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Edwards Lifesciences Corporation (NYSE:EW)

Q4 2008 Earnings Call

February 03, 2009 05:00 pm ET

Executives

David K. Erickson – Vice President, Investor Relations.

Michael A. Mussallem – Chairman and Chief Executive Officer

Thomas M. Abate – Corporate Vice President, Chief Financial Officer, and Treasurer

Analysts

Jason Mills – Canaccord Adams

Kristen Stewart – Credit Suisse

Timothy Lee – Piper Jaffray.

Larry Biegelsen – Wachovia Securities

David Lewis – Morgan Stanley

Michael Weinstein – JP Morgan

Amit Bail la – Citigroup

Josh Zable – Natexis Bleichroeder

Suraj Kalia – Sanders Morris Harris Group Increases

Kristen Stewart – Credit Suisse

Operator

Greeting ladies and gentlemen and welcome to the Edwards Lifesciences Fourth Quarter 2008 Earnings Conference Call. At this time, all participants are in a listen-only-mode. A question and answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, Mr. David Erickson, Vice President, Investor Relations. Thank you, Mr. Erickson, you may begin.

David K. Erickson

Welcome and thank you for joining us today. Just after the close of regular trading, we released our fourth quarter 2008 financial results. During our call today, we'll focus our prepared remarks on information that complements the material included in the press release and 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 and Treasurer.

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, sales, gross profit margin, net income, earnings per share, and free cash flow goals for 2009. The regulatory approvals and sales of Heart Valve Therapy products including Magna Ease and Magna Mitral Ease, the competitive dynamics of the Heart Valve market, the timing, progress, and results of clinical studies including the PARTNER trial, the continued adoption in Europe, and expected 2009 sales of the Edwards SAPIEN valve. The expected sales and enhancements for the FloTrac system and the development of continuous blood glucose monitoring technology.

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 actual results to materially differ from those in the forward-looking statements may be found in our press release, our annual report on Form 10-K for the year ended December 31, 2007, and our other SEC filings which are available on our website at edwards.com.

With that, I'll turn the call to Mike Mussallem. Mike?

Michael A. Mussallem

Thank you, David. 2008 was another successful year for Edward’s on several fronts. We achieved substantial earnings growth, successfully introduced the SAPIEN, transcatheter heart valve in Europe and continued to make substantial investments in our future. This is our best year yet for top line growth with total underlying sales for 2008 increasing 12%.

In Heart Valve Therapy, we introduced our Magna Mitral Valve in the U.S. and our Magna Aortic Valve in Japan. During our first year of Transcatheter Heart Valve sales in Europe, we achieved $53 million, which was significantly above our initial estimate of greater than $20 million. We continue to make great progress on our U.S. clinical trial and began a CE Mark trial in Europe for SAPIEN XT, our next generation Transcatheter Heart Valve.

At the same time, FloTrac continues to generate solid growth within Critical Care. In addition, we unveiled our continuous glucose monitoring plans, which represent a potential new growth platform, and lastly, we successfully integrated the CardioVations MIS product line. Just to recap our 2008 financial goals, excluding special items, our total sales reached $1.24 billion, exceeding the top of our range of 1.21 billion. We improved our gross profit margin by 90 basis points, which was just below our 100 to 150 basis point goal. Our net income growth of 16.2% exceeded our 11 to 14% range and free cash flow for the year of $166 million achieved the top-end of our goal.

Now, turning to fourth quarter results, on a reported basis, total sales grew 5.7% or $310 million and grew 13.2% on an underlying basis. Overall, we were able to achieve excellent sales results and we are fortunate to see a little impact in the fourth quarter from the economic downturn

Now I’ll shift to a more detailed review of our product line sales and progress on new products and then Tom will discuss the financial results. For the fourth quarter, reported sales for Heart Valve Therapy were a $150 million, an increase of 13.9%, which is reduced by $4 million of foreign exchange. Additionally, as we signaled last December at the Investor Conference our sales results were also reduced by $5 million by the retrieval of our IMR and Mitral Repair products from customers. I will discuss the product retrieval in more detail in a few moments.

On an underlying basis, growth was 21% for the quarter lead by strong performance from all regions. Transcatheter Heart Valve sales continue to expand in the quarter exceeding $18 million and as previously untreated patients now have more options for therapy. For the full year 2008, we reported sales for Heart Valve Therapy, which includes our Transcatheter Heart Valve sales, were $607 million, an increase of 17.9%. On an underlying basis, growth was 16.2% for the year, which is well above the 8 to 10% growth rate projected before the start of 2008.

Turning to Surgical Heart Valves. In the U.S., we gained share this quarter and grew approximately 6% even with two recent competitive product launches. Outside the U.S. our Surgical Heart Valve business continue to achieve double-digit underlying sales growth driven by growing adoption of our Magna Heart Valve platform. The fourth quarter was our first quarter full quarter of Magna Mitral sales in the U.S. Clinician experience and feedback has been very positive and although it’s contribution to growth this quarter was modest, we look forward to driving the future share gains

The valve is uniquely designed for the mitral position, combining clinically superior performance with ease-of-use benefits. In Japan, our Magna Aortic valve, which was launched in June continue to drive growth during the fourth quarter.

Turning to the status of our Magna Ease Aortic valve, we responded to the FDA’s questions and are waiting for the agency’s response. We continue to anticipate a U.S. launch in the third quarter of 2009 pending regulatory approval.

In addition, we expect to launch an enhancement to our Magna Mitral Valve called Magna Mitral Ease in the second half of 2009 in both the U.S. and Europe. The unique design of the Magna Mitral Ease will continue to improve its ease of implantation, which is beneficial for both traditional and MIS procedures. We believe these clinical advantages will make the Magna the leading Mitral valve.

Now turning to repair, growth in the quarter was in the low single-digits on an underlying basis excluding the impact of the product retrieval. As explained in our Investor Conference in December, we voluntarily suspended shipments and retrieved our IMR and Myxo repair products from U.S. customers as we await FDA clearance of our 510-K submissions.

Following FDA clearance, we expect to return the products to customers. For perspective, these specialty products together represented less then 10% of our 2008 U.S. repair sales. As announced at STS last week, we received clearance for our Physio II ring and are launching it in the U.S and Europe in the first quarter of this year. This new ring represents the next generation repair products for degenerative mitral valve disease, which is the largest segment in repair and where we’ve experienced the most competitive activity

To summarize, for full year 2008 our Surgical Heart Valve franchise achieved 7% underlying growth above the 4 to 6% range that we had initially estimated. This was driven by our consistently improving performance in the U.S. and continued double-digit sales growth outside the U.S.

We’ve been aggressively investing in our Heart Valve Therapy pipeline, and 2009 will be an unprecedented year of planned introductions across the aortic, mitral, and valve repair categories.

Now, turning to Transcatheter Heart Valve sales. We had a strong finish to the year achieving fourth quarter sales of $18.5 million continued clinician enthusiasm, combined with additional active centers drove growth in procedures. In Europe, we implanted approximately 650 valves during the fourth quarter and our selling prices remains stable. While new centers do make stocking purchases, our sales continue to be driven by implants with approximately 85% of the units sold being implanted in the quarter.

We expanded from about 70 centers performing cases in the third quarter, to over a 100 centers performing cases in the fourth quarter. We will continue to train centers throughout 2009. I’m very pleased to report that in our commercial sales the combined Transapical and Transfemoral acute procedural success rate remained high at about 95%. Global demand is strong and we recently expanded to centers in Asia-Pacific and the Middle East.

For 2009, our goal is to double the number of Transcatheter Heart Valve procedures compared to 2008, based on our momentum, we feel confident in meeting our $75 to $95 million expectation for global Transcatheter Heart Valve sales for the full year.

Regarding reimbursements, we continue to expect formal reimbursement to be established in most of the major European countries between 2009 and 2011 with the first country coming online in 2009. In the meantime, the same dynamics surrounding funding continue to exist. We remain pleased that hospitals are currently able to support these procedures and while not assured, we expect this to continue as we make progress towards securing formal reimbursement.

At last week’s STS Cardiac Surgeon Meeting, enthusiasm for Transcatheter technology remained strong. There were several presentations on the Transapical procedure that showcased the benefits for high-risk patients and the advancements in that procedure.

Turning to the U.S. PARTNER trial. To-date, we’ve enrolled 700 patients in the PARTNER trial. We continue to expect to complete enrollment in Cohort B, before the end of the first quarter. In addition, we still expect enrollment for Cohort A to be completed in August of this year. No other competitor has yet initiated a U.S. clinical trial.

We are excited about next generation Transcatheter Heart Valve called the Edwards SAPIEN XT. In December, we completed an important milestone, the first three implants were performed in our CE mark trial. We expect to complete enrollment in the second quarter of 2009 and gain a U.S. IDE approval to begin a clinical trial before year-end. Our safety XT valve is particularly well suited for the Transfemoral procedures offering a smaller profile and further leveraging our expertise in heart valves.

In addition, we recently received CE Mark approval for our new RetroFlex 3 Transfemoral delivery system, which simplifies the delivery of the SAPIEN Valve. We expect to roll this out across commercial sites this year. We’re also continuing to make progress on our progress on our 30 patient U.S. feasibility trial of the SAPIEN Valve in the pulmonic position. We expect to complete enrollment this April and then transition to a larger humanitarian device exemption trial.

As we announced last month, while the U.K. court upheld the validity of our Andersen patent for Transcatheter Valve Technology it found that a competitor’s specific product design did not infringe. We are filing an appeal on this aspect of the case. Separately, we have a THV patent Infringement trial in Germany later this quarter brought against us by Cook. And we have the U.S. CoreValve trial scheduled for early 2010.

We believe Edwards has the strongest Transcatheter Valve patent portfolio and are investing to broaden its reach. We're committed to leading the Transcatheter Valve space and enforcing our IP is only one element of our broad leadership strategy.

Now, turning to our Critical Care business, for the fourth quarter, Critical Care reported $118 million of sales up 4.6%, which included $1.8 million negative impact from foreign exchange. Underlying sales growth was 6.5% against the substantial prior year comparison. Sales of new products lead by FloTrac continue to be the biggest growth driver this quarter. In addition, sales of our pressure monitoring and hemofiltration products also contributed to grow.

FloTrac continues to be a very strong performer and we expected to continue to expand the market. To-date FloTrac’s success has been primarily focused on expanding our monitoring presence in the high risks surgical environment. In 2009, we’ll strengthen FloTrac’s applicability in the medical ICU with two new product launches. We anticipate launching an algorithm enhancement in the second quarter and in the third quarter we plan to launch a substantial upgrade for FloTrac based on the intellectual property which we purchased last year.

Also in the third quarter, we anticipate launching a new hardware platform that will result in a simpler more intuitive informational display and ultimately consolidate all our parameters into one platform. In our hemofiltration segment, as we mentioned in December, our solution supplier struggle to meet demand which lowered our growth rate in the fourth quarter. We expect this shortfall continue in the first quarter and anticipate improvement beginning in the second quarter.

During the quarter, we announced a partnership with DexCom to develop products for hospital based continuous blood glucose monitoring. There is a substantial clinical interest in tight glycemic control for improving outcomes for critical ill patients. We intend to leverage our global sales channel and extensive experience with catheter based monitoring to provide the best in-hospital continuos glucose center.

In 2009, we plan to complete clinical studies to support regulatory approval and hopefully introduce our first generation product in Europe before the end of the year. Tight glycemic control represents an exciting new opportunity to accelerate our critical care growth rate.

Turning to cardiac surgery systems reported sales for the quarter increased 52% to $23 million primarily as a result of the CardioVations MIS acquisition. For full year 2008 MIS growth was approximately 25% on an underlying basis as we continue to increase our penetration into existing accounts and introduce MIS therapy in the new accounts.

Our base Cannula products were up about 4% on an underlying basis. We are committed to leading the way in developing MIS tools and implants that enable surgeons to meet the demand for less than base with valve therapy. In 2009, we will continue to invest in professional eduction, which supports MIS procedures.

In the U.S., we unveiled a new training program, at the STS designed to provide training and customer support to our surgeons and our OR teams. Our reported sales of vascular products were $19 million this quarter sales of our market leading Fogarty based vascular products remained relatively constant at $14 million versus the prior year.

And now I will the call over to Tom.

Thomas M. Abate

Thanks Mike. In addition to the strong underlying sales performance that Mike reported, our fourth quarter results were further enhanced by a 210 basis point improvement in our gross profit margin. We are very pleased to see this significant upward movement in our reported rate. In the quarter, we were able to further leverage the combination of sales growth and the gross profit improvement to lift our non-GAAP diluted EPS growth to more than 39%.

Additionally, we are very pleased to achieve a full year non-GAAP diluted EPS growth of approximately 20%. Before I go through the P&L I would like to spend a minute on the accounting treatment for the retrieval of our repair products. Our GAAP results include an approximate $5 million reductions to sales, gross profit and pretax income. This estimate represents the sales value of all products impacted by our action, plus the cost of executing the retrieval. Upon receipt of FDA’s clearance, the product will be returned to customers and a sale will be recognized in the future period.

To-date we have contacted approximately 90% of the customers affected by the retrieval and the vast majority have simply asked us to return the product when we received FDA clearance. So far, we have only been ask to issue credits totalling $500,000

On our non-GAAP results reflect only these credits and not the full $5 million estimates in our GAAP results. Going forward, when we return these products to customers we will not record a sale in our non-GAAP results. We believe this offers the clearnest comparison of sales and earnings between periods.

Moving forward we recorded diluted EPS for the fourth quarter of $0.66 compared to $0.27 last year. Excluding special items and the impact of the product retrieval our first quarter non-GAAP EPS was $0.78 compared to $0.56 last year. The 39% increase as I mentioned in our openings remarks. From the quarter, our gross profit margin of 68.1% compares to the 66% we reported in the same period of last year. This quarter’s improvement was due to an equal contribution from product mix and foreign exchange.

Over the last several quarter’s we have seen our product mix steadily strengthen as we successfully launched new technologies while divesting more commodity-based product. In the fourth quarter as the downward pressure from FX rates subsided the benefit of our product mix became more visible. This is a great starting point for 2009 where we continue to expect full year gross profit margin to be between 68 to 70% of sales.

For the quarter SG&A expenses were $120.2 million, an increase of $5.7 million. This dollar increase was driven by spending for the SAPIEN valve launch in Europe and compensation expenses related to our strong sales performance partially offset by foreign exchange. For the full year 2009, we continue to expect SG&A to be between 37% and 39% of sales with a declining trend throughout the year.

R&D investments in the quarter were $35.8 million or a 11.6% of sales compared to $33.5 million last year. This increase is primarily the result of additional investment in the Transcatheter Heart Valve program partially offset by the discontinuation of peripheral stents. For full year 2009, we continue to expect R&D as a percentage of sales to be between 13% and 13.5% as we continue investing in the development of SAPIEN XT and our glucose program.

As we previously discussed in our Investor conference we expect a number of special items this quarter. The items recorded on the special charges line totaled a net $15.8 million charge. The components will primarily transaction related event. A $23 million gain related to the receipt of a LifeStent milestone payment, a $13 million charge for the purchase of glucose technology right, a $13 million charge for the purchase of Critical Care monitoring technology, a $5 million charge for the purchase of structural heart intellectual property, and in $8 million charge related to previously capitalized patent enforcement costs this amount primarily represents the expenses related to our AAA litigation that began back in 2003. Since we no longer expect future revenue from AAA products we are expensing all related legal fee.

Additionally, during the quarter we settled prior year tax audit resulting in a $10 million income tax benefit and initiated the previously discussed repair product retrieval. The impact of these items resulted in a reduction to net income of $7.1 million, a reconciliation table accompanies the press release. Other expense of $4.4 million for the quarter consisted primarily of balance sheet related foreign exchange losses resulting from the significant currency movement and a loss associated with our investment in an enhanced money market fund.

For the fourth quarter primarily as a result of our special items we actually recorded a $,4.1 million tax benefit compared to a $3.8 million tax expense a year ago. Excluding the impact of our special items the effective tax rate was 17.1% for the quarter. This quarter’s rate benefitted from the renewal of the federal R&D tax credit and a full year adjustment to our country profit mix. Including these adjustments the underlying rate for the full year is 22.6%. For 2009, we continue to expect our rate to be approximately 24%.

When compared to the same quarter last year, FX rate negatively impacted fourth quarter reported sales by $6 million but resulted in a slight benefit on the bottom line. At current foreign exchange rate we anticipate only a $40 to $50 million negatively impact on 2009 sales, an improvement since December’s guidance.

Free cash flow generated during the quarter was $76 million, which we defined at cash flow from operating activities of $81 million minus CapEx of 18 million plus a $13 million payment to favorably settle certain prior year tax audits. In the first quarter, we plan to discontinue securitizing our Japan accounts receivable

Similar, to the discontinuation of our U.S. program in the third quarter of 2008, the Japan program no longer offers us attractive financing alternatives. Although, terminating the Japan program will reduce 2009’s free cash flow by approximately $45 million it does not impact our ability to generate future cash. For 2009, we continue to expect free cash flow to be $160 to $170 million excluding the impact of terminating our Japan securitization program.

During the fourth quarter, we repurchased 395,000 shares of common stock at $21 million. For the full year, we repurchased a total of $5.8 million shares for a $306 million. At the same time, we ended the quarter with total net cash position of $43 million, total debt at December 31 of $176 million was less than our cash on hand of $219 million. Including receivables in our securitization program day sales outstanding for the quarter was down to 68 days. Inventories at the end of the quarter were $152 million.

Turning to our 2009 sales guidance, we are projecting no change in the underlying strength of our sales, they remain the same as we presented in December. As a result of the improvement in foreign exchange rates since our Investor conference we are now projecting total sales to be at the upper end of our full year guidance of $1.24 to $1.03 billion. For Heart Valve Therapy, we expect sales at the upper end of $640 to $670 million representing a 14% to 16% underlying growth rate.

In Critical Care, we expect sales at the upper end of the $455 to $475 million range, a 6 to 9% underlying rate. In Cardiac Surgery Systems, we expect $90 millon to $100 million, a 9 to 11% underlying growth rate and in Vascular we expect 50 to $60 million.

For the first quarter of 2009, we project total sales of $300 million to $320 million and finally we estimate that first quarter diluted EPS will be between $0.66 and $0.70 for full year 2009 we continue to estimate that diluted EPS will be between $2.93 and $2.03.

And with that I will turn it back over to Mike.

Michael A. Mussallem

Thanks, Tom. Overall we expect to carry our 2008 momentum into 2009 and deliver a strong results while making substantial investments in our future. In Heart Valve Therapy, we anticipate launching two new valves in the U.S. and doubling our SAPIEN Transcatheter Heart Valve procedures. In critical care, we have planned for additional extensions to our FloTrac systems and hope to introduce a continuous glucose monitoring systems in Europe by the end of the year.

And lastly in 2009, we anticipate completing enrollment in our U.S. PARTNER trial and gaining the U.S. IDE for the approval of SAPIEN XT. We are going to remaining focused on achieving our previously stated financial goals which include generating total sales between $1.24 and $1.3 billion increasing our gross profit margin between 68 and 70%, achieving diluted EPS growth of 15 to 19% and generating free cash flow of $160 million to $170 million.

And with that I will turn the call back over to David.

David K. Erickson

In order to allow everyone a chance to participate we ask that you limit the number of questions that you ask. If you have additional questions please re-enter the queue and we'll answer as many as we can during the remainder of the call. Operator we're ready to take the questions, please to allow everyone a chance to participate we ask that you limit the number of questions that you ask. If you have additional questions please re-enter the queue and we'll answer as many as we can during the remainder of the call. Operator we're ready to take the questions, please.

Question & Answer Session

Operator

Thank you [Operator Instructions] Our first question is coming from Jason Mills with Canaccord Adams. Please state your question.

Jason Mills – Canaccord Adams

Thanks guys. Congratulations on a good quarter. My first question Mike is out of Europe and is specific to the SAPIEN franchise. You mentioned, reiterated plans to double procedures year-over-year. I’m wondering if you could help us out a little bit with same-store sales growth implicit in this expectation in an addition to that, your new center expansion update. I am really trying to get - I think for the last few quarters you’ve mentioned pretty strong growth and procedures or implant as a percentage of the total sales that you’ve reported and I’m wondering if we sort of look at the expectations you’ve given for 2009 if we are seeing much in the way of center expansion implicit in your guidance? Thanks Mike.

Michael A. Mussallem

Yeah, thanks Jason, yeah again, maybe the most important thing that we’re saying as we’ve set a goal to actually double procedures next year. Some of them will come from new centers. We expect to add new centers, I don’t know exactly what that will workout to be. We said we have approximately 100 centers in planning in the fourth quarter, maybe we’ll add somewhere in the 50 to 100 range again next year. But we certainly expect there to be growth within the existing centers as well and that’s sort of net to a doubling of procedures. Does that get at your question Jason?

Jason Mills – Canaccord Adams

It’s helps. I know that there were more sort of “stocking” probably in the first quarter and half of launch in earlier in 2008, but I’m wondering for the full year percentage of implants relative to sales is it’s sort of 65%, 70% in 2008. Can you give us some feel for the number in 2008 so that we can sort of extrapolate forward the mix between center revenue and sort of “same-store” sales revenue in 2009?

Michael A. Mussallem

Yeah, just for clarification, our practice has not changed. It was just more obvious in the first quarter when we were adding centers, before we had a run rate going, because where we are both Transapical and Transfemoral and we have two sizes on each people were typically putting the complete compliment on the shelf

Jason Mills – Canaccord Adams

Okay.

Michael A. Mussallem

As they got started and that was one of the requirements. I’d say full year probably worked out the procedures equals about 70% of sales, maybe a little higher than that for full year and we’d expect that to continue to decline as we have a more mature business.

Jason Mills – Canaccord Adams

Okay, so just before I get, one question for Tom before I move on there. If I kind of take that number, then we are looking at sort of $35 million in implants sales, $35 million, $40 million doubling that assuming ASP’s are stable you already getting to the lower end of your range before you add sort of new centers and stock into those centers, is that, am I thinking about that right?

Thomas M. Abate

You lost me with the reference to $35 to $40 million, what we are referring to that?

Jason Mills – Canaccord Adams

Well if I take sort of 70% or something like that implants relative to $53 million you reported?

Thomas M. Abate

I think that there is number of factors when you convert everything into dollars, not least of which is Jason, primarily the sales are coming out of Europe, and are going to be a affected by the euro or so.

Jason Mills – Canaccord Adams

Okay.

Thomas M. Abate

So, at the end of the year, the rates have changed dramatically. So that you need to factor that in but, we feel good about the dollar range that we gave and I think that’s probably the best way to think about it at a high level.

Jason Mills with Canaccord Adams

Great. And just one question for you and I’ll get back in queue. With respect to the R&D, you’re obviously expecting to ramp the spending in 2009 largely driven by the CGMS project. I’m wondering if you see any slippage in product development here, not to say that there will be but certainly that is an area that that will require a lot of development and perhaps projects could be pushed out. I’m wondering what is sort of implicit in your guidance for that if you see some slippage in product development on that side, I guess I’m asking would that drop down into the bottom line and perhaps be accretive if there again if some slippage here and there which I don’t think would be out of the realm of possibility given that it is somewhat of a new area?

Michael A. Mussallem

I think that Jason. It’s Mike. I think we have fully accounted for what we think spending is going to be in 2009. So the spending is all in there and when you take a look at products like XT and glucose that really not in terms of much in the way sales or gross profit. So it’s not really a downside exposure, if that’s what you are getting at during 2009, of course it would affect future periods. But we’re expecting to execute at a high level.

Jason Mills with Canaccord Adams

I’m actually asking perhaps if there could be some accretion to the bottom line given that..

Michael A. Mussallem

R&D savings you’re referring potential R&D savings?

Jason Mills with Canaccord Adams

That’s right. Not spending as much as you factored in.

Michael A. Mussallem

It’s not in our current calculation Jason I think that would be being, I don’t know optimistic whether you’d call it optimistic or not, but no that’s not really in the plans.

Jason Mills – Canaccord Adams

Okay, thanks guys.

Operator

Our next question is coming from Kristen Stewart with Credit Suisse. Please state your question.

Kristen Stewart – Credit Suisse

Hi thanks for taking the call or questions. On Magna Mitral did you give a number for what that contributed in the quarter or what FloTrac contributed in the quarter as well from a sales dollars perspective?

Michael A. Mussallem

Yeah we didn’t. Magna Mitral, I think we sold something in the neighborhood of $5 million in the quarter, but the bulk of that Kristen would have been replacement of our existing products with an upgrade to Magna Mitral. So incrementally it probably only added a little over a $1 million in the quarter. So it wasn’t a big contributor, certainly a contributor in the U.S. and in the mitral position but in aggregate not that much. The FloTrac I think the question was how much for the quarter?

Kristen Stewart – Credit Suisse

Yeah.

Michael A. Mussallem

Or for the year?

Kristen Stewart – Credit Suisse

For the quarter.

Michael A. Mussallem

Okay, well. I think for the quarter it was a little north of $15 million. We did more than $50 million in the year and it was an increasing progression.

Kristen Stewart – Credit Suisse

And then just two questions or housekeeping. The other expense item jumped up about $4 million, what was in that and then just reconciling back to the gross margin are you adding back 4.7 into sales to get to the (inaudible) like how are you what's the mechanic side?

Michael A. Mussallem

Are you referring to the product retrieval on the second part, Kristen?

Kristen Stewart – Credit Suisse

Yes to get to reconcile back to the adjusted number. I assume you are adding something to the shelf base and then something in the hospital leverage?

Michael A. Mussallem

Okay, let me start with other expense, but we had two large items. One was a we referred to it back in Q3 when we give guidance that we’re going to see on that line a negative impact from FX. But that was slightly greater than half of the amount and then there was a $2 million amount, which occurred towards the latter half of the quarter that related to the valuation of one of our money market, the enhanced money markets by Colombia Strategic Fund. So we have to take it down. Now, originally we are down to total balancing that fund or something less than a 11 million and probably get 3 million of charge that we took this year. So, the net balance on the balance sheet is down to about $8 million as we are trying to get out of that fund. Does that answer the other expense question?

Kristen Stewart – Credit Suisse

Yeah, that’s perfect and then just the gross margin.

Michael A. Mussallem

And that on the gross margin, what’s in the gross margins, was penalized on the reported obviously it was affected by the what you call the charge of $5 million to sales. It is just about an equal charge to GP. We added there is a little bit on the retrieval cost we did not do a return to inventory as the inventory belongs to the customer since we haven’t issued credit. So, it’s pretty straightforward difference between the two. Now, remember on the non-GAAP, it just that was more like a half a million. And that reflected actual credit issues.

Undefined Company Representative

I think its fair to say Tom, the gross profit rate did get depressed we are reporting here because of the retrieval.

Undefined Company Representative

Yes, it was staying to about 50 basis points.

Undefined Company Representative

Yes.

Kristen Stewart – Credit Suisse

Okay. And with the full year tax rate at little under 23 helping to the full year for ’09 it can be closer to 24.

Undefined Company Representative

You know, its Kristen, the question I think, it’s within the realm of possibility within 24 I think could be plus or minus 1%, very possibly it could be. This is not at the end of the year it went lower than we had originally expected, but I still think 24 is a good number.

Kristen Stewart – Credit Suisse

Yes perfect. Thank you.

Operator

Our next question is coming from Tim Lee with Piper Jaffray. Please state your question.

Timothy Lee – Piper Jaffray.

Hey, good afternoon. Thanks for taking my question. A couple of questions here, just given the number of centers that you’re now in and given the number of centers on the SAPIEN side given the number of centers that your competitor is in. Are you going more head-to-head, are you seeing them out in the field more and how are you fairing in those bake offs?

Michael A. Mussallem

Yeah Tim. Our first year of introduction, largely we were staffed with just clinical resources and so we really focused on training and we focused on just helping people to get up and to do good procedures. So, it was just a lot market expansion and I wouldn’t say there was a lot of head-to-head fighting. We’re just adding sales resources at this point. I think for the most part I expect 2009 still to be a year of expansion. There will be some competition. But I don’t think there is anything to report at this point in terms of we’ll share battles.

Timothy Lee – Piper Jaffray.

And then just a point of clarification on the 100 centres that you are in, were they all active in the quarter or were they some centers that ran out of funding as the year progressed?

Michael A. Mussallem

Yeah that actually the number of centers that had an implant in the fourth quarter, there were a 100, you’d call those active centers.

Timothy Lee – Piper Jaffray.

Okay, and then last one here. Of these 650 plus implants that you performed during the quarter, does that include the partner trial enrollment as well?

Michael A. Mussallem

No, that was I think I referenced purely to Europe.

Timothy Lee – Piper Jaffray.

Okay. Great. Thanks for your clarification.

Operator

The next question is coming from Larry Biegelsen with Wachovia securities. Please state your question.

Larry Biegelsen – Wachovia Securities

Hi, good evening and thanks for taking my call. Tom, just for clarification, can you tell us how you are getting to the $0.78 what the tax rate I think you said was 71, the gross margin is 68.6 in the release, what are the other components, is the other income, is it that 4 million that gets we are having trouble getting to $0.78.

Thomas M. Abate

Well, it should be all into P&L as let’s say the $0.78 difference would be I think it’s what you are having is you're reconciling what was reported. We had the 68% the other expense before we considering the other expense components of this Larry?

Larry Biegelsen – Wachovia Securities

Maybe it is better to do it off-line with David after the call. Just another clarification question then on restocking of 5 million, is that in your guidance for '09 the sales guidance?

Thomas M. Abate

On the restocking, you're saying the sale as it returns to the customers?

Larry Biegelsen – Wachovia Securities

Is that in your guidance for next year?

Thomas M. Abate

No, no. And Larry let me say on the other one. There is the attachment that does the full reconciliation. So you’ve a complete list of what reconciles the two numbers.

Larry Biegelsen – Wachovia Securities

Okay. I will followup on that afterwards. Let me ask my real questions then. So Transapical, Transfemoral mix in Europe. Can you tell us what that was in the quarter please?

Thomas M. Abate

It was approximately two-thirds to one-thirds, two to one. Transapical to Transfemoral.

Larry Biegelsen – Wachovia Securities

And your SAPIEN guidance I mean, just to follow up on an earlier question you did 85 in the quarter. So, you’re at a $74 million run rate, but your guidance is 75 to 95 million and I appreciate the FX, the uncertainly around FX, but it does seen conservative. Is there anything that makes you conservative in terms of reimbursement in Europe or impact from the economy?

Michael A. Mussallem

No is that Larry, we're being conservative. We feel very, very confident obviously, putting up a quarter like this one makes us feel confident. We continue to like all the dynamics. Naturally, we're a little thoughtful about it when you have these products that are being paid for by government that are going to go through tough economic times. We're mindful of that, but no, we don't have any new facts that cause us be extra conservative.

Larry Biegelsen – Wachovia Securities

Just as a last quick one. U.S. sales for SAPIEN in the quarter Mike, how much were those?

Michael A. Mussallem

I think they have been running between, it's a little over $1 million certainly less than two, it's in that range Larry.

Larry Biegelsen – Wachovia Securities

Okay, thanks. I'll get back in the queue.

Operator

Our next question is coming from David Lewis with Morgan Stanley. Please state your question.

David Lewis – Morgan Stanley

Hi good afternoon.

Michael A. Mussallem

Hi David.

David Lewis – Morgan Stanley

Hi Mike could you tell us the assumptions for Transapical Transfemoral mix as well as your Transfemoral markets share expectations that underpin 2009 guidance?

Michael Mussallem

Yeah, we’ve been tracking probably at this rate of 2 to 1 to Transapical versus Transfemoral We would expect as particularly as XT comes on, that we're going to be getting share in the Transfemoral position. We think that that's going to be very popular in Transfemoral and so it will cause that percentage to go up as a percentage of our sale and also causes us to gain share. The doubling of procedures, I think it is something that we can do without gaining an awful lot of share. I think most of that is there through market expansion and if that we do get substantial share gain that's probably upside.

David Lewis – Morgan Stanley

Mike, what do you think Transfemoral market share would trough before launch of Nextgen?

Michael Mussallem

It is might have already troughed earlier this year. If anything we feel like Transfemoral share might have been improved for Edwards in the fourth quarter, it's still not that favorable for us. So I think the competitor probably has three to one in the transfemoral position something like that. So just to give you a sense for it. But, the other side of this is Transapical is doing very well and so and when we talk about these ratios and you compare Transfemoral with Transapical and we’re the only ones in the Transapical position, it sort of makes our Transfemoral now look quite as good just because of the comparison.

David Lewis – Morgan Stanley

Okay and to say a couple question here. New centers that are coming on, is there any reason to believe that new centers are going to be at a relatively lower level of utilization given that you're moving down markets or that the mix of Transapical to Transfemoral would be different because you are getting, you are scrutinizing less in terms of making sure they're committed to Transapical?

Michael A. Mussallem

David, my recollection of all of our modeling here is there is no substantial change of the new centers compared to what we are experiencing. As you might imagine they are probably they tend to be a little smaller centers, but we wouldn’t expect much change in the dynamics.

David Lewis – Morgan Stanley

Okay and then just lastly I’ll get back in queue. Tom so at least in the mix remains favorable on gross margins prove to be conservative. Are you going to spend any gross margin upside and invest in the international market for valve or would you drop that through to the bottom line? Thank you.

Thomas M. Abate

Well we have put in the guidance that we already had a pretty big range and expectation to possibly top out as high as 70%. We also had R&D growing over 20% to like13 and 13.5 to sales. So, I think we put in lot in the P&L. We think at this point if there were additional upside we have to look at that hard since we could find another place for it.

Operator

Our next question is coming from Mike Weinstein with JP Morgan. Please state your question.

Michael Weinstein – JP Morgan

Thanks, lets begin question so as you know it’s a little bit tough to hear you guys in the room I think it’s may just be the speaker. Let me just follow up on the questions on SAPIEN first, you obviously had a very strong step up sequentially this quarter you added more than 30 centres, any reason to think that sequentially as we look at first quarter sales wouldn’t increase again.

Unidentified Company Representative

Mike, thanks for the question. Let us know here, if you if anybody ever gets an answer that you can’t hear please let us know and we will repeat it or try and make sure we get that back out to you. Sorry about that.

Michael Weinstein - JP Morgan

Thanks.

Unidentified Company Representative

There is no any reason to believe that the first quarter is not going to be a continuation of the trends lines that we’re on right now. So, nothing like that we’re foreseeing.

Michael Weinstein - JP Morgan

Can you give us any help for modeling Mike on a blended ASP for SAIPEN right now.

Michael A. Mussallem

You know, our pricing has been pretty stable, so although there might be a some country mix that changes a little bit from quarter-to-quarter so but the pricing within a country was continue to be very stable and we have been disciplined about our pricing. So, I am not sure I can give you a whole out there. We don’t expect there to be a much of a story in pricing in 2009.

Michael Weinstein - JP Morgan

That 15,000 to 22,000 you have given pretty wide range. Can you narrow it at all?

Michael A. Mussallem

Well, it’s pretty tough. We feel this early stage of the market is pretty tough for us to give something like an ASP. So we - I guess we prefer to keep it in this broad range and as we get a little bit more maturity Mike, and I think that's pretty reasonable.

Michael Weinstein - JP Morgan

Okay

Michael Mussallem

You know I think its pretty reasonable

Michael Weinstein - JP Morgan

Okay two financial items just to clarify here. The tax rate coming in at 78% for the quarter part of the R&D tax credit and other was you said adjustment to your country profit mix, obviously R&D tax credit we understand and we all know the timing of when that was implemented, so that shouldn't have surprised you guys. Why did the country profit mix come in so differently in the fourth - why was such a big adjustment and why - why did that catch you guys, off guard? Obviously it is positive in terms of how it helps the tax rate in the fourth quarter but you weren’t anticipating in the October when you gave guidance so what was the big swing in the fourth quarter that led you to make the adjustment. Thanks.

Michael Mussallem

That's a good question Mike, let me start off by saying no - we absolutely I didn't anticipate it back in December and basically as the tax department goes through all over the profitability and you’re talking about roughly $200 million of profit getting it in the right buckets by country. The adjustments and we didn’t already mention the adjustments, but it is in the neighborhood of somewhere in the neighborhood of $2 million it’s a slightly less could be a little bit more or less in that so its not a huge adjustment, but I didn’t want to disclose it specifically, it belongs in the year – it belongs to the full year rate. It just the – the way that you went through and as we did the more precise calculations at year-end it is way it turned out.

Michael Weinstein - JP Morgan

Okay then the last question. And I think we touched on, at the meeting in December that is I wanted to get your feedback on the free cash flow. Free cash flow hasn’t been growing the same rate, which your net income has been growing, and you’re guiding to flat free cash flow in 2009 versus 2008. It is one to maybe just to understand that a little bit better, thanks.

Michael Mussallem

Oh, sure. You know if we focus just on the difference between 2008 and 2009 and between first off let me say, I think we’re fortunate, we have a very cash rich business and it very consistent and we’ve been very fortunate in that regard. In your comparison of ’08, you need to remember that 2008 performance was relatively weak and the incentive pay out fall into the following years. So where we paid under target for 2007 that fell into the 2008 it was an upsize and the 2008 performance, which was above target falls into 2009. The difference between an under in one year and the average in the other year was 10 under and possibly 15 to 20 on the overhead side. That maybe to put those to together when you’re preparing to two years so, so pretty significant impact and another thing I’d say working capital, I am very pleased with the all of the elements of working capital and the basic of what’s being driven by the operation. So nothing to report there concern capital spendings pretty much inline, so if you look at DSO’s and things that are critical to generate future cash flow everything seems like it is in great shape that seems to be the number one exception.

Michael Weinstein - JP Morgan

Okay, thanks David.

Operator

Your next question is coming from Amit Bhalla with Citigroup. Please state your question.

Amit Bhalla – Citigroup

Hi good afternoon. I wanted to ask you a couple of questions on Critical Care. The Critical Care number came in a little bit later than our expectation, so I wondered if you go a little more detail about the impact of the hemofiltration supplier issue, what was the dollar impact there and can you also clarify the $13.2 million charge for the purchase of a Critical Care monitoring technology, I think I may have missed that?

Michael Mussallem

Okay, yeah. I think if we, what we trying to signal at the Investor Conference and as that we’re having some suppliers, our suppliers were struggling and we would had a real strong year prior in hemofiltration and that’s probably $1 million easily that it would cost us in the fourth quarter. You’d also just heard about we were also concerned actually, that it was going to be tougher than this on the capital side but it actually worked out to be pretty good. But I think the thing we keep in mind as we had adjust the – our blowout quarter in Q4, 2007. And so it made the comparison tough and we anticipated that going into it but overall we weren’t too disappointed with the way things turned out. In terms of the monitoring technology, we were able to buy some technology that there is a couple thing for us. One, it is a great enhancement to FloTrac. And in particularly it helps FloTrac as we want to move into the medical ICU and so we’re going to be incorporating that matter of fact expect a launch our product later on in 2009. Additionally, we would came along with that is very neat hardware, which gives us a hardware platform for the future and allow us to potentially consolidate a number of these items. I think we’re able to mention all these in December conference and Tom might be will have details on the schedule so, I hope that wasn’t surprised anyone.

Amit Bhalla – Citigroup

Okay, thank you. And on the Heart Valve Therapy side, are you still getting even though you have got a $5 million of Magna Mitral contribution in the quarter. Where you still getting about 10% to 20% price premium there and can you give us an update on Evolution II trial enrollments?

Michael A. Mussallem

Yeah, sure Amit. First of all in terms of the premium yes, we’re getting a premium on Micro Magna. It’s probably in the 10% range and so, we are pleased with that and we look forward to that ramping up during 2009. In Evolution II, we are actively screening right now for that trial so, this is one that we look forward, getting enrolled here in the full path and getting some results reported here before the end of the year. So, we look forward to really getting some result but we’ve got sides that are actively screenings patients as we speak.

Operator

Your next question is coming from Josh Zable with Natexis Bleichroeder. Please state your question.

Josh Zable – Natexis Bleichroeder

Hi, guys, congrats on a great quarter, and thanks for taking my questions here.

Michael A. Mussallem

Surely Josh. Sure, thank you.

Josh Zable – Natexis Bleichroeder

A Couple of housing keeping item here, real quick sorry about that, first just on the foreign exchange, I know obviously it bounces around and charge for you guys actually predicted I’m not asking to do that but given that kind of where at the guidance call here, we had a December meeting and October guidance, I’m just trying gauge because foreign currency bounces around so much and we’re fortunate to get a lot of updates I’m just trying to understand, can you give us range or sort of how we should think about it, because I know you said look to the high end of the range but if currency kind of fluctuates just so we’re sort of prepared for what kind of moves, it will be?

Michael A. Mussallem

Well, we try to do it as we said today’s rates. We are thinking $40 million to $50 million of impact. Back to the Investors Conference it was more like $75 million. So just in that short period of time it changed to $30 million. All right, so all on total company sale.

Josh Zable – Natexis Bleichroeder

On total company sales.

Michael A. Mussallem

On total companies sales full year 2009. So big swings are possible Josh, but I’d say to give you an idea also that when I am looking at rates in the $30 to $35 on the euros, it probably 90 to 95 Yen. So, it actually where we are at and that’s relatively tight range but rather than give a really wild big range of I tried to say, look at relatively these rate will falling into ranges it look like that.

Josh Zable – Natexis Bleichroeder

That’s all right. Very, very helpful. And then just quickly on the gross margin obviously really impressive this quarter. And I know you guys talked about expansion for next year just, can you just kind of help me walk through a little bit more granularity here as far as it is really just a mix shift to new products or a long list sort of discontinuation of products or is it just all mix shift?

Michael A. Mussallem

Well, when we talk about product mix, we are looking at new product, new technologies, (inaudible) superior rates moving reduction, but also the discontinuation in a commodity related products so, those two together as what we are thinking about when we talk about product mix. In terms of the composition, it was pretty much and equal split in the quarter and are you more interested in the quarter Josh?

Josh Zable – Natexis Bleichroeder

Quarter and outlook

Michael A. Mussallem

Well in the quarter, it was pretty much 50-50 split in comparison to last year. But what’s underlying - what we are talking about for a number of quarters now that the rate has been improving but we were expecting some suppression as a result of FX. So as FX lightens up you are starting to see the benefit of all of these moves show up in our rates. So, we are very pleased with the rate this quarter and it’s a pretty standing in line with our expectations for next year. Next year, we actually had a chrt back at the Investors Conference and it was also about 50-50. I think it’s a 150 basis points of FX and the mid-point of the range, we gave as probably another 150 of product mix. So once again pretty even spilt.

Operator

Our next question is coming from Suraj Kalia with Sanders Morris Harris. Please state your questions

Suraj Kalia – Sanders Morris Harris

Good afternoon. Mike. Gentlemen congratulations on the nice quarter.

Michael A. Mussallem

Thanks Suraj.

Suraj Kalia – Sanders Morris Harris Group Inc

Mike. I am not sure this has been mentioned in the - in terms of Europe and the SAPIEN implants in Europe would you be willing to share what kind of patients are being implanted I understand the transapical two – is two-thirds?

Michael A. Mussallem

If we’re …

Michael A. Mussallem

I’m sorry what was that, Suraj.

Suraj Kalia – Sanders Morris Harris

Yeah, I am sorry about that, and what kind of patients are you seeing getting implanted on an average within the transapical or transfemoral and the reason at the rationale for that…

Michael A. Mussallem

We just lost you towards the tail end.

Suraj Kalia – Sanders Morris Harris

I am getting some background noise here. I’m just trying to understand whether, patients who were candidates for surgery on working candidates for surgery are getting what’s the mid-shift there?

Michael A. Mussallem

Okay. Yeah for the most part, we think people are that we are not really coming forward or coming forward today in a broader way. We’ve broadly characterize these patients has being high-risk for surgery. So that’s really where our indicater is in Europe and we think that the permissions have quite consistent in terms of doing that the average age of these patients I think it’s been running somewhere around 82 years old. So, it gives your sense for that I think in general the transapical patients are probably a little sicker because they tend to have peripheral vascular disease than the transfemoral patients but there are high risk of serve either some that are non-operable but less so in that category. [Audio Disturbance]

Michael A. Mussallem

Yeah, I am sorry Suraj we only get about every other word to hear somehow we are not getting the very good signal.

Suraj Kalia – Sanders Morris Harris Group Inc

Hopefully, this goes through, Mike in terms of Europe what are the lessons being learned from the initial experience with the SAPIEN just to read U.S. ID, the SAPIEN, the next generation SAPIEN, what are you all seeing that are leading to either design changes and or targeted patients.

Michael A. Mussallem

Well, we’re actually, we continue to learn a lot and not to say that we’re not confident in the trial design for partner. We are very confident with that. We continue to love the ideas of people who are working as partners that surgeons and cardiologists work together. We continue to get great results, we get that we're very please to see that we're actually getting people are able to learn this procedure and learn from those have gone before them and so the fact we have a acute procedural success of 95% approximately is one that we feel very good about. People are finding the money because they are finding this to high value procedure. And so overall, there is – for a lot of learning that's taken place. Having said that we also know that cardiologist would very much prefer as - a lower profile for these transfemoral procedures and we are pretty much at the limit of size here and so our SAPIEN XT is going to be very important to make the cardiologist have an easier approach in the transfemoral vein for transfemoral artery.

Suraj Kalia - Sanders Morris Harris Group Inc

One last question Mike I’ll get back in the queue. What is the anecdotal experience from Europe in terms of not acute procedural success but let say that 30-day mortality or 12 months whatever you all have from anecdotal experience what you are seeing (Audio Disturbance).

Michael A. Mussallem

Yeah, there is some – there is some data exits that’s been reported on, that some of the recent meetings and continue to be reported on that have some 30 day results and six month results and we look forward to having some one year results during 2009 and so I say tuned or that and look forward it at the upcoming clinical meetings enthusiasm has stayed high I would say in general there are not a lot secrets out there and one of the reasons why clinician enthusiasm as high as I think their feeling is that the patients are doing well as they leave these, and so I maybe rather than me trying to general lies I’ll just leave right there, Suraj. Thank you.

Suraj Kalia - Sanders Morris Harris Group Inc

Gentlemen, thank you for taking my questions.

Operator

Our final question is coming from Kristen Stewart with Credit Suisse. Please state your question.

Kristen Stewart – Credit Suisse

Hi, thanks for the follow up. Mike, I just wanted to touch base again one on the comment on additional clinical data. Is there anything specifically, we should be expecting at meeting like ACC your PCR will they update what you do some bids that PARTNER, experience or registries?

Michael A. Mussallem

Yeah, I would say probably the next substantial amount of data, you look toward the PCR I think you would see an update on the Partner EU data I think you would see an update on the source data that we are collecting out of our commercial experience, maybe either I would imagine there will be some reports on early experience with SAPIEN XT and some live cases. So I think its going to be pretty prominent at PCR Kristine, that’s one would be a good one to get an update on that.

Kristen Stewart – Credit Suisse

Do you have any updates on just kind of SAPIEN XT with respect to the U.S. trial designer you are still just kind of working through that and on I guess talking with the FDA anything with the question carrying back on the Magna Mitral Valve that was surprising and I know you reiterate your timelines, but anything out of the ordinary with some of the questions?

Michael A. Mussallem

No, we’re not really seeing anything out of the ordinary there I mean, is there – that continues to be a tremendous amount of diligence on the part of the FDA. They focus not only on trial design but they obviously focus on the design of the products themselves and how they perform on the bench. And so I think we learned an awful a lot going through our home Micro Magna experience and going through the experience as well on SAPIEN so far and I wouldn’t say there has been a real shift over the recent past.

Kristen Stewart - Credit Suisse

Thank you, Mike.

Michael A. Mussallem

Okay, thanks Kristen.

Michael A. Mussallem

All right well thanks all for your continued interest in Edward’s. Tom and David and I welcome any additional questions by telephone and with that back to you David.

David K. Erickson

Thank for joining us on today’s call. Reconciliations between GAAP and Non-GAAP numbers mentioned during this call, which include underlying growth rates and amounts adjusted for special items are included in today’s press release and can also be found in the Investor Relation section of our website at edwards.com.

If you missed any portion of today’s call a telephonic replay will be available for 72 hours, and to access this please dial 877-660-6853 or 201-612-7415. Use account number 2995 and pass code 308787. I will repeat those numbers call 877-660-6853 or 201-612-7415 the account number is 2995 and the pass code is 308787. Finally an audio replay will be archived on the investor relations section of our website. Thank you, very much.

Operator

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. And we thank you for your participation.

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Source: Edwards Lifesciences Corporation. Q4 2008 Earnings Call Transcript

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