid-part of the guidance for the rest of the year, for the close of the year. It's not clear. So it's hard to tell at this point, Jason, but if everything stayed the same that's about where it would be, but we're generally expecting a mild pick-up.

Last question from me, Japan. I know it's a little earlier to get guidance from you for 2014, but could you talk about what you're expecting preliminarily in terms of the ramp, maybe relative to what it was when you launched SAPIEN XT in Germany or Europe more broadly?

Yes, it's going to be a little different animal that when we launched in Europe or when we launched in the US. The upside in Japan is that reimbursement in Japan. The downside in Japan is that there's very few centers that have been trained at the start of launch because there were only, remember, three centers in our clinical trial. So it is going to be probably a more deliberate ramp as it comes. We think there's going to be steady demand and we think the ramp is going to be a good one. But it's going to be moderate at the beginning and picking up speed.

Thanks.

Brooks West, Piper Jaffray.

Mike, I wanted to test you a little bit on how you're seeing volumes in the US to large versus small centers, if you've seen any change in that since last quarter even. And then have you -- as a follow-up to that -- do you have any thoughts on what might be the ultimate number of US SAPIEN sites? And then I've got a follow-up.

Yes, in terms of do I think things have changed by -- it's been pretty moderate change. There hasn't really been anything that's noteworthy, Brooks, to say, that gee, the large centers or the small centers have really changed in terms of their contribution to the mix. There probably tends to be more favorable economics in the larger centers so they are continuing to do well so you probably surmise that that continues to be a driver. But that's probably that. In terms of total sites, we'll try and give you an update when we get to the investor conference. Last time around, we indicated that we would get to 400 centers over a two-year period, meaning by the end of '14. Just based on the way the NCD is being interpreted, we're guessing it might be a little bit lower than that but we're still working on that.

And then a follow-up for Tom, thanks for that Mike. A follow-up for Tom, just on the injunction in Germany. Maybe assuming that that injunction comes through, call it late Q3, early A4, $50 million to $60 million of potential [TAVI] revenue up for grabs, what's your comfort level in the street, adding some revenue to our models for that in '13 and '14 and what's appropriate thinking there?

Well, Brooks, there's a number of variables, mostly that relate to the start. There's questions about timing, in terms of inventory in the field and how that's actually going to work through and what's actually going to happy. So we purposely -- we gave it at lot of thought and we decided that we probably at this point will be in a much better position to give you a good look at it when we come to next quarter's earnings. By that time we will have got through the start-up phase. We'll have a better idea of what's in place in the field and what we can do. So if you don't mind, I would like to hold that one off to next quarter and what we tried to do, though, is give you a couple key numbers for Germany to give you an idea of what is available. And that is the full markets out there and our sales and most of you guys can back into that pretty closely and then it comes down to share assumptions and things like that.

Thanks Tom. Maybe I could sneak one more in. I apologize. Any thoughts on the injunction and really the whole IP portfolio as it relates to other players that are entering the market?

We really don't discuss our litigation strategy in advance, Brooks, so we really don't have anything to add at this point.

Okay. Thanks, guys.

Imron Zafar, Jefferies.

Sorry to beat a dead horse on Germany, but can you talk about the comment on these reports that there was bulk selling and channel stuffing from CoreValves in the second quarter and to what extent that might get into future revenues in the third quarter?

Yes. It's a good point. We've also heard that there's been some stocking, maybe up to hundreds of valves into the German market. And we're still in the process of understanding what are the implications and the options associated with that. Just to give you a little bit more color, just to get the sense for what Germany looks like, probably a good 80% of the centers, actually more than 80% of the centers in Germany, already utilize Edwards as a product. So either exclusively or shared with CoreValve today.

Okay. And then in terms of the US market, the 20 centers that put off their training in the first quarter, how many of those were actually trained in the second quarter?

I believe that pretty much all of those have. There might be one or two or three that haven't, but for the most part those have all been trained. So the people that haven't been trained at this point are people that haven't already been qualified on transfemoral. We really have them going through a process where they do transfemoral first.

Okay. Thank you.

Bruce Nudell, Credit Suisse.

Mike, I'm going violate the rules and ask three. First, in terms of ramp and the United States, is it finding patients, or is it capacity and reimbursement? Second, given the validity hearing coming up and the disruption to clinicians, does it make sense to enforce an injunction only after you've heard the validity? And third is, could you just comment about what you believe the scale of mitral is and might we see something at TCT?

Sure. First, in the US, economics, capacity, patients, those are all somewhat related. So it's difficult to say exactly what it is, and it's quite account-specific and even region-specific. And you might imagine, as economics improve, then more energy goes into increasing capacity and finding patients. So there really is a relation, and we have redirected our teams to really help accounts with their economics. We think they have huge opportunities for improvements, and we think that that's a linchpin. At the same time, there is some pretty steady efforts to improve capacity, but it's quite account specific. And same thing with their ability to drive into their referral networks. They're all making some progress but some moving faster than others.

In terms of your second question, we believe that the patent is valid, and we're going move forward with all the steps toward injunction, independent of what's going to go on in terms of the judgment of validity. So we don't see that as a pivotal issue. Your final point on mitrals. As we pointed out, we continue to feel like it's likely that we're going to have our first-in-man mitral series. We're not going to talk about exactly when that is. There's a number of milestones for us still to clear before we get there, but we think it's likely. We're excited about it. It's a very large opportunity. But it's difficult to size the opportunity until you actually have the product manifestation. We do know that it's a very large group of patients and we think that a mitral replacement actually is one of those that gets after a substantial component of that.

And just for the last thought on that, is the --

Bruce, you had three already. We're moving on.

All right, thanks.

Rick Wise, Stifel Nicolaus.

Maybe Mike or Tom, could you help us think through the sequential flow on the [TAVI] US commercial [line away]? We've come at several different ways. And Mike, I heard you say it might fall slightly below the middle end of your guidance range, not surprisingly, but can -- you had a nice 2Q versus 1Q sequential increase by 12%. Given the expanded number of hospitals, can you be flat commercial sequentially into the third quarter? Because it just seems like you'd need a huge step up into the fourth quarter to get into the middle of the range, and that's where I'm going. Theoretically, why should the fourth quarter be so big beyond it not including a vacation period?

Well, I will just point out, that we're in a launch, and we're in a ramp, and we are adding centers. Just the first half of the year we added 50 centers. And the other centers are becoming more mature. And as they become more mature, they're building their capacity in the process of doing that and improving their operations. So it's very likely to expect that there is momentum in the back half, such as the back half would be bigger than the first. As we point out, there's been -- there was pretty profound seasonality that we experienced last third quarter so we're mindful of that. We really don't know what's going to happen this third quarter, and so we hesitate to provide estimates by quarter, but you have our full-year estimate, and we already have half the year under our belt so we have a pretty good sense of confidence that we are going to fall within the range.

Okay and maybe, Tom, for you, you'd mentioned you completed your share repurchase -- you said you ran through the authorization. Any perspective from you or Mike on whether you are going to re-up and whether the Board would consider reinitiating?

To be clear, what we finished was the prior authorization for $500 million.

Okay.

So we put about $150 million in the quarter. So we just received the new approval for a fresh $750 million. So obviously we like the stock where it's at right now in terms of value. So the intention is always -- in the past we've used these relatively quickly, in 18 to 24 months. So the thought was that, yes, we're interested in repurchase.

Thank you so much.

Danielle Antalffy, Leerink Swann.

Mike, I just wanted to follow up on the comment you made about hospitals not yet being optimized and you guys are working hard to help with that on reimbursement front, et cetera. What other areas can hospitals improve on? For example, is it possible for hospitals to reduce the number of resources required to do one of these procedures as they get more experience? Can you talk about that? Because it seems like obviously they're limited by the NCD but the Europeans are doing something that the US guys aren't doing yet and I'm just wondering what that is as far as number of procedures per day?

Yes, thanks, Danielle. There are a number of opportunities for improvement. Probably the most substantial are length of stay. This lengths of stay are still quite large, and the length of stay in the ICU is still quite long, and there already are a number of good examples of leading accounts that are able to get their length of stays in the four to five day range. And so being able -- for those that aren't there yet, to be able to have them see what best practices look like is great education for them, and we think that will have impact. The point you make about less resources during the procedure is also a very real one, and that has opportunity. There's also an opportunity in coding and classification. We had a chance to look back at the MEDPAR data and see real opportunities there for accounts to improve, and then as the new technology comes out, we think that also is an opportunity. Right now they're still dealing with a 24-French system, and as those systems get smaller, we think that it's going to mean that their economics improve and there's real opportunities associated with that.

And are you seeing progress already at centers here, or is this still too early days to tell and what's the timeline in getting these centers to a point where these structural issues aren't a factor any more?

Yes, it's just starting to improve. We don't think that there's very many centers that really are at optimum levels at this point. If you look back at the MEDPAR data, and again, this is the data that was concluded in October of '12, and it looked at the prior 12 months. So really the first 11 months of TAVR in the US. You even saw length of stay by quarter coming down lightly. A little bit. And so it already started from the first days of TAVR, and we think there will be a steady progression there. And one of the things that we have an opportunity to do is to help try and share some of those best practices.

All right. Thanks so much.

Michael Weinstein, JP Morgan.

Maybe just starting, Tom, just to clarify it, on the gross margin this quarter what was the FX contribution? You said $100 million to $150 million but I thought you were talking about the full first half.

Yes, I was giving -- $150 million is probably closer to Q1 and the $100 million closer to Q2.

Okay, that's helpful. And I just want to make sure I'm understanding your thought process relative to the back half of the year and maybe give you an opportunity as well. Remember, last year because of the seasonality and some of the reimbursement issues, the market really slowed from 2Q to 3Q and you ended up stubbing your toe on third-quarter numbers. With that in mind, do you want to just give us a little bit more thought on how we should think about particularly the TAVI performance from second quarter to third quarter to fourth quarter? Are you expecting a similar play out in 2013 as we saw in 2012?

It's hard to estimate. We look from time to time on what is already being estimated externally, and I'm not sure that the external estimates are necessarily that far off. But frankly we don't know what they are, and we hesitate to actually give specific US TAVI numbers by quarter.

And you are -- we should assume that the consignment headwind -- let me just make sure, go back to your original guidance on this. But should we assume that your net stocking headwind in the second half is basically about equivalent to what the benefit was in the first half of the year?

We find this difficult to accurately predict net stocking. You recall if you go back to the investor conference, we predicted for some time here that there was going to be this gradual change where it was going to be -- the net stocking would be a contributor to our growth early in 2013 and be -- start detracting from growth in the back half of '13, and then pretty much wash out by '14. We think it's basically playing out that way but we're not able to be accurate enough to call what that looks like in each individual quarter. There are too many factors there.

Okay. And then last question on SAPIEN XT. The docs seem to be anticipating approval later this year but you guys keep talking about not until mid-2014. Can you maybe just share with us why you think it will take that long? And second, if does it come early, later this year, will you need to write down SAPIEN inventory?

Sure. We're real believers in XT. It's been in Europe since 2010. We think there's compelling evidence for why it should be in the US. And you can believe that we're making all the arguments that we know how to make with the FDA to say that we should accelerate that. But just to be realistic, we made our submission of Cohort B in late April of this year. We're simply using the math to say add 365 days to that and there's your approval -- about that time in 2014, knowing that PMAs typically take longer than that. And we haven't necessarily been right when we've had our one year out there in the past. So that's what's really driving our estimate. So we're hoping that it will be better than that but I don't think it should be something that anybody counts on.

And based on our experience with XT introduction in Europe, we did take a write-down of inventory because we thought the product was that much better than the SAPIEN that it made sense, and overall that was the right thing to do. And I also wouldn't know anywhere else to go with the SAPIEN valve since the US will be our last approval. So would likely if it came earlier, depending on how early, would likely result in some inventory write-off.

Kristen Stewart, Deutsche Bank.

Just following up on SAPIEN XT, Mike, what is your intended label indication that you're seeking for that? Are you just going according to what the Cohort B was in the inoperable patient population, or will you also seek a high-risk indication? Because I'm just curious on how that plays out with the CMS reimbursement that specifies an approved indication for an approved device if you could potentially be in the situation with SAPIEN XT only for inoperables and then SAPIEN for high-risk?

Yes, it's good question, Kristen. The trial very clearly was for inoperable patients. So the PARTNER II B trial was for inoperable, and that's the one that we're counting on. It would be nice if we would get a broader indication than that, but what we really aren't anticipating that that's going to be the case. We'd hope that FDA would give some consideration to have the same approval that already exists for SAPIEN but, again, that's one that has to be discussed.

Okay and given your understanding of CMS and the reimbursement with the NCD, would that be correct in saying that the products for Medicare would then only be reimbursable SAPIEN XT in inoperables?

Yes, that's -- our interpretation of the NCD is it's written in such a way that reimbursement occurs as there is an approved label indication. So if it was outside label, it would it not be approved unless there was a protocol in which it was being studied under.

So you could have SAPIEN for high-risk, and then SAPIEN XT for only inoperables until you get the expanded with SAPIEN 2, or PARTNER II data?

Yes, that's possible.

Okay. And then just lastly, on the enrollment in PARTNER II, can you just maybe go back and discuss why it is taking a little bit longer? You mentioned some of the nested registries. Is that just simply capacity at some of the centers, I would imagine? Or just some color on that?

Yes, we think it is. We mentioned both the nested registries, and also competitive trials. And so we believe at some point that that's consumed some capacity, and probably slowed us down a couple of months here. In addition to the transcatheter trials that are going on, Edwards' own trials probably compete. We would imagine that some of the patients that are going into the INTUITY and GLX trials are also competing. So when you add those together with our registries and [SUR] TAVI and the continued access in CoreValve, you end up with a fair amount of competition for these kind of patients.

Thank you.

Amit Bhalla, Citigroup.

Mike, question on Europe TAVI. You mentioned in the prepared comments that Europe performed better than expected for that 11% unit growth. Was that all due to Southern Europe? Are there other dynamics that picked up or changed in Europe that mad you make that comment?

Yes, thanks. We were pleased with what's going on in Europe. We wonder and we watch obviously the overall economy in Europe, and we think the fact that the economy is picking up certainly helped but we thought the single largest factor is that Southern Europe turned from being a drag on growth to being a contributor again. For example, we saw a particular pick-up in Spain. So we really didn't see pricing impact in Europe quite as much this quarter as we've seen in the past. Outcomes continue to be strong. So it turned out to be a pretty solid quarter. And when we look at it, it was pretty broad-based. We saw it in the big, well-reimbursed countries. We mentioned already Southern Europe. We even see it in some of the ascension countries of Eastern Europe. So it was pretty broad-based.

And then Mike, as a follow-up to the last question, if sites in the US, the sites base is competing with trials and nested registry, how do you take that into account for the underlying commercial demand that you're expecting for TAVI in the back half of the year? How is it factored in?

Yes. It's a good question. These are sick patients out there that really, really desperately need to be treated. And some of these patients are treated in clinical trials and other ones qualify for commercial. But the combined number gives you a good sense for the underlying demand and the people that are making it through the system and really are expecting the procedure to be done. So it probably gives -- at least gives us some insight as to the underlying demand out there.

Thanks, Mike.

Glenn Novarro, RBC Capital Markets.

Two questions. First, Mike, the Spenser patent in Europe, you alluded to that these patents may also be enforced in other countries. So can you walk us through the process and the timing of Spenser being enforced in France and the UK, as an example?

Yes. So the Spenser patent is indeed in place, and it's got a good long life on it, and it's true in these other countries. We really -- a matter of fact, it's in over 20 countries. We just don't comment on future litigation. We've got a lot of decisions in front of us, Glenn, in terms of what we do and we still haven't determined that at this point.

Would you be able to say, at least, would Spenser and the decisions in other countries -- is that a 2014 event that we should expect at some point?

Yes. I'd really not want to commit to any specifics at this point, Glenn.

Okay and then just a real quick one. Number of selling days, or any extra selling days in the quarter?

The only place we saw extra days was in Europe. Both US and Japan were flat, but it was enough for maybe 1% of growth in total overall sales.

Yes so if you compare it to the first quarter, the first quarter actually probably hurt us, maybe 1% or 2%, 2% to 3% where we got maybe 1% help in--

That's likely the way you could expect it for the remainder of the year, Glenn, is that each quarter we'll probably get some of what we gave up in the first quarter so it's all evens out.

Okay. So 1 or 2 points in the back end of the year?

right.

Okay. Thank you.

Spencer Nam, Janney.

Just a couple of quick questions. The first one is, so with Germany, the competitive landscape potentially changing in the next few months, I was curious if you guys expect any pricing changes or pressure, if you will, particularly from the entrants potentially lowering the price in the market to grab some of the available share?

Yes, in general, Spencer, we don't anticipate changing our pricing policies. Obviously, we're going work very closely with customers to reach mutual agreement, but we're pretty consistent in terms of the way we do that and we do give discounts based on volume, but that's pretty much it.

And you don't expect your competitors to be coming at you with discounted pricing in Germany, for example?

You know what, we wouldn't be surprised in general if competitors comes in at lower pricing than we do. We find that's common. We don't think it is going to be dramatically lower but we think it will be lower.

Okay. And then just quick follow-up. In US, I was curious whether you guys have made a concerted effort to reach out to the CoreValve sites for training and what kind of reception/experience you've had so far working with those centers?

Sure. We have started to reach out to people and actually overall the reception has been very gratifying. There aren't really -- I tried to indicate that earlier, that over 80% of the centers already have experience with Edwards' products. Oh, I'm sorry, did I misunderstand? I thought you were talking about Germany, or are you talking about the US?

I'm talking about US actually?

Okay. Then I misunderstood the question. I'm sorry. Could you repeat it again Spencer?

Yes. So just in the US, while the trial initiated, the CoreValve initiated, those centers were excluded from access to SAPIEN. I'm curious whether you, over the last several months, you guys had approached these centers, what kind of reception you received?

Okay, yes, I understand now. Yes, thanks. A matter of fact, we have talked to those center, and we probably have trained most of the CoreValve sites at this point, those folks that are involved in implanting the CoreValve in the clinical, and I would say most of them have some experience in implanting the SAPIEN valve and they're doing it today.

Great, thanks.

Bob Hopkins, Bank of America.

Mike so just a question on the US launch and the trajectory of the US launch, and looking at numbers in Q2 versus what you were able to do in Q1. And obviously, you guys kindly break out commercial versus stocking but really what most of us are looking for is trends in implants. And so I know in commercial revenues you had a 12% or 13% sequential uptick but can you give us a sense in terms of what the implant rate was or the increase in implants in Q2 versus Q1?

Yes. We feel overall that reorders tracks implants pretty good. There's -- when you -- I'm searching to some extent exactly how to do that. Are you meaning by site, or maybe you can--?

I just mean the cleanest way to -- I would guess the cleanest way to think about your US launch is how many SAPIENs did you implant, how many were implanted in Q1 versus implanted in Q2?

I would say take out net stocking and the combination of clinical plus commercial is pretty close to implants. That's probably the cleanest way to look at it. Our pricing is very consistent. The pricing is slightly lower on clinical units but you should think of something in the $30,000 plus range for the commercial units, and they're around $25,000 for the clinical units and you can get very close to implants.

And then on mitral, I appreciate all that you've had to say here, but I was just wondering if you could just give a little more color on not necessarily when, because you've outlined that but exactly what we will hear -- how many first-in-man implants will there be and is there some follow-up that you'll be giving? Just a little more color on exactly what we'll be hearing from you when we do ultimately hear it?

Yes, I hesitate to be able to predict that, Bob. A lot of this is just going to depend on how it goes. So we're going go out there, and we're going to start implants, and if things go great, then maybe there's more, and if we learn something that causes us to go slower, then we'll slow down. So it will depend on what we learn. We're going out with the idea that first-in-man is not a single implant but a series. And that's the way we look at it and we're just going to have to play these out one at a time.

Okay, thanks very much.

David Lewis, Morgan Stanley.

Tom, maybe just a quick question following up on Mike's comments about Germany where 80% of the CoreValve centers have some [applicative] nature in terms of the sales and service infrastructure. So, I wondered, to the extent that revenue begins to flow potentially in the fourth quarter, how do you think about the contribution margins on that business? Do you have the reps to service those accounts? Do you have to add more reps? And to the extent that revenue seems to have dropped down out of the high contribution margin, do you let that drop through or do you reinvest that money? And I have a quick follow-up?

Wow. All right. We're thinking of it more as -- it's a big advantage, the fact that they're trained. So what we would have normally anticipated is where there's going to be a lag due to training and so forth. So that doesn't seem to be the issue so we don't need -- it doesn't seem to require extra resources there. The accounts are already covered by existing reps, so maybe -- but I don't think initially we're going to see anything. Maybe we'll tell you a little more as we get into it in '14. So initially I would say not a big incremental spending number there. That goes with that. If that's what you were asking.

Perfect. And then, Mike, just to come back to TVT for a second. There are -- length of stay were the fancy three letters of that conference, and you did mention that length of stay has come down in the last 12 months, maybe 9.5 days or 7.5 days. What's interesting is you have certain centers seem to be breaking through a certain length of stay and seem to be achieving a higher profitability. Do you have a sense working with centers what you think that breakthrough number is on length of stay and any sense of how long it could take for the US to get to that number?

Yes, in our experience, it's all about their focus. If they decide that they're really going to get focused on doing it and they have a tight team, they have an opportunity to really drive it down. We're finding that there are more -- there are several centers that seem to be able to get into the four to five day range today. And so we look at that and say that that's one that's been replicated in multiple accounts, and the economics certainly improve substantially when you get into that range.

And, Mike, those four to five length of stay centers, have you seen an increase in utilization at those centers once they break through, let's say five days?

In general, those tend to be successful TAVR sites, and because they're -- the same people that are investing in driving down their length of stay, they're also investing in driving their referral networks, and they tend to have successful programs. And we're optimistic. There's some things going on outside the US to really evaluate how good this can get. And again, we think the opportunity for improvement is substantial with the existing systems, let alone what you get when you get into next-generation products.

Great. Thank you very much.

Thank you. That is all the time we have for questions at this time. I would like to turn the floor back over to Mr. Mussallem for closing comments.

Okay, thanks for your continued interest in Edwards. Tom and David and I welcome any additional questions by telephone. Back to you, David.

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