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Edwards Lifesciences Corp. (NYSE:EW)

Q4 2009 Earnings Call

February 04, 2010 05:00 pm ET

Executives

David Erickson - VP, IR

Mike Mussallem - Chairman and CEO

Tom Abate - Corporate VP, CFO & Treasurer

Analysts

Bob Hopkins - Bank of America

David Roman - Goldman Sachs

Amit Bhalla - Citigroup

Douglas Tsao - Barclays Capital

Larry Biegelsen - Wells Fargo

David Lewis - Morgan Stanley

Bruce Nudell - UBS

Kristen Stewart - Credit Suisse

Chris Pasquale - JPMorgan

Jason Mills - Canaccord Adams

Tim Lee - Piper Jeffery

Glenn Novarro - RBC Capital Markets

Sara Michelmore - Cowen

Jeff Englander - Standard & Poors

Operator

Greetings, and welcome to the Edwards Lifesciences Corporation fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David Erickson, Vice President, 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 fourth quarter 2009 financial results. During today's call we'll discuss those 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'd like to remind you that during today's call we will be making forward looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to our sales, gross profit margin, net income, earnings per share and free cash flow goals and other financial expectations for 2010; the regulatory approval and sales of heart valve therapy products including Magna Mitral Ease, and Physio II; clinical study of Project Odyssey the continued adoption and expected 2010 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; the development of continuous blood glucose monitoring technology and the impact of foreign exchange fluctuation on our financial results.

These statements speak only as of the date on which they were 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

Thank you David. 2009 was another successful year for Edwards on several fronts including achieving substantial earnings growth and continuing to make significant investments in our future. We're proud to report that the matter exceeded all of our 2009 financial goals. Our total sales diluted earnings per share and free cash flow all exceeded our original guidance while our gross profit margin increased to 69.8% of sales which was at the high end of our 68% to 70% goal. We also extended our leadership in Transcatheter Heart Valve. We fully enrolled the US Partner Trial and prepared to launch our next generation Sapien XT outside the US.

We continue to see very favorable clinical results and believe we are will positioned to continue to lead in this transformational therapy. This is a strong year for top line growth. As we achieved an underlying sales growth of 11% in 2009. And Heart Valve therapy during our second year of Transcatheter and Heart Valve sales, we achieved a $112 million and exceeded our goal of doubling Sapien implants in 2009. We also introduced our Magna Ease aortic valve in the US and our Physio II ring in the US and Europe.

Now turning to fourth quarter results, on a reported basis total sales grew 11.9% to $347 million and grew 10.2% on an underlying basis. Reported sales were lifted by approximately $17 million from foreign exchange, largely offset by discontinued products.

Reported sales for Heart Valve therapy were $188 million, representing a 26% growth over last year, which included a $9 million contribution for foreign exchange. Sales grew 15% on an underlying basis driven by strong Transcatheter Valve sale and recent US surgical product introductions.

Globally surgical Heart Valve sales grew approximately 8% on a underlying basis for the fourth quarter. The US continue to play a significant role and sales grew approximately 10% and we gained share during the quarter. For the full year 2009, surgical heart valves grew 8.4%, new products drove the global growth and unit share gains, particularly noteworthy were the performances in the US and Japan, where we saw strong adoption of our newly approved Magna valves, we expect these new launches to enable us to continue our surgical heart valve sales momentum in 2010.

This year we planned to introduce Magna Mitral Ease in the US and Europe during the third quarter this new micro valve enables easier implantation and is specifically configured to facilitate minimally invasive surgery invasive surgery. We believe this is an important step forward as it offers patients and surgeons an expanded set of options.

At [STS] we announced the first implants of our new MIS aortic valve surgery system called Project Odyssey and we performed at two centers in Germany. This system (inaudible) our expertise and heart valves within innovations and delivery to enable an even faster procedure with both the shorter patient time of bypass and smaller incision. We have begun actively enrolling patients and a small clinical feasibility study called TRITON and if results look favorable we'll expanded to a CE mark trial.

Turning to repair, underlying growth in the quarter was approximately 8%. The strong adoption of our Physio II rings in the US and Europe played a role in driving global sales this quarter as customers continued to convert to this ring.

In addition, we introduce new minimally invasive accessories to use with our Physio II ring, and in January we launched this ring in Japan and expected to see a strong adoption over the next several quarters.

Last month the FDA issued draft guidelines for the development of heart valve products and these guidelines are currently open to industry and public comment. A prime review there appears to be a high degree of consistency between the new guidelines and current industry practice, therefore we don’t expect this process to result in any significant change to our business. We are working together with our industry peers that’s part of an (inaudible) heart valve working group to respond to the FDA during this comment period.

To summarize, we are in the first year of launch for Magna Ease and Physio II and combined with our Magna Mitral Ease launch later this year, we are confident in about our ability to drive continued growth and share gains throughout 2010. In addition, we'll continue to make substantial investments and our strong product pipeline which we expect to fuel our success beyond this year.

Turning to Transcatheter Heart Valves, we had a strong finish to the year, achieving fourth quarter SAPIEN sales of $35 million driven by robust sales in Europe and continued international expansion. In addition, for 2009 we exceeded our goal of doubling the number of Transcatheter and Heart Valve procedures compared to 2008. We are making good progress on obtaining four more reimbursement in Europe. Last quarter we announced reimbursement for Germany, and we are pleased that France also granted formal reimbursement beginning on January 1. Procedures in France will be reimbursed that approximately EUR27,000 to EUR28,000 with coverage for both transapical and transfemoral approaches. This is important news as France is the second largest market in Europe. We expect the implementation of formal reimbursement to expand the use of Transcatheter Valves. We continue to pursue formal reimbursement in other countries, but in the mean time the same dynamic surrounding transitional funding continue to exist and we remain pleased that hospitals are able to perform these procedures.

We look forward to a steady stream of clinical data being presented at medical meetings during the year. In May one year of source data which represents our European commercial experience will be featured at EuroPCR in Paris.

Turning to our US partner trial, as previously discussed we completed enrollment both arms of our IDE trial for SAPIEN and are continuing to enroll approximately 40 patient per month under continued access. As previously mentioned we planned to submit Cohort B data independently and expect to complete one year follow-up by the end of April 2010.

Given our current projections, we anticipate Cohort B data to be presented in the third quarter and in the fourth quarter we would expect to submit to the FDA for approval. For Cohot A we completed enrollment in August of 2009 and anticipate FDA submission in mid 2011. As a reminder Cohort A compares randomized patients to either SAPIEN technology or surgery and includes the transapical approach.

We remain confident in our partner trial design assuming our favorable data comparison and a one-year approval process this would result in US SAPIEN approval for medically managed patients in 2011.

Building a upon our transcatheter platform we continue to make excellent progress on our next generation SAPIEN XT which enables access the smaller arteries thereby expanding the treatable patient population. In Europe, we continue to anticipate CEE mark approval and a discipline launch of SAPIEN XT with our NovaFlex system in the first quarter of 2010 with increased adoption throughout the year.

Additionally, we are pleased to report the completion of several successful cases with our new larger or 29 millimeter SAPIEN XT valve. The addition of the 29 millimeter valve to our SAPIEN XT portfolio is important as of expense of treatable patient population for transcatheter heart valve. This valve is expected to be commercially available in Europe later in 2010. We are also continuing to enroll patients in the PREVAIL TA study of our SAPIEN XT with the lower profile a sender to delivery system. We still anticipate introducing this system in the second quarter.

In the fourth quarter, we submitted our US IDE for the Partner 2 trial which will study our SAPIEN XT valve, this trail which includes both our NovaFlex and our sender to delivery systems will target high risk patients. We receive questions from the FDA and are working closely with them to further the approval process. Based on the current rigorous regulatory environment trial approval maybe delayed into the second quarter of 2010.

In Japan, we completed out first compassionate used cases with the SAPIEN valve using both delivery systems last October. We are pleased to report that we received approval of our clinical; trial design and intend to start a trial with our SAPIEN XT during the second quarter of 2010. Successful trial completion could result in an approval as early as 2013. We are very excited to achieve this milestone as we expect this technology to be an attractive option for Japanese patients.

With regard to the core valve litigation we are pleased with the recent decision in Germany which found our German Anderson patent valid. The UK Anderson patent was earlier found valid as well. We expect a decision on our infringement appeal versus core valve in Germany later this month.

In the US case against core valve we continue to prepare for the jury trial which is scheduled to begin next month. We believe Edwards has the strongest transcatheter valve patent portfolio and enforcing our intellectual property as an important element of our broad leadership strategy.

In summary, we are coming of a great 2009 with $112 million in sales and based on our momentum, we remained confident in meeting our $170 million to $190 million expectation this year. As we expand the reach of this exciting technology we will remained focus as always on our clinical success. 2010 promises to be an eventful year with several important commercial and clinical milestones that will help us set the stage for the future.

Now turning to critical care, for the fourth quarter critical care reported $121 million in sales. On an underlying basis we grew 7.2% which excludes the positive $6 million impact from foreign exchange and a negative $11 million dollars associated with the sale of our hemofiltration product line, underlying growth was driven by the strong sales of FloTrac pressure monitoring product and PreSep.

FloTrac results continue to benefit from the earlier launch of a third generation algorithm which 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 continues to be very well received by clinicians.

In pressure monitoring, we continue to gain share based on our market leading products and sales of PreSep showed continued solid growth as a result of clinicians increasing adoption of early goals record therapy protocol for the treatment of Sepsis, also we recently announced an agreement with Phillips to display oximetry results while using our catheters at their monitors. This agreement will allow clinicians to more conveniently obtain the valuable information delivered by our products.

As you maybe aware there is a US field corrective action underway out of hemo filtration product part of a product line we divested to Baxter last year. We are assisting Baxter in providing customers with a software upgrade. We don’t expect this to have a material impact on our financial results.

With regard to our continuous glucose monitoring program, during the quarter we received this CE Mark and have begun clinical evaluation of our first generation product in a limited number of European sites. This year we plan to continue post approval trials in Europe to gain real world experience in a variety of clinical situations and implement system enhancements.

In addition, in the US we anticipate filing for regulatory approval in the middle of 2010. There is growing evidence that closely monitoring glucose levels in critically ill patients can positively impact patient care and outcomes. We are excited about this new opportunity to fill an unmet need and anticipate that our investment in this technology will help drive long term growth in critical care.

In conclusion we've stepped up our critical care growth rate in the second half of 2009, we also made significant progress in making our parameters more accessible to clinicians while strengthening the evidence that demonstrates the value of our technology. And in 2010 on an underlying basis we continue to spec critical care sales to grow 5% to 8%.

Turning to cardiac surgery systems reported sales for the quarter of $24 million were relatively unchanged from the prior period. As previously announced, last September we initiated a voluntary recall of our EndoClamp balloon catheter due to a supplier quality issue with one of the components. As anticipated, fourth quarter MIS sales were impacted by more than $1 million we've since addressed the issue and re-entered the market last December. Consistent with our previous announcement, we plan to transfer our cardiac surgery system products to our new facility in Draper, Utah this year which will enable us to significantly expand our manufacturing and R&D capabilities. For 2010, we continue to expect full year revenue of $100 to $110 million which represents an underlying growth rate of 11% to 13%.

Total reported sales of vascular products were approximately $14 million this quarter and we are down year-over-year due to lower sales of the divested life span products. Sales of our Fogarty products were relatively flat versus the prior year.

Now I’ll turn the call over to Tom.

Tom Abate

Thank you, Mike. In addition to this strong sales result Mike discussed we met our EPS guidance while we substantially increased R&D investment and we are particularly pleased that we also achieved a record growth profit margins. For the quarter our gross profit margin was 70.7% compared to 68.1% in the same period last year. This 260 basis point improvement was due primarily to product mix partially offset by foreign exchange.

For 2010, due to foreign exchange rate changes since our December investor conference. We now expect our gross profit margin to be at the high end of our previous 50 to 100 basis point increase.

Fourth quarter SG&A expenses were $132 million, or 38.2% of sales, an increase of $12 million over the prior year. This increase was driven by foreign exchange and higher heart valve therapy sales and marketing expenses. For the full year 2010, we continue to expect SG&A to be between 37% and 39% of sales. R&D investments in the quarter were 48 million or 13.9% of sales, an increase of 12 million over the prior year. This increase was primarily the result of additional investments in Transcatheter technology and glucose monitoring. For full year 2010, we continue to expect R&D as a percentage of sales to be 13% to 14%, as we invest in our growth initiative.

During the quarter, we recorded a $3.7 million special charge related to the write-off of previously capitalized pattern enforcement cost. This write-off resulted from our year end assessment of pending a palette court patent litigation in Europe. Our reported tax rate for the fourth quarter with 23.7%, excluding our special charge the tax rate was 24.7%.

For the full year 2010, we continue to expect our rate to be between 25% and 26%, assuming the federal R&D tax credit is renewed this year. This credit provides an approximate of 150 basis points benefit to our annual rate. We are not assuming renewal of the credit in the first quarter of 2010. Accordingly, we are projecting a first quarter tax rate of 27%. When the credit in renewed, our results will reflect the cumulative year-to-date benefit.

FX rates positively impacted fourth quarter sales by approximately $17 million, compared to the prior year. Since issuing fourth quarter guidance last October, the impact from changes in FX rates was immaterial. Looking forward, at current exchange rate we now anticipate an approximate 15% positive FX impact to 2010 full year sale, compared to the 40 million positive impact we communicated in our December guidance.

Free cash flow generated during the fourth quarter was $46 million; we defined this as cash flow from operating activities of $66 million, less capital spending of $24 million plus $4 million in tax payments related to previous license milestone. For 2010, excluding special items we continue to expect free cash flow to be between 190 million and 200 million. For fourth quarter we repurchased 208,000 shares of common stock for approximately $16 million. For the full year, we repurchased 1.5 million shares for approximately $96 million.

At the end of the year, we had about a 100 million remaining on our existing share repurchase authorization. Our current plan is to request a new authorization at our upcoming board meeting. For modeling purposes we still expect diluted shares outstanding to be between 59 million and 60 million for 2010.

Turning to the balance sheet, we ended the quarter with a net cash position of $244 million. Total cash of $334 million, exceeded our total debt of $90 million. Our DSO at the end of the quarter was 66 days, an improvement of 5 days from the prior quarter. Inventory turns were 2.5, a small increase from the prior quarter.

Turning to our 2010 sales guidance, we are projecting no change in the underlying strength of our sales. If FX rates remain at current levels, we would expect reported sales to be at the lower end of our previous full year guidance of 1.43 billion to 1.50 billion. We continue to expect our product line sales ranges and underlying growth rates to remain unchanged from guidance we provided at our December investor conference.

For first quarter 2010, we project total sales of $335 million to $355 million. We estimate that first quarter diluted EPS will be between $0.77 and $0.81. For full year 2010, despite the recent FX headwind, we continue to estimate that diluted EPS will be between $3.50 to $3.60, representing an annual growth rate of 15% to 18%.

Finally, our net income growth expectation for the full year 2010 remains unchanged at 17% to 19%. Before I turn the call over to Mike, I would like to inform you that in the next few months, we have long term stock option grants that will be expiring. Several of our offices and directors retain their options for the full term and will be required to exercise them. You will see these transactions in SEC filings, but the number of shares involved is relatively modest as less than 400,000.

With that, I’ll turn it back over to Mike.

Mike Mussallem

Thanks Tom. We are pleased with our strong finish to a very successful year, as we achieve substantial 2009 earnings growth, while continuing to invest in our future. Looking forward, we remained focused on achieving our annual financial goals for 2010, we expect to generate total sales of $1.43 billion to $1.5 billion which represents 10% to 13% underlying growth. In addition, we anticipate increasing our gross profit margin by 50 to 100 basis points achieving net income growth of 17% to 19% and generating free cash flow of a $190 billion to $200 billion.

In closing, we are approaching our 10 year anniversary as an independent public company in April. As proud as we are of the company that we built and the innovations that we brought to patients, we remained very focused on creating a bright future for Edward's and believe that the best is yet to come.

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

David Erickson

Thank you we intend to end today’s call by 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 that you ask if you have additional questions please reenter the queue and we'll answer as many as we can during the remainder of the hour. Operator we are ready to take questions please.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question is coming from the line of Bob Hopkins with Bank of America. Your line is now open you may proceed with your question.

Bob Hopkins - Bank of America

Great thanks Mike. First question for you just on the comments about the status of the [CPNX TIDE] filling in United States and the potential for delaying of the second quarter I was wondering if you could be any more specific on what is going on there, is that more of function or just the regular inventory environment or is there something specific with the filing that needs to be addressed?

Mike Mussallem

No, we don't believe that there is anything specific with the filing that really needs to be addressed Bob, we really do believe that its climate related. We are working very closely with FDA, we are going back and forth answering their questions, but its just appears that the level of rigor that they are exhibiting is at a higher level than we have seen in the past and so that’s why we say that the approval could be delayed here into the second quarter.

Bob Hopkins - Bank of America

So, nothing in terms of new data or new analysis that might take any extended period of time?

Mike Mussallem

No, they ask for some things, but nothing that's time consuming and developing Bob.

Bob Hopkins - Bank of America

Okay. And then just to shift gears in terms of the reimbursement climate in Europe, I was wondering if you could comment, do you think you are going to be able to generate the same ASP in France as in Germany and then can you just give us a sense as to what other countries you might expect offering of reimbursement in Europe in 2010 and should we again, we expect rates more to be lower like inline with France or is potential for hire more online with Germany? Thank you.

Mike Mussallem

Sure. There is a lot there, overall Bob, the short answer is we don't expect this to affect our ASPs, in fact when we introduced XT, we would expect XT to be introduced at a higher ASP. We certainly like the reimbursement in Germany better than France but when you compare it to the alternative, that there was not formal reimbursement in place in France, this is still a big offer and we think its just going have the French market open up for us and so that’s an net positive and we expect this to evolve overtime, there is even a review process on the French number that could influence that favorably. Overall, its tough to predict exactly what other countries are going to come inline, fortunately we have got a very nice climate right now that allows people to pay and so any kind of progress that we make on formal reimbursement we feel the net positive but we got to feel good about the fact that the two largest countries in Europe already have reimbursement in place and we think its such great tone and a great example.

Bob Hopkins - Bank of America

And partners still at TCT.

Mike Mussallem

We have never said that Bob. What we have said is that the partner results we would expect to be available in the third quarter or probably at a major meeting. So it could very well line up with that but until we at the data loss and see it specifically, we haven’t shared exactly once.

Operator

Our next question is coming from the line of Mr. David Roman with Goldman Sachs. Your line is open you may proceed with your question.

David Roman - Goldman Sachs

Just hoping if you could just talk a little bit more about two things first the review process in France how that works and when we could expect to hear something on that? And then secondly, of the analyst meeting you are talking about seeing some data in May regarding proxies for the medical management arm at PCR can you be elaborate on that and then lastly just a follow-up on the tax rate.

Mike Mussallem

Let me do a little bit first and then we’ll turn over to Tom on the tax rate. First of all on French imbursement, yes its in place, it’s a two year reimbursement it refers to both transapical and transfemoral, we feel good about that there is a common period we will argue that the rate maybe should be a little larger. I don’t know whether that’s going to turn out to be fruitful or not David so not clear.

In terms of the data that’s coming up what we were suggesting and trying to signal at that time is obviously the partner measures one year data related to survival et cetera and we have been tracking the European commercial experience in a registry and that source registry should have one year data that’s available for presentation at EuroPCR in May.

And so, that will be a pretty substantial data point of arguably sort of the same vintage of technology that’s been in the US partner trial. So it’s a little more modern and it's more indicative of what US partner patients have had and we know that there has been a learning curve. So, we think that there is something there that could be meaningful in terms of leading indicator. And finally as it relates to tax rate, I’m glad you picked up on that because that actually will effect our first quarter projections and Tom can (inaudible) like that.

Tom Abate

Is your question related to Q1?

David Roman - Goldman Sachs

Assuming the R&D tax credit gets renewed to as if say Q1 is 27, is in fact 27% that throughout the year it doesn’t basically evenly get distributed over the remaining three quarters?

Tom Abate

No, actually what it will do, will do a catch up in the quarter that the bill is signed. So, we are very confident in the passage of the legislation but until the actual document is signed by the president you are not able to actually factor that until your number. So, but when it does, when it is inactive then it’s a retroactive in that particular quarter.

David Roman - Goldman Sachs

Got it, okay, so just by math asset the tax rate probably knocked $0.02 to $0.03 off of Q1 earnings (relative) to where people were looking?

Tom Abate

You are exactly right, it’s about $0.02.

Operator

Our next question is coming from the line of Mr. Amit Bhalla with Citigroup. Your line is open you may proceed with your question.

Amit Bhalla - Citigroup

I wanted to ask you about Germany and France and talk a little about adoption there, with reimbursement in place with Germany for a couple of months and France for the last month. What have you seen in terms of increases in adoption or no changes at all?

Mike Mussallem

I would say again without signaling any Q1 results because we're still early into it. Clearly this is a big net positive in Germany. This is the biggest most important country to us, and the fact that they have this level of reimbursement is very substantial. You can imagine hospitals will just soon keep as much of that as possible, but are actually our selling price in Germany we think actually will end up probably having be favorably impacted by that current reimbursement climate.

In France, we're just at the front end of this. We really think this is going to be a real positive going forward and France is a country that we really look forward to being a lift for us in 2010, so you can't tell a lot here in terms of their being a step function, but this is meaningful and highly noticed, people sort of start priming their referral bases once this reimbursement is in place on it, so we expect it to have sort of building impact.

Amit Bhalla - Citigroup

And then in terms of following up, can you give us an update on the percentage of centers that are running independently right now and then for Tom, CapEx in the quarter rough in the mid-$20 million range, I haven’t seen it at that level in several years, can you just elaborate on what happened with CapEx in the quarter?

Mike Mussallem

In terms of centers running independently, I don't have the exact number, I want to guess that its somewhere in the 25% or 30% level right now of centers that are operating independently. So its clearly stepped up and we're continuing to make progress and that's the one that we expect to make a lot of progress on during the course of the year.

Tom Abate

And in CapEx in the quarter, I would say pretty consistent, its very consistent well that full-year expectations and maybe timing wise a little heavy in the fourth quarter as we pick up the initiatives to build the infrastructures for some of the things we're looking forward to.

Operator

Our next question is coming from the line of Mr. Douglas Tsao with Barclays Capital. Your line is open. You may proceed.

Douglas Tsao - Barclays Capital

Hi, thanks for taking the questions. Just turning to the Odyssey Project I was just wondering if you could provide a little bit more detail in terms of the timeline for progressing the feasibility study into a CE marking study. Is this something you're looking for a particular number of patients, or are you trying to get a sense of the results in the study first?

Mike Mussallem

Thanks for the question. Here is what we're trying to relate. We started enrolling these patients, and if things go very well here, and we get all green lights, we're just going to keep it rolling and we'll just expand the size of this and turn it into a CE mark trial. If we see things that really should be changed or improved, then we would be willing to go back and make whatever changes are necessary before we embarked on a CE mark trial. So what I'll relate to you is if let's say everything goes great, what could happen, well we could find ourselves with the CE mark in 2011. Right, but that really presumes that we get all green lights at this stage of the game. So it's hopefully that's helpful.

Douglas Tsao - Barclays Capital

And then at what point do you expect to provide us with more details in terms of sort of the technical aspects of the valve whether it's futureless in some of the mechanisms around that?

Mike Mussallem

There is a few things that I could say we've kept a little bit under wraps at this point, but I can say a couple of things. One is very much based on the Magna technology, and so the Magna valve itself, the leaflets, the frame and so forth, it's really pretty much a duplicate of that. But it also employs some technology that's not far from our transcatheter technology in terms of the way that it actually attaches, so it has its has a [extent like] frame that's incorporated into a Magna type body. So maybe that gives you a few clues there overtime. I would say stay tuned for the next medical meetings I would imagine in a meeting like ATS if we continue to have green lights that we're able to share more.

Douglas Tsao - Barclays Capital

And then just finally quickly if you could a little bit more detail around on the cap process for the PARTNER trial. Are you having to go back regularly to get the caps extended, or are they filling up and just a little bit more detail there?

Mike Mussallem

Could you repeat that what around …

Douglas Tsao - Barclays Capital

Just around the continued access protocols for the PARTNER trial in the US. Are you having to go back regularly to the FDA to get those extended or have they given you a certain limit that enables you to continue enrolling patients or implanting at a pretty regular pace?

Mike Mussallem

At this point, we see this as continued access continuing up to the point that certainly, that the data is available and we would expect up to the point of approval. There is clear pressure from clinicians. Clinicians would like to have many more people available for continued access and it's kind of a little bit of a sad story right now that there are a number of patients on the waiting list that just don't get the technology. You used to have twice as many patients that at least went into the trial, now you have really only the treatment group. So that's a little rough, but I think that FDA is being very focused on having a trial that has high scientific significance, so I expect to stay right at this kind of number for the foreseeable future.

Operator

Our next question is coming from the line of Mr. Larry Biegelsen with Wells Fargo. Your line is open. You may proceed with your question.

Larry Biegelsen - Wells Fargo

Just two questions, first on XT. It sounds like there's no delay to the launch, the original timeframe in Europe first-quarter 2010, but, Mike, in your comments you talked about a disciplined launch of XT, what does that mean, and why wouldn't physicians immediately switch over to the XT from the other valve?

Mike Mussallem

So just the first part of that question, yes we stay confident that will get a CE mark and be able to get started here in Q1. When we stay disciplined, you will recall what we've done in the past Larry, there is a tremendous pull on the part of clinicians that like to just go right now, just ship into us, but we're not willing to go through that.

We really want to go through a very deliberate training process, so that we're sure that people are fully comfortable and fully confident in terms of implementing the XT even though there is not much, it's not a big change from the SAPIEN valve, it's one that we're going to be very deliberate, so I would expect it to be a ramp Larry rather than some kind of a step function when we introduce.

Larry Biegelsen - Wells Fargo

That's not a supply issue.

Mike Mussallem

No. I fully expect us to be able to supply plenty for what we have planned.

Larry Biegelsen - Wells Fargo

All right and one long-term question; things have gone well for you recently, and I think investors have become more comfortable with the PARTNER trial, and although the US approval is still much two years away, some investors could draw parallel with Edwards and other medtech stocks and maybe come to the conclusion that we should sell the stock around the US approval SAPIEN, I guess my question is how do you maintain your premium valuation long-term, once SAPIEN is approved in the US?

Mike Mussallem

Thanks, Larry. I think the big picture, the point that you're raising and why we feel confident that valuation should not be returned is that we really see our growth that's going to be sustainable on a long-term basis.

And I'll tell you why, even today there is probably some discounting in the price for the risks that exist in the trial and so forth and we expect those risks to be mitigated over time, but on top of that there will be serial launches though in a number of ways. There will be serial launches around the world as we move from the US to Japan and open up other countries.

We will be building clinical evidence and as we do, I would expect us to broaden indications and again with more durability demonstrated, we would expect this technology to be more and more useful for younger patients, and we would also expect this technology to move to other valve physicians.

So just set aside the other things that might be going on inside Edwards that can drive growth just within the structural heart disease, the transcatheter space there, there's just a lot of layers here that cause us to believe that we will have sustainable long-term growth which sort of separates us from some of the other examples that might sort of have a peak and then a trough afterwards.

Operator

Our next is coming from the line of Mr. David Lewis with Morgan Stanley. Your line is now open. You may proceed with your question.

David Lewis - Morgan Stanley

Mike, just a quick question. I think you mentioned under the continued access program 40 patients came in the last quarter. So a significant number of patients that have trickled in here in the last couple of quarters, is there any chance that we'll see presented data from the continued assets program in a registry type situation prior to the September timeframe?

Mike Mussallem

I don't expect there to be any data that's going to be presented before that third quarter timeframe. No, I don't see that. I would say these patients will continue to be tracked. They will be measured. They will be probably looked at it in terms of the total data set, but I don't think that's going to prompt there to be any early look?

David Lewis - Morgan Stanley

And you seem pretty adamant on the IP position, Mike, so should we assume that heading into this jury trial with core valves, a settlement is simply not on the table?

Mike Mussallem

I think there've been discussions in the past. I don't expect there to be a settlement. I fully expect this to go to trial.

David Lewis - Morgan Stanley

Okay. Just one quick one for Tom and I'll jump back in queue. Tom, given the fourth quarter there was a bullish increase in R&D but you maintained your guidance for 2010, should we be assuming, based on this fourth quarter, that perhaps R&D comes at the higher end of the range for 2010, or should we assume that the fourth quarter was somewhat of an anomaly.

Mike Mussallem

I will go with the later, David. I think we're pretty consistent where we're at. And you know it will fluctuate a little bit in sales particularly there’s some seasonality, but I think the number is solidly in the guidance we gave.

Operator

Our next question is coming from the line of Mr. Bruce Nudell with UBS. Your line is open. You may proceed with your question.

Bruce Nudell - UBS

Mike, I'm presuming that the $170 million to $190 million is still confirmed for TAVI this year and could you just talk about the ramp profile across the year, maybe in the context of the training cadence that you'll likely be able to achieve? Then I have a follow up.

Mike Mussallem

Bruce, first of all we said yes. We continued to be very confident in the $170 million to $190 million especially when you consider, we finished at $112 million, we expect there to be market growth and that to be a driver of growth, then we would expect to probably pick up some transfemoral share during the course of the year.

The foreign exchange rates naturally are the wild card. When we talk about a disciplined launch, I think what you should anticipate is the back half of the year, we would expect to be larger than the front half of the year, Bruce and for the obvious reasons, that would be moving up the ramp.

Tom Abate

As a percentage Bruce, the percentage is not wildly different. This year, we ramped up pretty significantly, so if there is a ramp up, but it's not anything all that unusual.

Bruce Nudell - UBS

And could you give us the units that were actually implanted and the only other thing is are you seeking injunctive relief in the core valve case?

Mike Mussallem

So Bruce, we're trying to get out of this unit count because we find ourselves in this mode you count these 12 units and not count others and so forth. So we really haven’t done that starting this quarter and hopefully that’s okay with you all. In terms of injunctive release, yes we would clearly ask for injunctive release and damages.

Operator

Thank you. Our next question is coming from the line of Ms. Kristen Stewart with Credit Suisse. Your line is open, you may proceed with your question.

Kristen Stewart - Credit Suisse

Tom, just in terms of guidance you're suggesting because of FX changes that the topline should fall to the low end of the range, just how should we think about the impact relative to FX on the bottom line?

Given your hedges, do you still feel like the range is good or should we be more middle, low, how should we think about how it falls through the P&L?

Mike Mussallem

You are saying for 2010 correct?

Kristen Stewart - Credit Suisse

For 2010 guidance, yes.

Tom Abate

The $25million, actually probably bottom line is in the area $0.04 to $0.05 of additional pressure on the earnings

Mike Mussallem

We are not changing our guidance

Tom Abate

But it does raise the challenge slightly.

Kristen Stewart - Credit Suisse

Is that, since you are mostly just on the low end of the top and the earnings should be at the low end as well of your range?

Mike Mussallem

No I would look at it that way. I just want you to know that that is something that’s we are accommodating for in the guidance, but not changing. So we decided consciously not make change to the EPS range.

Kristen Stewart - Credit Suisse

I'm just wondering, the fourth quarter transcatheter valve number obviously came in pretty good, but I was curious whether or not you were seeing any delay in terms of procedures in Germany or France in anticipation of reimbursement coming on line beginning in the first quarter?

Any signs in the market that there was additional pent-up demand rolling into the first quarter to give extra confidence and the ability to meet the $170 million to $190 million?

Mike Mussallem

It’s a little hard to tell Kristen exactly what's going on there. I wouldn’t say that there is, there was a postponing of orders necessarily. So I wouldn’t look at that as a trend. We do see a difference between those European countries that are I would cash strapped having tough economies than those that are doing a little better. So that might be the only color that we can add that’s very meaningful there, but overall we feel very confident of $170 million to $190 million.

Kristen Stewart - Credit Suisse

Would you be willing to give the number of centers that you're in? I know you won't give units of implant?

Mike Mussallem

We’re approximately at the 200 level, Kristen, maybe a little more.

Tom Abate

A little more.

Operator

Our next question is coming from the line of Mr. Mike Weinstein with JPMorgan. Your line is open. You may proceed with your question.

Chris Pasquale - JPMorgan

It’s Chris Pasquale here for Mike. Mike, you mentioned the source data we're going to see at PCR, are you guys going to continue to follow and report out longer-term results from PARTNER EU?

Mike Mussallem

There probably is some continuous follow-up on PARTNER EU. I don’t know precisely. I haven’t done my homework here in terms of what's going to be presented at Euro PCR Chris, but I think we do end up following that data.

The one thing that I would point out about SOURCE versus PARTNER EU is the vintage of partner EU is a little older paced, a little earlier on the learning curve. So we like to think there is probably a greater parallel between the source data and the partner data than there would be in partner EU, but no. Where it’s going to be interesting and where you're right on to ask the question, it’s going to be nice just to see long-term data on patients and that will be valuable.

Mike Weinstein - JPMorgan

Yeah, that was my point exactly. And then just along the same lines, when can we expect to see something from PREVAIL?

Mike Mussallem

Hold on a second. Let me see if I have anything on my notes on that. PREVAIL is the TA study with XT and again this study was done in anticipation of a CE mark. We’d expect that CE mark is around the corner and that we can get the CE mark in the second quarter and I think that we'll have regular updates, probably see something Euro PCR although it's going to be pretty young data at that stage of the game.

Mike Weinstein - JPMorgan

Okay, and as one last quick one, any kind of timeline that we should be thinking of for a verdict in the US core valve trial?

Mike Mussallem

What we're fully expecting is that at the end of this trial, if it’s a jury trial there actually is a verdict and we get a decision at the end of that. So that means that early April we should have a result.

Operator

Thank you. Our next question is coming from the line of Mr. Jason Mills with Canaccord Adams. Your line is now open. You may proceed with your question.

Jason Mills - Canaccord Adams

Thanks Mike for joining the question, can you hear me okay Mike, I had a question on SAPIEN. Let's start with surgical heart valves where the growth in the quarter seemed to be quite robust not withstanding strong transcatheter. You mentioned I think 8% underlying of what was reported growth there and how did that compare with underlying growth compared with what you see tissue valve market, surgical tissue valve market growing, both in the U.S and worldwide. It seems like you've gained a fair bit of share there?

Mike Mussallem

Yeah, we think that the market itself is growing in this 3% to 5% range. In the quarter it probably grew four. We influenced the market quite a bit ourselves. So because we're the largest player when we grow obviously at least the market grow. So we think it's in that sort of range. If we say what is the growth units versus ASP probably most of that was units, I would say it's probably two-thirds, one-third units versus ASP so pretty good share gain in the quarter.

Tom Abate

Actually on the reported basis it looks like surgical 17.

Mike Mussallem

Definitely got a boost exchange rate.

Jason Mills - Canaccord Adams

Was that heavily weighted to repair on time given that you had maybe a bit easier comp?

Tom Abate

No, I think the numbers that Mike gave you were the correct numbers on an underlying basis that you had ask on a reported basis correct?

Jason Mills - Canaccord Adams

Right that's correct

Mike Mussallem

Yeah those are a pretty big difference there.

Jason Mills - Canaccord Adams

Okay and assuming the R&D tax credit comes through we're obviously assuming higher tax rate pro forma year over year, with your guidance of gross margin should be at the higher end of your range it would imply that operating margin expansion should be perhaps towards that 100 basis point extension year over year as well any comments there on operating margin expansion this year?

Tom Abate

No, absolutely. I think you know if you put the pieces together from some investor conference. We are definitely confirming all of that it's about a 150 basis points that we are looking for in 2010.

Jason Mills - Canaccord Adams

For operating margin?

Tom Abate

Yeah, you get a little help from SG&A, little back in R&D but the main driver being GP.

Jason Mills - Canaccord Adams

Great. And last question just as a follow up on that, as we look over the next couple of years where do you see your SG&A as a percentage of revenue going? Where should it be going?

Tom Abate

Well, we should improvement in the fourth quarter and we talk about a way to there was an improvement year-over-year in 2010. Overall, that is the trend that we have tried to indicate in the direction that we are going and consistently that's the outlook particularly once you get out a couple of years.

Operator

Thank you. Our next question is coming from the line of Mr. Tim Lee with Piper Jeffery.

Tim Lee - Piper Jeffery

Just wanted to follow up on the core valve trail question, so its the US-based trial so I am thinking that Medtronic is manufacturing the product in the US so it infringes your patents, it could potential impact to their international sales as well. Is that the right way to think about it or?

Mike Mussallem

It is, the way US law is, not only can you not sell in the US if you are a French but you couldn’t produce.

Tim Lee - Piper Jeffery

Got it. But hypothetical they could shift manufacturing over to Europe given some of the outcomes we saw in Germany, would that be correct?

Mike Mussallem

Yeah, that hypothetically that's the way you get it around infringing a patent would be to produce outside the US and sell that way.

Tim Lee - Piper Jeffery

Got it, thank you and just kind of switching gears on the critical care side, on the glucose front do we see any revenues in the quarter or should we be thinking near-term revenues to be relatively modest?

Mike Mussallem

In glucose in which quarter?

Tim Lee - Piper Jeffery

Just this most recent quarter, in the fourth quarter were there any?

Mike Mussallem

Very negligible.

Tim Lee - Piper Jeffery

Okay and again just going forward should we think about couple of hundred thousand dollars a quarter? I am just trying to get?

Mike Mussallem

You are not far off. Its really we are really concentrating and working out the kinks and getting this technology understood, priority.

Tim Lee - Piper Jeffery

And the just one last one on the reimbursement front both in Germany and in France I mean once SAPIEN XT comes out those are automatically rolled in the current reimbursement?

Mike Mussallem

That would be our belief we believe that our XP is going to be covered there may be some paper work which needs to be filed but we wouldn’t expect there to be a supply interruption.

Operator

Thank you. Our next question is coming from the line of Mr. Glenn Navaro with RBC Capital Markets. Your line is open. You may proceeds with your question.

Glenn Novarro - RBC Capital Markets

I just wanted to follow up with Bruce’s question on the valve, the transcatheter valve guidance for 2010 over $170 to $190 million. I know you said that guidance is still good despite that the dollar strengthening and you anticipate strong market growth in gaining share but I am just trying to get a sense of in the last two months can you give us any specifics as to what the offset is because as the dollar has strengthened its probably bringing you closer to the low end of that $170 million range. Is that fair and if can you give us any specifics as to kind of in your model what was the offset, did you just dial in may be a little bit more share maybe a little bit more pricing anything would be helpful? Thanks.

Mike Mussallem

Yeah, Glenn I think what Tom indicated is at the time of the investor conference we thought we would have tailwind of like $40 million and now $15 million. So it's over $25 million hit to top line across total Edward sales. When you think about this it’s a much slower part of total Edwards it attracts a little more than 10% of total Edward so this is it matters what $3 million or $4 million if you would sort of translate that because its all Europe its probably a little more so may be you qualify. So its that kind of a number. Within that range when we gave that range in the first place we knew that there were several variables that we are good, be the most predominant ones for this number in 2010.

One would obviously be the foreign exchange rate and so we provided for some of that. One would just how fast this market expands there clearly as market expansion that still continues and we continue to be bullish on that one Glenn and then the other is just how well this SAPIEN XT valve performs and the kind of [trans-thermal] share that might come from that. So all those factors are in there. We end up feeling positive enough about just market expansion and the performance of the XP valve that we are not concerned about this FX rate knocking aside of the range.

Operator

Thank you. Our next question is coming from the line of Ms. Sara Michelmore with Cowen. Your line is open. You may proceed.

Sara Michelmore - Cowen

Thank you. Mike just back to this whole concept of share gains, their share gain potential with SAPIEN XP, can you just remind us what you were assuming in that $170 million or $190 million number and just talking through kind of how you conceptually looked at that, is it just as the market continues to expand that you would pickup a higher proportion of new accounts or are you actually talking about the potential for competitive landings and how might that play out, thanks?

Mike Mussallem

Sure. yeah, we really have an offer up and the detailed guidance on that one, Sarah. So clearly as the market expands we think just because the new XP is smaller it's going to make it even more preferred option for new customers. But along the way we also think there is potential to pick up some competitive share. We think that will be quite, we are not thinking into those anything there that is very dramatic. We are going to serve our existing accounts first and foremost because we obviously want to we reward their royalty and then later on it will be available to other customers and we will find out how people feel about that valve versus core valve.

Sara Michelmore - Cowen

Okay and if you could just give us an update on your latest thinking on what you are doing in emerging markets with the transcatheter valve commercially and what do you think the potential may be there may be not for 2010 but over the next couple of years.

Mike Mussallem

I will tell you how we look at emerging markets at this point the biggest markets by far we think for (inaudible) you know if I say the sort of the big markets you Europe, US and Japan and outside of those big markets where obviously most of the medical technology that we offer is sold today. Outside of that, we are going to be very thoughtful about how we do that if there is a population of patients where there is really substantial patients with the ability to pay at the existing prices that we are offering at then those would be the kind of places where we would be able to go and support the program, support the training, support the infrastructure that's necessary and so its going to be quite deliberate you see us doing that and we are walking that right up we have been surprised that at the high level of interest that's there, but we have been very clear that there is such demand here in the markets with the ability to afford that we are going to continue to keep a high par up there in terms of our ASP expectations.

Sara Michelmore - Cowen

That's a great update and one last one on critical care I was curious about this deal you gave so (inaudible) should we think about you doing additional deals like whatever financial players and what kind of opportunity is it for that particular product line to have it integrated like that into the interesting (inaudible) system.

Mike Mussallem

We do think about other players and we are in discussions with other players, we actually could expand this offering even more so in Philips and we can certainly expand it into other players and we would expect to have others to announce at some point in time. You know its not clear to us whether that is wondered more or less removes an objection or really as a big driver of growth. It’s a clear positive and we know that our customers very much like to have this on their central monitoring system and it adds to the convenience and gets rid of some extra boxes and wires, but its not clear to us exactly what it might do to our growth rate, whether it’s a bio positive or something more than that.

Sara Michelmore - Cowen

And I assume just one last quick one I mean is that the kind of strategy you might overtime pursue with the diabetes product to grow the glucose monitor as well?

Mike Mussallem

You know its not clear at this point it probably would be I mean a lot of this has to do with the monitoring companies themselves. They very much want to have the important parameters on their boxes so if we are successful as we hope to be, we wouldn’t be surprised if that becomes a factor later.

Operator

Thank you ladies ad gentlemen our final question will be coming from Mr. Jeff Englander, with Standard & Poors. Your line is now open you may proceed.

Jeff Englander - Standard & Poors

Mike can you just talk a little bit about if you get anything in the numbers for healthcare reform and if so can you quantify that at all and also following up on that any expectations you have going forward for what healthcare reform might look like if at all.

Mike Mussallem

Yeah first of all for 2010, there is really nothing at our numbers that reflects a change in the environment in terms of health care we pretty much expect the environment to be much the same as it is today. In terms of prognosticating on the future healthcare reforms I am lost on that one I mean there are so many possibilities at this point Jeff that its really I am unable to predict how this is going to go. I think we are as an industry broadly I think we are well positioned, I think we play a critical role in the healthcare system and we clearly agree that the healthcare should be reformed there are some important things that need to happen there, but in terms of being able to predict how its going to effect medical devices company is going forward, its beyond their viability.

Jeff Englander - Standard & Poors

Just one question there is nothing in your numbers for the proposed medical device tax?

Mike Mussallem

That’s correct.

Operator

Thank you. We have ended the Q&A session I’d like to turn the call back to management for any closing comments.

Mike Mussallem

Okay, well thanks everybody for your continued interest in Edwards. Tom, and Dave and I’ll welcome any additional question by telephone, 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 relation section of our website at edwards.com. If you missed any portion in today’s 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 341603. I’ll repeat those numbers, 877-660-6853 or 201-612-7415, account number 2995, the pass code 341606.

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

Operator

Thank you. Ladies and gentlemen this concludes today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation. Have a wonderful afternoon.

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Source: Edwards Lifesciences Corp. Q4 2009 Earnings Call Transcript
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