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Edwards Lifesciences Corporation (NYSE:EW)

Q3 2009 Earnings Call

October 21, 2009 5:00 pm ET

Executives

David K. Erickson - Vice President, Investor Relations

Michael A. Mussallem - Chairman of the Board, Chief Executive Officer

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

Analysts

Mike - UBS

Kristen Stewart - Credit Suisse

Glenn Novarro - RBC Capital Markets

Michael Weinstein - J.P. Morgan Chase & Co.

Larry Biegelsen - Wells Fargo

David Lewis - Morgan Stanley

Timothy Lee - Piper Jaffray

David Roman - Goldman Sachs

Jason Mills - Canaccord Adams

Amit Bhalla - Citigroup

Sara Michelmore - Cowen and Company

Doug LaSalle - Barclays Capital

Suraj Spencer Nam - Summer Street Research Group

Brooks West - Craig Hallum Capital Group

Operator

Good afternoon ladies and gentlemen and welcome everyone to the Edwards Lifesciences Corporation Third Quarter Earnings Conference Call. (Operator Instructions). It is now my pleasure to introduce your host, Mr. David Erickson, Vice President of Investor Relations for Edwards Lifesciences Corporation. Thank you. Mr. Erickson, you may begin.

David Erickson

Welcome and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2009 financial results. During our today’s call we’ll discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q&A. Our presenters on today’s call are Mike Mussallem, Chairman and CEO; and Tom Abate, CFO and Treasurer.

Before I turn the call over to Mike, I would like to remind you that during today’s call we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren’t limited to our sales, gross profit margin, earnings per share and free cash flow goals and other financial expectations for 2009; the regulatory approval and sales of heart valve therapy products including Magna Ease, Magna Mitral Ease, and Physio II;

the competitive dynamics of the heart valve market; the continued adoption and expected 2009 sales of the Edwards SAPIEN valve; the receipt of formal reimbursement for SAPIEN; the timing, progress and results of clinical studies including the partner trial and the US approval of SAPIEN; expected sales and enhancements for the FloTrac system and the development of continuous blood glucose monitoring technology.

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, 2008, 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?

Mike Mussallem

Thanks David. We are proud to report strong third quarter sales and earnings growth led by our heart valve therapy portfolio. Sales growth of our critical care franchise was also a strong contributor as we expected. Additionally this quarter’s results were highlighted by continued improvement in profitability resulting from our strategy of divesting non-strategic products to focus on new product introductions. On a reported basis total sales grew 7.3% to $326 million. Our total underlying sales growth was 13.1% for the quarter.

Now I will shift to a more detailed review of our product line sales and progress on our new products and then Tom will discuss the financial results and the outlook.

For the third quarter reported heart valve therapy sales were $174 million which includes a negative impact from foreign exchange of $2 million. On an underlying basis heart valve therapy sales increased 19.2% for the quarter led by continued adoption of transcatheter valves and strong double-digit performance from our new US surgical valves.

Looking more specifically at surgical valve products on a global basis surgical heart valve sales grew 10.4% for the quarter representing the highest growth rate in several years. The US played a significant role in driving global sales growth this quarter.

In the US growth stepped up to approximately 11% driven by strong adoption of our premium Magna Ease aortic valve and continued growth of our Magna mitral valve. Outside the US growth continued to be strong as we gained share.

Turning to repair, underlying growth in the quarter was approximately 6%. We are continuing to see growing acceptance of our Physio II ring in both the US and Europe as a number of customers upgrade from Physio I.

In addition, we received formal reimbursement and launched our IMR ring in Japan during the third quarter. Although its contribution in the quarter was minimal initial acceptance has been encouraging and we expect strong adoption. We also received formal reimbursement in the fourth quarter.

To summarize, for 2009 we continue to expect our surgical heart valve therapy products to achieve underlying growth at the high end of our prior 7% to 9% range as our Magna products continue to drive share gains.

Turning to transcatheter heart valves, we are pleased that sales momentum outside the US was robust as both sales and implants were double last year’s levels. For the third quarter we achieved SAPIEN sales of $26.4 million and globally we estimate that nearly 1,100 valves were implanted despite what is typically our lowest quarter due to summer vacations, particularly in Europe. As compared to last quarter implants as a percent of sales declined as accounts restored their inventory levels. On a country basis prices remain consistent with previous quarters.

This quarter approximately 1/3 of the s SAPIEN cases were performed independently without a representative from Edwards present during the procedure. As previously mentioned, the increasing level of hospital independents gives us less visibility into the actual number of valves implanted so we will no longer provide actual implant data beginning next year. We do expect a steady stream of clinical data will be presented at future medical meetings.

The quarter also included a limited number of transcatheter valves that were used in the SAPIEN XT PREVAIL trial; those were provided at no charge. Based on our momentum we are confident that we will exceed our goal of doubling the number of transcatheter heart valve procedures compared to 2008 and expect full year 2009 transcatheter valve sales of approximately $110 million, significantly exceeding our early estimates.

Regarding reimbursements, during the quarter Germany granted formal DRG reimbursement of approximately 35,000 euro for transcatheter aortic valve procedures beginning in January 1, 2010. Both the transapical and transfemoral approaches are covered. This is important positive news as Germany is our largest implanting country and it is encouraging to see them recognize the clinical and economic value of this new therapy. We expect formal reimbursement in other European countries in 2010; in the meantime the same dynamics surrounding transitional funding continue to exist and we remain pleased that hospitals are currently able to support these procedures.

At last months TCT meeting in San Francisco our transcatheter valve technology was featured in a large number of clinical presentations including four successful live cases showcasing SAPIEN with the RetroFlex 3 delivery system and our new lower profile SAPIEN XT valve with the NovaFlex delivery system. Two of the cases, a transapical valve and valve mitral replacement and an aortic replacement using the subclavian approach were particularly noteworthy as they highlight the versatility of our SAPIEN technology.

Turning to our US partner trial, in August we completed enrollment of Cohort A for IDE for SAPIEN right on schedule. In addition to enrolling both the surgical and non-surgical arms of the partner trial we are delighted to receive FDA approval for non-randomized continued access for our existing partner sites to ensure this technology remains available for patients. We expect to continue enrolling patients at our existing implant rate of approximately 40 cases a month.

We remain confident in our partner trial design and continue to anticipate US approval of SAPIEN in 2011.

We would like to thank our participating clinicians and their teams for the remarkable job they did in enrolling this trial. We look forward to the timely completion of the clinical follow up on these patients and applaud our trial investigators for their rigor and ensuring that trial data is of the highest quality and integrity.

SAPIEN XT is generating considerable interest amongst clinicians. We continue to anticipate European approval and launch of SAPIEN XT with our innovative NovaFlex system in the first quarter of 2010 and expect increasing adoption through out the year. We are developing in-hospital training programs in order to facilitate the successful launch of SAPIEN XT and its new deliver system.

The first implants of our SAPIEN XT valve with our new low profile Ascendra 2 transapical delivery system were recently performed as part of our PREVAIL TA study which has started enrolling. We anticipate a limited launch of the SAPIEN XT with Ascendra 2 in the second quarter of 2010.

This week we plan to submit our IDE for SAPIEN XT. This trial will be called PARTNER 2 and will include both our NovaFlex and the Ascendra 2 delivery systems. The submission targets the same high risk patients studied in the PARTNER trial. We anticipate receiving questions from the FDA during the quarter and plan to work closely with them to further the approval process. Based on our assumptions we continue to expect to begin enrollment in the first quarter of 2010. We are excited to be this close to introducing this novel technology which has the potential to help many more patients both inside and outside the US.

We have not yet completed enrollment in our 30 patient three sites US feasibility trial of SAPIEN in the pulmonic position. Upon completion of enrollment we intend to transition into a larger humanitarian device exemption trial.

With regard to the US core valve litigation we are continuing to prepare for a jury trial which is scheduled for the first quarter of 2010. We believe Edwards has the strongest transcatheter valve patent portfolio and are committed to leadership, enforcing our intellectual property as an important element of our broad strategy.

Now turning to critical care, for the third quarter critical care reported $114 million in sales. Underlying sales growth increased to 8.4% from a first half rate of 2% driven by strong sales of FloTrac and pressure monitoring products. Our discontinued hemofiltration business contributed 2.1% to the underlying growth rate in the third quarter.

On September 1 we completed the sale of our hemofiltration product line which allows us to better focus on our global strategic priorities. For perspective this product line represented approximately $32 million of 2009 sales through the close of the transaction.

Turning to new product introductions, our results were boosted by the earlier launch of a third generation algorhythm for FloTrac that enhances its accuracy when used in patients with sepsis and other critical illnesses. This product enhancement enables FloTrac to address an even wider range of patients and has been very well received by clinicians.

In the quarter we are planning a limited launch of a substantial upgrade to our FloTrac system that strengthens its applicability in the medical ICU. At the same time we will also roll out a new hardware platform to selected sites which provide users with a simpler, more intuitive informational display. We plan to consolidate all of our parameters into this new hardware platform and move forward with a broad launch in March of next year. The fourth quarter launches represent about a ¼ delay as we refined our product offerings.

With regard to our continuous glucose monitoring program, during the third quarter the first of two clinical studies to validate performance was successfully completed and we are continuing to study the product in the clinical settings. We remain on track to achieve European regulatory approval and begin clinical evaluation of our first generation product before year-end in a limited number of European sites. Glycemic control represents an exciting new opportunity to fill an unmet need and accelerate our longer-term critical care growth rate.

In summary, we stepped up our growth rate, made good progress in the area of new product development including glucose and completed the sale of our hemofiltration product line. We expect a strong fourth quarter and an annual underlying growth rate in critical care of 3% to 6%.

Turning to cardiac surgery systems reported sales for the quarter increased to $22 million which grew approximately 6% on an underlying basis. In September we initiated a voluntary recall of our EndoClamp balloon catheter due to the supplier quality issue with one of the components. As a result third quarter MIS sales were impacted by nearly $1 million and we expect a slightly larger impact in the fourth quarter while we resolve this issue.

Due to the strong interest in minimally invasive surgery we continue to invest in professional education. During the quarter we conducted the first in a series of interactive webinars on port access procedures with over 200 clinicians participating.

In the fourth quarter we expect CSS sales to be $23 to $214 million and for the full year 2009 we are lowering our underlying growth expectation to between 5% and 7% due primarily to the voluntary recall.

Total reported sales of vascular products were $15.1 million this quarter and declined due to lower sales of the divested life span products. Sales of our Fogarty vascular products were relatively constant versus prior year at approximately $13 million.

In the third quarter we achieved our final milestone associated with the LifeStent product divestiture and recorded a gain of $15 million.

Before I turn the call over to Tom I would like to mention a couple of things. Earlier this month we announced that we will be moving into a new facility in Utah that will enable us to significantly expand our manufacturing and R&D capability to support future growth. We are pleased that we are able to partner with both state and local authorities and receive financial incentives to encourage our investments.

Additionally, we contributed $15 million to our charitable fund during the quarter. The Edwards Lifesciences fund was established back in 2004 to provide philanthropic support for cardiovascular and community related charitable causes. We are fortunate to be able to make this contribution based on the Company’s continued strong operating performance and cash flow and our commitment to the funds mission.

Lastly, as a strong supporter of transparency in industry clinician financial relationships we previously announced our intent to begin voluntarily disclosing information about our payments to US physicians. I am pleased to say that on October 1st we took our first step in this process by posting information on our website covering the first six months of 2009. We intend to post this information annually.

With that I will turn the call over to Tom.

Tom Abate

Thank you, Mike. We achieved third quarter non-GAAP diluted EPS at $0.71 a 27% increase versus prior year. This ESP improvement was driven primarily by stronger sales growth and continued expansion of our gross profit margin. We are particularly pleased with our results considering we also increased our R&D investments by 27%.

Free cash flow generated this quarter of $74 million was also a highlight. For the quarter our gross profit margin was 69.85 compared to 65.4% in the same period last year. This 440 basis point improvement was due primarily to product mix with favorable FX representing approximately 100 basis points. In the fourth quarter we expect our gross profit margin to be similar to this quarter.

Third quarter SG&A expenses were $126 million, or 38.7% of sales, an increase of $7 million over the prior year. This increase was driven by higher sales and marketing expenses primarily for the SAPIEN valve program in Europe, partially offset by foreign exchange. For the fourth quarter we expect SG&A as a percentage of sales to be approximately 38%.

R&D investments in the quarter were $45 million, or 13.7% of sales, compared to $35 million in the prior year. This increase was primarily the result of additional investments in transcatheter technology and glucose monitoring. For the fourth quarter we expect R&D as a percentage of sales to be approximately 13.5%.

During the quarter we recorded a number of special items that resulted in a net $38 million pre-tax gain: the main components were a $44 million gain associated with the sale of our hemofiltration product line, a $15 million gain from the achievement of our final LifeStent milestone, and a $15 million charge for the contribution to our charitable fund. A reconciliation table of all components of our net special gain accompanies the press release.

Our reported tax rate for the third quarter was 22%: excluding special items this rate was 25.4%. For the full year 2009 we continue to expect our rate to be approximately 24% excluding special items.

When compared to the same quarter last year FX rates negatively impacted third quarter sales by approximately $3 million. As a result of our hedging strategy we limited the negative impact to our bottom line to approximately $0.01 this quarter.

At current exchange rates the negative impact on our full year 2009 sales is reduced to the $15 to $20 million range.

Free cash flow generated during the third quarter was $74 million; excluding the charitable fund contribution. We define free cash flow as cash flow from operating activities of $71 million less capital spending of $12 million plus the $15 million contribution. For 2009 excluding the impact of special items we now expect free cash flow to exceed $170 million which was the top end of our original goal.

During the quarter we repurchased 385,000 shares of common stock for approximately $25 million. During the first nine months of the year we repurchased 1.3 million shares for approximately $80 million.

Turning to our balance sheet we ended the quarter with net cash position of $185 million. Total cash of $287 million exceeded our total debt of $102 million. Our DSO at the end of the quarter was 71 days, an increase of 2 days from the prior quarter. Inventory turns were 2.3, a small decrease from the prior quarter.

Turning to our 2009 sales guidance, we are now raising our full year total sales guidance to between $1.305 billion and $1.325 billion based on strong year-to-date sales results and the positive trend in foreign exchange rates.

For heart valve therapy we are raising our full year sales guidance to the high end of our previously stated $690 to $710 million range; this excludes the $4 million from the relaunch of repair rings last quarter.

In critical care we are now raising our midpoint by $5 million to between $445 to $455 million.

In cardiac surgery systems we now expect to be at the lower end of our previously stated range of $90 to $100 million and in vascular we continue to expect sales to be at the upper end of our previous guidance of $50 to $60 million.

For fourth quarter 2009 we project total sales of $335 to $355 million and we estimate that fourth quarter diluted EPS, excluding special items, will be between $0.82 and $0.86.

For the full year 2009, excluding special items, we are increasing the mid point of our guidance for diluted EPS and our new range is $3.02 to $3.06 representing an annual growth rate of 18% to 29%.

With that I will turn it back over to Mike.

Mike Mussallem

Thanks, Tom. Based on our strong year-to-date performance we continue to expect to meet our exceed all of our original financial goals that we presented last December. These goals were generating total sales between $1.24 and $1.3 billion, increasing our gross profit margin to between 68% and 70%, delivering non-GAAP net income growth of 15% to 19% and generating free cash flow of $160 to $170 million.

We are generating robust sales growth across our core franchises which demonstrates the underlying strength of these businesses and at the same time we are making good progress on US approval of our SAPIEN valves adoption outside the US continues to grow rapidly. This further reinforces the growing belief that transcatheter heart valves represents a truly transformational growth opportunity.

With that, I will turn it back over to David.

David Erickson

Before we open it up for questions I would like to remind you about our 2009 Investor Conference which will be held at our corporate headquarters in Irvine on December 9th and 10th. At this event we will provide an update on our new technologies as well as our outlook for 2010. For more information and to RSVP please visit our website.

We intend to end today’s call at 6:00 PM Eastern and in order to allow broad participation in the Q&A we ask that you please limit the number of questions. If you have additional questions please reenter the queue and we will answer as many as we can during the remainder of the hour.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Eric Schneider with UBS.

Mike - UBS

It is actually Mike for Eric. On the German reimbursement is there any restriction for patients that can get the device, or is it also open for low risk patients?

Mike Mussallem

I don’t know the specifics of what’s written there. I would guess that it is consistent with what the CE mark indication is.

Mike - UBS

Okay and then sizing on CP and XT obviously it is a smaller profile. How much potential do you think there is for reducing the size further going forward given that you have balloon expansion versus core valve that does not?

Mike Mussallem

We think that we cleared a major hurdle to be able to get this system to this 18 French size and we think it becomes applicable to most patients and that is the gigantic step. Is it possible to go further, yes it is always possible to go further and we will work on that, but we think this step is a huge one for patient care.

Operator

Your next question comes from Kristen Stewart with Credit Suisse.

Kristen Stewart - Credit Suisse

In terms of submitting for the PARTNER 2 trial are you still thinking that it is going to be a non-randomized trial and will it just be more surgical candidates rather than non-operable?

Tom Abate

Here is what we can say on that. One is what we ask for and of course it is what the FDA approves that really matters and we don’t have any feedback from the FDA yet. I can tell you that what we are interested in is bringing in the SAPIEN XT to US patients as quickly as we can and we believe that that says let’s study the same group of patients and we believe that that would argue for a non-randomized trial. But again, we are still waiting for feedback from the FDA so we really don’t know.

Kristen Stewart - Credit Suisse

Then just in terms of the building cash and the balance sheet, can you just remind us in terms of your preference? You obviously do a lot of share repurchases year-to-year, but how are you thinking about acquisitions at this stage?

Tom Abate

Sure, you know that remains unchanged as it has for a long time now. We are always looking for technologies early on that sit neatly into the portfolio. If you remember back to Q4 last year we were very successful in picking up a number of them, so we continue to look and that is the No. 1 priority. Until this point it hasn’t represented significant cash requirements and I wouldn’t predict anything that different going forward; so share repurchase has been actually the No.1 use of cash for a while now.

Operator

Your next question comes from Glenn Novarro with RBC Capital Markets.

Glenn Novarro - RBC Capital Markets

I have two questions on percutaneous valves, one you are taking your full year guidance for the percutaneous valves up to $110 million; how much of that is currency, is my first question. My second question is what the next countries will be to come on board next year in terms of reimbursement, how big are the markets and how meaningful can it be?

Tom Abate

Let me take the currency, I think you can do your calculation. Between the last guidance and the last range we gave and today you are only seeing about a 3, 3.5% move, so if you think about a number in the neighborhood of 25, 26 per quarter you are talking maybe $1 million or two.

Mike Mussallem

Maybe another way to think about that is, it’s full year guidance so we already have three quarters done and so we when we say approximately 110 that sort of says something in the neighborhood of 33 for the last quarter and currencies haven’t moved very much right now versus the last, so you can sort of sort it out from that perspective.

Glenn Novarro - RBC Capital Markets

Just as a follow up to that before you answer the reimbursement question, that is a nice jump up from the third quarter, so is there any color behind what is driving the nice jump up in the fourth quarter?

Mike Mussallem

We just think we have a real nice growth ramp going and even though we try to express how much seasonality there is, because this business is primarily Europe we just see a lot of seasonality in the fourth quarter and more than you would typically see in global numbers. So, even thought that looks like a big step up, I think it is more consistent with the kind of ramp that we might have expected. Things are getting a little brighter, but overall it is part of this ramp.

Glenn Novarro - RBC Capital Markets

Okay and just any color on what would be next on the reimbursement front in Europe in 2010 beyond Germany?

Mike Mussallem

We are working on reimbursement pretty much in all of the countries and it is tough for us to predict exactly who will be next. We know that there are a number of countries in the queue and including large countries like France, but it is tough to predict who is next.

Operator

Your next question comes from Michael Weinstein with J.P. Morgan Chase & Co.

Michael Weinstein - J.P. Morgan Chase & Co.

Mike I am going to cheat and make you wear your other hat for a minute here, what seems to be your full time hat these days as chair to ACTINET and I was hoping you could give us your latest thoughts on the discussions between ACTINET and the Centers of Finance and the members of the congress and the administration.

Mike Mussallem

Broadly here you know that the industry really thinks that this tax that is in the Baucus proposal right now is just too high and we have done pretty much everything within our power to make sure that people understand that, Frank presents some really detailed discussions of why it’s too high and it’s out of line and the devastating impact it can have particularly on small and emerging companies in this space. It is yet to be seen exactly where this comes out. We’re hopeful that there will be some give on this before it is all done. I think the most optimistic of us hope that it goes away completely. It might be something in between. It is just impossible to predict.

Michael Weinstein - J.P. Morgan Chase & Co.

What do you think the timing is on that visibility?

Mike Mussallem

It is tough to tell. I think we all believe that they will be done putting the bills together in the Senate before Thanksgiving and then probably have something on the way to the President’s desk before Christmas, but it is tough for us to tell exactly where this might be addressed.

Michael Weinstein - J.P. Morgan Chase & Co.

Okay, let me ask you one partner question, I guess this is a follow up to TCT. It has been our expectation, I guess, since the original trial design and in your announcement of the study that the patients in the medical management arm would be fairly actively managed, more than your normal patients, because of their inclusion in the trial and the care that they are getting, and that a number of those patients would be getting repeat balloon valvoplastys which is atypical. You wouldn’t expect them to undergo that type of intensive care. When that happens in the trial with this second primary endpoint that you now have will those events be counted as hospitalization when the doctor’s call them back, say let’s go ahead and try balloon valvoplasty on this patient?

Mike Mussallem

Yes it would.

Michael Weinstein - J.P. Morgan Chase & Co.

So what does that mean? I mean I am trying to understand the value then of the endpoint [interposing].

Mike Mussallem

Your question, if these patients did come back for a balloon valvuloplasty that would be considered a hospitalization, or if the patients came back and actually maybe say they flew to Europe and decided to get a valve that would be considered a hospitalization. So that gets considered as part of the data. Exactly what people do with that I don’t know, but it certainly is favorable that it is counted that way.

Michael Weinstein - J.P. Morgan Chase & Co.

It is favorable for the trial, but I am just trying to figure out the value in counting balloon valvuloplastys, if those are a large number of events. Does that tell us about the therapy or no?

Mike Mussallem

What was the last part of the question?

Michael Weinstein - J.P. Morgan Chase & Co.

Is it really telling us about the values of therapy? What is it really telling us if patients have to get repeat balloon valvuloplasty during the trial design?

Mike Mussallem

I think we would be happy to take a look at the economics of this, Mike and I probably should ask you to get back in the queue after this, but I think it just speaks well of this new technology. If the alternative is that you keep going back to the hospital to get balloon valvuloplastys it is hard to believe that that is a better therapy option.

Operator

Your next question comes from Larry Biegelsen with Wells Fargo.

Larry Biegelsen - Wells Fargo

The 1,100 implants in the quarter, does that compare to the 1,200 last quarter?

Mike Mussallem

Yes it does.

Larry Biegelsen - Wells Fargo

And how many trial implants were there in Europe this quarter?

Mike Mussallem

I think it was in the 20 to 30 range. You are talking about in the PREVAIL trial?

Larry Biegelsen - Wells Fargo

Yes and just two other things here, centers exiting the quarter implanting and the implant as a percent of total valves sold, you said it went down this quarter just those two data points that you usually give us? My last question is are there limitations in implants in Germany for reimbursement, is there a limitation on annual implants?

Mike Mussallem

Let me start with the last one. I am not aware of any limitation on annual implants, so this doesn’t have that sort of a factor in it, and we are really trying to move away from, given all of these other factors like number of accounts and exact percentages because as this business gets larger and more mature we think it would be less important to be able to provide that kind of data. Broadly I think we probably added another between 10 and 20 accounts in the quarter compared to what we had before and the sales to implant rate, again we are estimating because we don’t have the actual, but it is probably in the mid 80s.

Operator

Your next question comes from David Lewis with Morgan Stanley.

David Lewis - Morgan Stanley

Mike, in terms of unassisted procedures in Europe was that 1/3 at the end of the third quarter?

Mike Mussallem

That is correct.

David Lewis - Morgan Stanley

Okay and is that 1/3 number higher or lower in Germany?

Mike Mussallem

I would guess it would be similar. Germany is by far the largest country and they probably got started earlier. Because they have large accounts that number might be a little higher, but I would have to check on that.

David Lewis - Morgan Stanley

So, as we think about sales infrastructure in Germany heading into next year, obviously the increase in reimbursements is going to drive increased utilization. Do you think you have to increase support for that utilization or are you pretty comfortable with your fixed infrastructure in Germany?

Mike Mussallem

I think we are pretty comfortable, although we would be delighted to add more, but there is a great return here, sort of the differences between any kind of resource we add and the number of implants they support makes that a really favorable economics for the Company, so not really much of a factor. I don’t expect anything really substantial that you would see in our results.

Tom Abate

You would probably see a shift from actually clinicians supporting cases where that is diminishing to maybe more customer requirements and things like that, you know, working referrals.

David Lewis - Morgan Stanley

Okay and Mike what is your disclosure on the ongoing enrollment, obviously post disclosure of the PARTNER trials. What are your specific plans for that registry data and any specific timing?

Mike Mussallem

We will continue to collect that data and I am sure that it will be rolled out at some medical meetings in the future, but again, the trial itself is going to be evaluated on the trial results before the continued access started. So, it will be at the end of the trial if that is what you are getting at.

David Lewis - Morgan Stanley

No, could we possibly see registry data from the US coming off of that trial potentially as early as May of next year?

Mike Mussallem

I don’t know that for a fact, but that is one that we can do some homework on and make sure that we address when we have our Investor Conference in December.

David Lewis - Morgan Stanley

Great and Tom just kind of looking at gross margins, you mentioned kind of flattish sequentially heading into the fourth quarter. Just considering the ramp in per valves, as well as currency, why would gross margins be flat into the fourth quarter?

Tom Abate

One of the things, if you remember, we have been getting benefits and GP from FX and that situation totally reverses in the fourth quarter. The underlying product mix looks very, very consistent, so I am comfortable that is what is going to happen.

Operator

Your next question comes from Timothy Lee with Piper Jaffray.

Timothy Lee - Piper Jaffray

In regards to the German reimbursement how should we think about the impact of reimbursement in regards to your sales ramp and how much of a gating factor has a lack of reimbursement been in Germany or any other country for that matter?

Mike Mussallem

I am not sure it has been a big gating factor in the past, but we have been concerned overall that without formal reimbursement it could ultimately limit our ability to grow. One of the reasons that we are really pleased with this is we think they put their reasonable number out there that the hospital is going to be reimbursed and it really gives us the ability to have this procedure just adopted without this financial constraint as an issue. I mean hospitals are still going to judge whether they think this is good therapy and whether the patients are there and we are delighted that this is working out this way.

Timothy Lee - Piper Jaffray

On the competitive front, at TCT there seems to be a heightened interest in at least the pacemaker implants on one of your competitor’s products. Are you seeing that as a concern in the marketplace and are you seeing any of your competitors accounts looking at your device just given some of the data that you have on the pacemaker implant rate?

Mike Mussallem

I think all things equal, people would probably rather not put in a pacemaker when they are going a transcatheter valve implantation. Having said that I would say that the big difference in sizes have been a more prominent issue for clinicians. Now once XT comes on and we think that sort of levels the playing field I think pacemakers start becoming a bigger issue, but right now the bigger issue is really implant size.

Operator

Your next question comes from David Roman with Goldman Sachs.

David Roman - Goldman Sachs

First, Tom your comments on FX for gross margin in the fourth quarter, I assume that also reverses itself in the first three quarters of next year as well?

Tom Abate

Assuming the rates stay where they are today, yes you are probably right.

David Roman - Goldman Sachs

So the way to look at gross margins without giving guidance for 2010, you disclosed what the impact was the first three quarters of the year, we just take that out and use that as a base gross margin to come up with 2010?

Tom Abate

Let me help you with that a little bit. What I said is that if you look at the full year, now I would adjust the headwind we are facing due to FX at being probably more in the neighborhood of 100 to 120 basis points.

David Roman - Goldman Sachs

So you would really reduce your quarter by that to get your quote base operating margin?

Tom Abate

Yes, you know you have that as headwind; we also have a couple of things, we just divested the hemofiltration business, the stents are finally gone, so I probably have 100 of mix already in our pockets. So it is looking better as we relied less on the rates to get to the point in our targets than we originally saw and we are doing more with product mix. It makes next years headwind that much less.

David Roman - Goldman Sachs

Mike, if you look at the other commentary from, maybe not your direct competitors, but from other similar companies pricing inventory, unit demand, these have all been issues and you just don’t seem to be seeing it in any of your businesses. Could you talk about your ability to continue to get mix and particularly in heart valve therapies and what the reception is and maybe what has happening on the pricing front?

Mike Mussallem

We are continuing to see good up tick of our premium products. This has been pretty consistent and was again true this quarter. For example we have new products launched in the US and some of the list actually is related to price to not units. Maybe two out of those ten points of growth are probably related to price as opposed to the unit growth. So, we are still seeing very solid pricing on the valve side. I think we would say the same is true in critical care, so it may just be a by-product of the product lines that we are in.

Operator

Your next question comes from Jason Mills with Canaccord Adams.

Jason Mills - Canaccord Adams

I wanted to start with something we haven’t talked about in awhile, US surgical heart valves. Could you help us understand what underlying unit growth was for you relative to the market? It certainly seems beyond the mix that from a unit perspective you gained some share this quarter.

Tom Abate

I tried to indicate that overall here units were clearly up in the US, so we think we had something in the neighborhood of 8% unit growth, probably, that happened in the big aortic side which is the big driver of the growth. We also saw unit growth on the mitral side, more modest but still solid probably at or above the market.

Jason Mills - Canaccord Adams

Where do you see the market at in terms of surgical heart valve therapy unit growth as you enter 2010 and so you still expect to see, especially if you get an IDE for an XT trial, to enjoy some ample effect from that as it relates to your surgical heart valve business?

Tom Abate

Yes, overall we think that the heart valve market has probably grown and it is a little higher than its typical 3% to 5% growth rate and that may be because we are out there with premium products and so we are causing that to happen. We may also see units operating at the little bit of the higher end of that range as well. It is possible that the attraction of additional patients actually really does stimulate the surgical growth rate; it is not clear at this point. Frankly, if we go back to what has been going on in Europe it seems as though the surgical growth rates have been relatively constant compared to what they were before our transcatheter heart valve. The good news about that is all in all the market growth from THV has been up side, but there may be a little bit of cannibalization in Europe too and those factors, the up side that sort of comes into surgery sort of gets offset. I don’t know exactly how that plays out in the US yet.

Jason Mills - Canaccord Adams

Great and then I have one question for PARTNER and then one for Tom. On PARTNER 2 do you expect to have a co-primary endpoint similar to PARTNER 1? Then for Tom, most of the operating margin expansion you have shown thus far in 2009 well over 100 basis points has come from top line in gross margins. I am wondering what we can expect over the next couple of years from SG&A leverage, if anything, to drive you over that 20% level perhaps as you look at 2010, 2011. Should we look at SG&A perhaps more than we have in the past as our leverage point in the model?

Mike Mussallem

You are probably not going to be surprised, but we really don’t have any details on PARTNER 2 at this point. I mean, it would be foolish to speculate. We are looking forward to hearing back from the FDA in the fourth quarter and we are hopeful here that we can get some pretty quick resolution on this so that we will start our ID trial in the first quarter, but we just don’t know what it is going to look like right now. As I said, we are trying to design a trial that gets it into the marketplace quickly, but it remains to be seen.

Tom Abate

In regards to operating margins we are very happy where we are. Year-to-date we are up about 200 basis points at operating income, 200 at net income. The quarter was up 280 at operating, so very, very good results, but you are right to say that a lot of that has been on GP, but of course we look at the whole picture when we look at what we are going to invest in the other areas of the P&L. I think it is logical. We haven’t given a lot of guidance, but what we have said is that we feel that we are at the high end, at the high water mark for both, particularly SG&A. As you see sales in SAPIEN and THV and some of the new products in critical care, we will expect to see additional leverage from the infrastructure that we’ve got in place all over the world. It is logical we have it that way and we will get more specific when we get to December.

Operator

Your next question comes from Amit Bhalla with Citigroup.

Amit Bhalla - Citigroup

I want to start with SAPIEN XT, in terms of the procedure itself are there any additional steps required in the procedure that would warrant any additional training for physicians, or is it strictly just the change in size for the valve?

Mike Mussallem

I don’t know how familiar you are with the NovaFlex delivery system, but there is an additional step of when we actually bring it in, or bring in the balloon, back into the stent. We think it is a pretty straightforward step, but it is different and it does require training on behalf of the accounts. We think that somebody that has experience with transcatheter heart valves will pick up this additional step pretty easily and it is worth it in terms of what you pick up in profile.

Amit Bhalla - Citigroup

Okay so at this point in terms of the procedures that have been done so far that additional step itself hasn’t caused any issues?

Mike Mussallem

That is correct, but this is the reason that we do this. What we expect, if this gives you any clue, we expect that any training for these sites will happen in the hospitals, so we will be able to bring our clinical specialists in there and without proctoring go through and show them the steps that are necessary.

Amit Bhalla - Citigroup

Okay and can you quantify the impact of any third quarter seasonality on the SAPIEN results and then additionally in terms of the continued Access Program, are any sites essentially butting up against their upper limits and how many procedures they can actually do since there are some limits in place for that program?

Mike Mussallem

In terms of seasonality maybe Tom will have something to add to that, but when you have Q3 essentially at the same level of Q2 that speaks to a lot of growth. If you look at the normal seasonality for Edwards sales are down pretty substantially in the third quarter and from a global point of view we see the most pronounced seasonality in Europe. Given that almost all of our safety and sales in Europe, I think it is a pretty encouraging sign from our perspective to see where sales came out in the quarter.

In terms of our accounts running out of gas, there are a lot of different stories out there. Some places where reimbursement is unconstrained it is going to be more a function of the referral patterns and the competence of physicians. There may be places in Europe where there actually are financial constraints.

Tom Abate

Was the question regarding continued Access in the US?

Amit Bhalla - Citigroup

Yes it was regarding continued Access in the US not in Europe.

Tom Abate

Okay, those numbers were set in proportion to the activity that the centers had in the trial; so, while it is not exactly the number of cases they were doing it was sort of the balance that they achieved probably in the last several months.

Amit Bhalla - Citigroup

Okay, but none of those sites are saying this is a limiting factor, we’ve got more patients coming in we need to…

Mike Mussallem

Oh sure, as a matter of fact almost every site is upset with this. They would like to have more patients there is no doubt about that.

Tom Abate

Bur we are looking at the glass half-full rather and they keep doing this so.

Amit Bhalla - Citigroup

Mike you didn’t quantify that seasonality; is there any way you can give a range there?

Mike Mussallem

There is not really anything to point to where we had a business that was exclusively in Europe and a new technology like this, I think you would just be picking a number out of the wind to say. But, we had talked about and we expected that we would see something that could potentially be less than the second quarter and when it measured up to the second quarter that is about the extent of what we can tell you.

Operator

Your next question comes from Sara Michelmore with Cowen and Company.

Sara Michelmore - Cowen and Company

I was wondering if you could just talk about the cost position of the SAPIEN XT and the Nova Flex catheter and as we look to our models next year is there anything we should keep in mind as far as start up costs associated with that launch in Europe or any differences in the cross position of that product versus the current one you have on the market?

Mike Mussallem

Let me start and then Tom can add to it. Over all I would expect the cost to be higher for the XT with the NovaFlex delivery system. Not substantially higher, but some higher, certainly for start up reasons and also there is also some nuances here that make it look a little more expensive to make. At the same time I would expect that we would get a higher price in the marketplace. Net, net I would expect margins to be somewhat similar to what we are experiencing right now.

Tom Abate

And it should be a lift in comparison to the Company overall.

Mike Mussallem

Yes, not where we want to be. We are moving quickly form generation to the next generation. It is more important about learning and getting it right. I think it represents a lot of potential going down the line to potentially take costs out of the system, but it is not currently the priority.

Sara Michelmore - Cowen and Company

Okay, so this is really in addition to the product line as opposed to a replacement for the SAPIEN. Is that the correct way to think about it?

Mike Mussallem

It is true that the SAPIEN is still there. Our expectations are that people would clearly choose the SAPIEN XP versus the SAPIEN if given a choice. The one place where this gets more interesting is the trial in the US, the PARTNER trial is for SAPIEN and so even though we may have all of our OUS volume over time, and it may take a year for this to happen to switch us over to XP, once we get approved in the US we will be making SAPIEN for the US markets.

Sara Michelmore - Cowen and Company

Okay and Mike is there any update on the transcatheter mitral program? I know you gave us a little update on the enrollment last quarter. I am just curious if there is any update there?

Mike Mussallem

Yes, on the Monarch program, yes as we indicated that enrollment is going a little slower than we originally anticipated, so I don’t expect us to complete enrollment of that trial until 2010.

Operator

Your next question comes from Doug LaSalle with Barclays.

Doug LaSalle - Barclays Capital

With the introduction of SAPIEN XT imminent in Europe will you have a change in terms of the centers that you try to go after in terms of adding accounts vis a vis potentially trying to go after some more centers that are perhaps using those competitive transcatheter valve right now?

Mike Mussallem

Yes, there are a couple of dimensions there. Obviously our good customers today are going to be very interested in getting that XT product and so we are going to want to take good care of them. At the same time we would hope that some of the customers that are maybe using competitor products might want to try out SAPIEN XT so I expect there to be new accounts as well, but the priority probably is for us first to take care of our customers that have been loyal right along.

Doug LaSalle - Barclays Capital

Okay and sort of following on Sara’s question on the mitral valve program, you sort of talked about STCT in terms of the Moebius program sort of being put on hold. Are most of your efforts now being focused on the Monarch program or are you perhaps pursing other things behind the scenes in terms of iterations of perhaps attacking or going after that condition?

Mike Mussallem

We have a high level of interest in the mitral position broadly and so this is one that we are on. We haven’t said anything public about what we are working on beyond the Monarch program, but this is a large opportunity and you can imagine that this has our attention.

Operator

Your next question comes from Spencer Nam with Summer Street Research Group.

Spencer Nam - Summer Street Research Group

I was wondering if you guys could maybe address roughly how many countries in Europe do you expect to hear from in terms of reimbursement in 2010?

Mike Mussallem

What happens is there are a lot of countries in the EU at this point; I think it probably approaches 20 and so I am not sure we keep score on all of the smaller countries. We keep score on the larger countries and we would expect out of the big countries that we might hear from another three, four during 2010 if that gives you some sense.

Spencer Nam - Summer Street Research Group

Yes that is helpful and does that mean that the reimbursement will kick in for 2011 for those countries, or could we see some reimbursement kick in for the second half of 2010 or things like that?

Mike Mussallem

I am not sure that it is necessarily all on a calendar year, so yes we could see some kick in sooner. I hate to speculate exactly how that works though.

Spencer Nam - Summer Street Research Group

Okay that is helpful and then I wasn’t sure if you commented in your prepared statements about the conclusion of the Cohort B trial and whether we could expect any sort of FDA filing on that cohort in 2010?

Mike Mussallem

We didn’t speak to it on this call, but we have spoke to that previously. Cohort B enrolls first and we completed enrollment back in March of this year. So, once we have that data we have decided that we will submit that data first and not wait for the Cohort A data; so that will indeed go in our expectation here that it goes in sometime mid-2010 if that is the question.

Operator

Your last question comes from Brooks West with Craig Hallum Capital Group.

Brooks West - Craig Hallum Capital Group

Mike, I wanted to drill down a little bit more on the potential impact of SAPIEN XT in Europe. I am trying to get your thoughts on how that might impact your transapical procedures and then some thoughts on your ability to potentially take some share from CoreValve and what might the training or familiarity hurdle be with the physicians that are using CoreValve and how you might overcome that.

Mike Mussallem

First and again this gets a little speculative because we really don’t know yet. Right now you would get patients that would not be good candidates for a TF procedure. Once their XT is in place they could indeed be candidates for that, so I think it does mean that you have the potential to do more TF. Having said that TA is very popular and it has become very popular with the surgeons and so I don’t expect them to walk away from the procedure and I wonder whether they will continue to do this and even consider it an interesting alternative versus an open sternotomy.

When we try and contrast it to customers that are CoreValve customers and their ability to learn the XT I think it is always helpful if you have already done transcatheter valves and you have developed a certain skill level around that and that is helpful. You still have to go through the training, but you have clearly made some big steps forward; your competence level is probably up; you have learned to work as a team and so I think it is definitely a pretty substantial step forward.

Brooks West - Craig Hallum Capital Group

So obviously you have probably had some conversations with centers that are using both devices. I mean is there a great interest in CoreValve doctors in the new slimmed down XT delivery system?

Mike Mussallem

Yes, there is clear interest that is for sure, and I think that is more or less the interventional cardiology as a community: when there is something new and interesting they are very interested and I wouldn’t be surprised if they look at it very carefully.

Mike Mussallem

Thanks so much folks for all your continued interest in Edwards. Tom, David, and I will welcome any additional questions by telephone and with that, back to you David.

David Erickson

Thank you for joining us on today’s call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying growth rates and amounts adjusted for special items, are included in today’s press release and can also be found in the Investor Relations section of our website at edwards.com. If you missed any portion of today’s call a telephonic replay will be available for 72 hours: to access this please dial 877-660-6853 or 201-612-7415 use account number 2995 and pass code 334198.

Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation. (Operator Instructions)

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Source: Edwards Lifesciences Corporation Q3 2009 Earnings Call Transcript
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