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Executives

John Barr – President and CEO

Brigid Makes – SVP and CFO

Analysts

Rick Wise – Leerink Swann

Vivian Cervantes – Maxim Group

Matthew Dodds – Citigroup

Larry Neibor – Robert W. Baird

Larry Biegelsen – Wells Fargo

Joshua Zable – Natixis

Elliot Davis – Davis Research

Bob Hopkins – Bank of America

Charles Haff – Dougherty & Company

Rick Wise – Leerink Swann

AGA Medical Holdings, Inc. (AGAM) Q2 2010 Earnings Call Transcript August 3, 2010 8:00 AM ET

Operator

Good morning, ladies and gentlemen and welcome to the AGA Medical second quarter 2010 conference call. My name is Diana, and I’ll be your coordinator for today. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in a listen-only mode. Following the prepared remarks there will be a question-and-answer session. (Operator Instructions)

Before we begin the company has asked me to read the following statement. Statements made in today’s conference call may constitute forward-looking statement, it will be based upon management current expectation and will be subject to various risk and uncertainties that could cause the company’s actual results to differ materially from those expressed or implied in such statement. Information concerning this risk and uncertainties, please see the company’s filing of United States Securities and Exchange Commission include in the company’s annual report on Form 10-k and quarterly reports on Form 10-Q.

The company does not undertake any obligation to update or advice any of its forward looking statement. Today’s conference call will also include a discussion a non-GAAP financial measures which management find useful in evaluating its business. A reconciliation to most comparable non-GAAP measure can be found in the company’s press release as filed on Form 8-K today with SEC. The company’s SEC filings may be accessed – to be accessed from the Investor’s page on the company’s website at www.amplatzer.com.

I would now like to turn the conference call over to your host for today, Mr. John Barr, President and CEO. Please proceed.

John Barr

Thank you operator. And welcome to the AGA Medical second quarter 2010 earnings conference call. With me on the call today are Brigid Makes, Chief Financial Officer and Rachel Ellingson, Senior Director Business Development and Investor Relations, Ron Lund is also here our Chief Counsel.

Our plan this morning is for Brigid to provide review of our financial results for the second quarter 2010, as well as to provide an update on our 2010 full-year guidance. I will then provide some business highlights from the quarter and we will open the call for your questions.

Before, I turn the call over to Brigid, I would like to author my perspective on some key achievement in the quarter and an overall assessment of our performance. Overall, we are pleased with our second quarter performance, despite the significant impact in currency, we completed the second quarter with solid growth rates at 8% over the same period last year and 10% on a constant currency basis.

Net sales grow year-to-date was 11% as reported, which remains within our targeted range for the year. Additionally, to demonstrate the impact currency head on our revenue in the second quarter and given the dramatic change in exchange rates seen in May and June, I’d like to point out that Q2 revenue would have been 55.5 million versus 53.8 million or 1.7 million higher, if Q2 revenue was reflected at the same foreign exchange rates that we had in Q1 of 2010.

If we kill away the impact of currency in the second quarter, we saw growth across all geographies with very strong results from our international markets particularly the specific room. Our vascular business continues to grow at a rapid space, driven by markets outside the U.S. where our four product offering is approved.

With the focus on sustaining our strong gross margin and managing operating expenses, we realize the significant increase in operating income of 58% on a sequential basis from the first quarter of 2010, excluding the impact to the Medtronic litigation settlement.

We accomplished this while still making strategic investment in our R&D programs, which include of course, our clinical trials. As you are aware, we have two multi-center randomized U.S. clinical trials regarding PFO closure, respect which is a valuating the length between PFO and we’re currently stroke and premium which is a valuating the link between PFO and migraine headaches.

In the quarter, we made strong progress in our clinical trials. Our respect trial achieved continued strong enrollment in the quarter and we saw continued solid progress on enrollment in premium. It remains our expectation that we will provide more information on enrollment as well as provide guidance on timing for the completion of premium before year-end.

We have – we also randomized the first patient in the feasibility phase of our U.S. clinical trial, design to evaluate our AMPLATZER Cardiac Plug inclosing the left atrial appendage for the prevention of stroke in atrial fibrillation or AF patients. I will provide additional details on all of our business milestones later in the call.

Overall, our first half results are generally on track from a sales perspective, despite the impact on currency and ahead in terms of gross margin and profits. We also continue to generate meaningful cash reflecting the underlying strength of our business, we remain highly optimistic about our prospects in 2010 and beyond.

With that, I’d like to turn the call over to Brigid.

Brigid Makes

Thanks, John. And good morning to everyone. In the second quarter of 2010, AGA Medicals reported net sales of $53.8 million versus $50 million in the prior year. This represented year-over-year net sales growth of 7.6% as reported and 10% on a constant currency.

Clearly, currency has had an impact on our results by way of reference; I’d like to remind you that our 2010 sales guidance was based on Euro rate in the range of 1.32 to 1.38. Our average Euro rate for the second quarter was 1.27 versus an average of 1.38 in the first quarter. While we think it is important to highlight the impact of currency and sales this quarter, we also want to know that the impact have a significant distributor order that for timing reason we did not received in this quarter but still expect to receive later this year.

For the quarter, Atrial Septal occluder sales represented 50.9% of net sales. PFO occluder sales represented 13.5% of net sales; vascular plug represented 9.9% of net sales. And other devices, including devices to close ventricular septal defects, patent ductus arteriosus and the AMPLATZER Cardiac Plug to close the left atrial appendage, accounted for 13.8% of net sales. Accessories that are used in procedure, such as delivery systems and sizing balloons, represented 11.9% of net sales.

Direct sales in North America represented 40.7% of net sales. Direct sales in Europe accounted for 37.9% of net sales. And distributors cover the rest of the world accounted for 21.4% of net sales. Net sales in North America grew 3.5% versus the prior year. For Europe direct net sales 6.6% despite the impact of currency, where 13.7% on a constant currency basis and our distributor net sales representing the rest of the world grew 18.3%.

As I mentioned earlier, the year-over-year sales comparison were affected in part by the timing of (inaudible) Annual Government Tender in one Latin American country. In Q2 2009, we received an order from our distributor in this country of approximately $900,000. This year’s tender process has been delayed and not yet awarded due to issues unrelated to AGA Medical. We still expect to receive this order in the second half of 2010.

In general and in our constant currency basis, the difference in growth rates between North America and the rest of the world is largely due to the availability of certain product sold outside the U.S. but not yet approved in the U.S. These products include the patent foramen ovale or PFO device. Our second product to close patent ductus arteriosus or the AMPLATZER Duct Occluder 2, the AMPLATZER cardiac plug to close the left atrial appendage and our latest version of the vascular plug AMPLATZER Vascular Plug 4 or AVP 4.

Overall growth for the second quarter was principally driven by higher unit growth, also by the appreciation of the U.S. dollar against foreign currency primarily the Euro. Our fastest growth product line continues to be our vascular business which experienced strong revenue growth in the second quarter of 2010, up 51% worldwide. While the vascular businesses are impressive revenue growth in North America at 36%, Europe continues to experience significant momentum with 74% revenue growth versus the second quarter of 2009.

All versions of the vascular plug are approved in Europe, but Europe’s impressive performance continues to be driven by sales of AVP 4 which was launched in Europe in the third quarter of 2009. In Q2, overall PFO sales were essentially flat from the prior year period. However, in line of significant impact of currency in Europe and the lumpiness that we can – that can be associated with distributors order, it might be useful to provide additional detail regarding this products performance from our direct sales force.

Excluding distributor sales PFO device volume increase 14% over the prior period, we continue to be pleased with the performance of our AMPLATZER Cardiac Plug and the acceptance by the physician community outside of the United States. As stated previously we hope to breakout sales of the device as separate line item by the end of 2010.

Moving down the P&L let me now discuss gross margin. Our performance of the gross margin line continues to be strong despite currency with gross margin at 85.5% for the second quarter versus 83.6% in the same quarter last year. Excluding the impact of currency, gross margin would have been 85.8% for the second quarter.

Total operating expenses for the quarter were $40.6 million versus $36.4 million for the second quarter of 2009. However, it is also important to note that total operating expenses for the quarter were essentially flat when compared sequentially to the first quarter of 2010. Excluding the expense associated with the Medtronic litigation settlement, operating expenses were $40.6 million in Q2 of 2010 versus $40.7 million in Q1 for 2010.

Selling general and administrative expenses for the second quarter were $24.5 million up from $23.8 million in the prior year period. The increase and expenses from the prior year was associated with strengthening from our direct sales force in Europe, as well as in North America, offset by lower legal fees and favorable currency impact on non-dollar denominated expense.

R&D expenses increased to $11.5 million in Q2 of 2010 as compared to $8.6 million in Q2 of 2009, largely due to increased spending on our clinical trials. As we have previously discussed spending in our clinical trial is effected by enrollment because these expenses are generally recognized on a per-patient enroll basis. Continued strong progress in enrollment will mean higher R&D spending when compared to the prior year.

For example premium enrollment is up compare to last year, which increased R&D spending in Q2 of 2010. We’ve remained pleased with the space of enrollment in all of our clinical trials. In addition, spending has increased over the prior year due to focus marketing initiative design to accelerate enrollment in our migrate studies and that investment appears to be paying off.

We also commence enrollment in the feasibility phase of our U.S. clinical trial for the AMPLATZER Cardiac Plug. Below the operating profit line there are two line items that I would like to highlight, our (inaudible) of $2.4 million decrease $1.2 million largely as a result of lower debt balances from the prior year, due to our initial public offering and lower interest rate order.

Also, now we’ve booked an income tax benefit of approximately 500,000 in this quarter as compared to a $400,000 expense in the prior year quarter. The income tax benefit is associated with certain deduction that were identity in the second quarter, as a result we increase our tax loss benefit from 9.6 million in Q1 to 10.2 million year-to-date.

EBITDA was $11.9 million or 22.1% of sales for Q2 2010, versus $12.1 million in the prior year. Net income in Q2 of 2010 increased 68% just $3.6 million from $2.2 million in the prior year period, excluding the impact of dividend in the second quarter of 2009.

Let me now talk about non-GAAP EPS, given the high amortization expenses associated with our business, we believe it is useful to provide non-GAAP net income in earnings per share information that would adjust for this charges, as detailed in our press release non-GAAP adjusted income for the three month ended 30th, 2010 were $6.9 million versus $7.4 million in the prior year period.

A non-GAAP adjusted net income for fully diluted share was $0.13 in the second quarter versus $0.18 for the prior year period. I would like to remind you that our non-GAAP EPS adjusted for amortization expense as well as certain one-time items which in this quarter includes expenses associated with changes in purchase consideration and the interest depreciation from our litigation settlement last quarter.

Now, let me make a few comments relating to the balance sheet. We ended Q2 with $14.7 million in cash and increase of $1.5 million from our cash position as of March 31, 2010. This increase is net of a $7.5 million cash payment to Medtronic and importance with determine of our litigation settlement and $2.5 million of tax payment. Our business continues to generate significant cash which will allows us to reinvest in our business specifically our pipeline program.

Accounts receivables were $50.2 million a slight decrease from our balance of $50.3 million at March 31 2010. The company’s Day Sales Outstanding or DSO is 84 days down from 88 days from the first quarter, we are aggressively managing collections to various programs, such as factoring in certain countries and we’ll continue to do so. Inventory decreased to $11.8 million as of June 30, 2010 as compared to $12.4 million at the end of the first quarter.

Now let me turn to guidance and provide some guidance for 2010. We are updating our financial guidance for 2010, as the result for the U.S. dollar strengthening, since providing our prior guidance. As you may recall I’m preparing for our full year 2001 guidance. We had used exchange rates which assume in the Euro would be in the range of 1.32 to 1.38.

Even that we are currently below those rates, we think it makes sense to provide additional clarity to our guidance. If the Euro remains above 1.32, we are comfortable with our existing 2010 guidance in the event the Euro rate averages 1.25 for the rest of the year. We would expand the lower end of our 2010 sales guidance to $217 million, to remind you our current 2010 sales guidance the $221 million to $226 million.

There are no changes to our previously full year guidance for gross margin of 85%, our effective tax rate of 35% and our fully diluted shares outstanding of $51 million. However, I would like to add that our effective tax rate guidance does not include any benefit from the Federal R&D credit. In the event this credit is an acid [ph], our effective income tax would be favorable to our current guidance. We also continue to manage expenses in accordance for our previous guidance.

In addition, if the Euro rate averages 1.25 for the rest of the year, we would also reduce the lower end of our non-GAAP adjusted earnings per share excluding the impact of amortization and certain onetime item to $0.46. Our current non-GAAP adjusted earnings per share is between $0.49 and $0.54.

Now let me turn the call back to John to review some operational highlight.

John Barr

Thanks, Brigid. Brigid has covered many of the financial highlights from our business, let me ship the focus a bit and update you on the status of our major clinical program and other product initiatives. Due to strong performance of our clinical team and study centers, we continue to see strong and steady enrollment in respect. As of July 31, 2010, 762 patients have been enrolled in the study and 1514 patients follow up years have been accrued versus 726 patients enrolled and 1352 patients years, as of April 30th 2010.

We are very proud of this performance and believe our team can maintain enrollment momentum going forward. We also continue to be pleased with the enrollment progress being made in premium, as we previously mentioned, we gained approval in the third quarter 2009 for a significant change through the protocol and we believe that could have an accelerating impact on the enrollment in the trial. And so far the combination of the protocol change and target recruitment efforts appeared to be achieving that objective.

We are not yet providing specific enrollment information, but expect to be in a position to update our investors in the second half of the year on enrollment in the study and our expectation when we also will complete enrollment.

In anticipation of the questions regarding the impact of closure one on our PFO business, let me take a few minutes to provide some commentary around us. For those of you who may not be aware, closure one is a PFO stroke trial that is being conducted by NMT Medical. About a month ago the company announced in the press release that they did not achieve their primary end-point.

We continue to believe that the good news from closure one, is that the trial suggest the PFO closure if safe and as good as medical management and preventing strokes in the patient population. In our experience, the typical PFO patient who has experience the stroke is relatively young, usually in this 30s and 40s. So a lifetime, our medical management is not an easy choice.

In terms of respect, these trials are different and both trial designed and the devices being evaluated. We believe the adapted design for our trial is a real strength. The adapted design is important because it allows us to dynamically adjust sample size based on events. Remember, NMT’s trial design is a fixed-time point analysis with a fixed sample size.

Our trial design is flexible and allows us to continue to enroll in follow-up patients until we accumulate enough endpoints. We believe there is a very real possibility that NMT may have inadvertently underpowered their study.

We’ve discussed the closure one results with key opinion leaders in major markets, particularly Europe. We’ve seen no indication that their practice of closing PFOs, particularly following a stroke will change as a result of this trial. We also expect no change in our ability to recruit patients in our respect study. In this case, not having a competitive product, actively involved in a PMA process is probably a net benefit.

Next, I’ll switch gears to discuss the AMPLATZER Cardiac Plug. Earlier, this year, we received conditional investigation of device exemption approval from the FDA to evaluate the safety inefficacy of our AMPLATZER Cardiac Plug to close left atrial appendage and in June, we enrolled our first patient in a feasibility phase of the trial.

The trial is designed to demonstrate non-inferiority in preventing stroke in atrial fibrillation patients, who are eligible to receive Warfarin when compared to patients who continue on Warfarin as well as safety of device in the procedure.

As we have previously mentioned, the feasibility phase of the trial to enroll 30 patients, randomized to device arm and up to 45 patients in total. It remains our objective to complete enrollment in the feasibility phase of the trial by the end of 2010.

As you are aware, the AMPLATZER Cardiac Plug is CE marked and we’re currently selling device throughout Europe, South America and the Pacific run. In June, the U.K.s National Institute for Health and Clinical Excellence, sometimes referred to as NICE, concluded that the percutaneous closure of left atrial appendage reduced the stroke risk – excuse me – in atrial fibrillation.

We believe these guidelines are significant step forward in recognizing the benefit of left atrial appendage closure and stroke reduction in AF patients. Given the stature and reputation of NICE, we also believe these guidelines could help facilitate reimbursement of our device in the U.K. and even help influence reimbursement recommendations across Europe.

We are working hard on securing reimbursement and have plans in place for all major countries. We continue to train physicians and nurse and there is great interest in the medical community. Reimbursement will be very important accelerating use and sale for this device.

In this quarter, we also continued to implement our plans targeting the electrophysiology community. So we believe to be an important physician group for AMPLATZER Cardiac Plug. We plan to specifically target those electrophysiologists, who perform ablations through our concerted marketing effort focused on training and education of the potential benefit in preventing stroke to the left atrial appendage closure.

We believe these efforts should have a positive impact in making left atrial appendage closure a standard of care for atrial fibrillation patients undergoing ablation. Once we secure reimbursement, we will be very well positioned to rapidly expand the use of this device in the appropriate patient population.

Now, let us turn to our vascular business. While we are hoping to receive approval of our AMPLATZER Vascular Plug 4 in the second quarter in the U.S., we’re continuing to work on answering remaining questions on the FDA. These questions are not clinical in nature and we’re confident they’re all answerable in a timely manner. We are hopeful that we will receive FDA clearance for this device in the third quarter.

I would also like to remind our investors that we continue to invest in developing a new product line of vascular drafts to treat aneurysms, leveraging our expertise in braided nitinol and experience and develop pacing to use systems. We believe we can introduce vascular grafts that could be delivered through a small catheter, resulting in a truly minimally invasive procedure.

We are very pleased with the progress being made in the program by R&D teams. We hope to complete internal validation of our peripheral vascular draft by year end and even more exciting, we also hope to complete validation of low profile graft to treat thoracic aortic aneurysm around year end as well.

In summary, second quarter demonstrated the ability of our business to deliver solid top line growth despite the significant impact of currency. We further demonstrate the power of our business to drive increasing profitability and significant cash generation.

We are entering the second half of the year with positive momentum and are excited about our growth prospects for 2010 and with beyond. With that operator, please open the call for questions.

Questions-and-Answer Session

Operator

(Operator Instructions) And the first question will come from the line of Rick Wise, Leerink Swann.

Rick Wise – Leerink Swann

Good morning, everybody.

John Barr

Good morning.

Brigid Makes

Good morning.

Rick Wise – Leerink Swann

Can you hear me? Yes. Let me start off with septal occluder question. I know there are lot of moving pieces. I just want to make sure I understand septal occluder sales were up sequentially but a little less than expected. I’m guessing currency might have played role. I don’t know whether it’s a distributor or it played role but I want to make sure, I fully understood. John, you don’t think there was any impact, negative impact from closure one on sales there?

John Barr

No. Again in Europe, I mean when closure one was announced, I think with two weeks left in the quarter, so it really couldn’t have had much of an impact to be honest.

Rick Wise – Leerink Swann

Right.

John Barr

And they wouldn’t really impact atrial septal defect sales. They would likely impact PFO sales in Europe and outside the U.S. and again we haven’t seen that and don’t expect that going forward. ASD sales again partly impacted by currency, of course, outside the U.S. In the U.S., we heard anecdotally earlier in the quarter, selective (inaudible) were there and again I take anecdotally and only in certain regions where there were fewer pediatric procedures, the other thing that people noted was several hospitals in the U.S. were taking their inventories but the order rates picked up later in the quarter. So I expected that’s one of those things that happens from time to time and particularly in a business where you have in excess of 80% market share.

Rick Wise – Leerink Swann

And you just touched on, I was going to ask later but we’re seeing a lot of concern, actually we’re seeing fair amount of evidence of slowing procedures, increasing price pressures, just in general, are you feeling any change in environment? Are you more concerned as you look ahead to the second half in that regard?

John Barr

Let me address both. There is two different dynamics I think going on from my perspective. In the U.S., we don’t see any change in pricing dynamics or ASPs were largely right on plan. Again, what we see is more careful inventory management underlying procedure volume, I don’t think has changed other than we said anecdotally at the beginning of the quarter. I don’t – I can’t extrapolate that yet to the balance of the year. And I don’t think it will happen based on what we’re seeing so far this quarter.

In Europe, there is – it’s a very – varying degrees. We don’t think there is an immediate impact but we don’t watch it very carefully but Europe was again more impacted by currency than anything else.

Rick Wise – Leerink Swann

Okay. Last question, sir. First, we’ve had a few NICE guideline announcements. What it means? Is it just a directional – could this have an increased sales momentum or should we concern? I know that there was one that struck me as positive on the left atrial appendage side that now they are looking for comments – that by August 24 on PFO closure, should we be concerned at all about this?

John Barr

No. On a PFO closure, nice periodically updates, all of their guidance and so I think that’s just part of the normal update in the guidance. After reading the literature that cited in their updated guidance, they reflect the most current literature in their request for comments. There was nothing in there that’s anything but positive in terms of continued strong observational and single center studies showing the benefit of PFO closure in preventing stroke. And also they are looking at migraine as well.

In terms of the cardiac plug in left atrial appendage closure, we were very encouraged by that. We think it certainly can help us in the U.K. On U.K. basis, you have to deal with each of the hospital trusts. I think we may have updated you folks that we hired in a health economic specialist earlier this year. That person is putting in place and working with each of the country managers on a specific, country specific plan to secure reimbursement. Each country is different. I think NICE is definitely going to help us in the U.K. but it’s again a process. And I think it will also be influential across Europe in helping us again attack each country on a specific basis.

Rick Wise – Leerink Swann

Okay. Just last for Brigid. Brigid, when we think about second half and seasonality, especially in the third quarter, just given again with all the moving pieces and you’re young coupled with not lot of history for us to judge, I mean, last year, third quarter was sort of like second quarter. Can we expect that trend this year or should we expect that it’s only weaker third quarter fall by a stronger fourth. Thanks so much.

Brigid Makes

I think, you’re probably right about seeing it somewhat similar to Q2.

Rick Wise – Leerink Swann

Okay.

Brigid Makes

Obviously, we need to adjust it for currency as well.

Rick Wise – Leerink Swann

Okay. Appreciate that. Thank you.

Operator

And the next question will come from the line of Vivian Cervantes, Maxim Group.

Vivian Cervantes – Maxim Group

Thank you for taking the question. Can you hear me okay?

John Barr

Yes, we can.

Vivian Cervantes – Maxim Group

Okay. Great. I appreciate your comments about no change in physician practices with the above closure, given closure one result. As we fast forward to November in AHA, potentially, there is an expectation that NMT would release subset data that could shed light on key populations that are getting PFO closure. That said, do you expect a change in practices from then on, may be curtailing you to just individuals with no other symptoms other than cryptogenic stroke and a PFO.

John Barr

Well, I think that cryptogenic stroke and a PFO was the majority of the stroke PFO were that were getting closed. If you’re talking about migraine, I’m not sure they can extrapolate the migraine at all and I don’t think this as much or nearly as much migraine closure going on as stroke. I think the predominant amount of closure of going on right now, today is stroke closure and we hope that changes obviously with positive premium results.

It’s hard to speculate on what additional data they will release. I think if the headlines persist then I think it’s all going to be a positive trend. I think it’s going to say hey it’s safe and hey it’s just as good and these people don’t want to stay on medical management. And we have another trial going on and hopefully we’ll provide a more definitive answer in respect.

I think that there is one new onset probably could occur. It’d be interesting to see that they have a different primary endpoint from us and that we have stroke and/or cause mortality and they included stroke and TIA. And it would be interesting to see in my opinion, how much TIA may have contributed to their not meeting the endpoint because TIA is somewhat speculative in the neurology community. It’s sometime referred to as a mini stroke, a stroke that resolves within 24 hours and who knows that could have quite played a role in their study but I think the biggest issue is probably they’re inadvertently on the power study, I think. Again that’s where the – our adapted model is so valuable because again if it takes more patients to get the right answer then we were allowed to do that with our model.

Vivian Cervantes – Maxim Group

Okay. That’s very helpful. So it looks like, it doesn’t appear to be more factorial that the current factor today is just for stroke and PFO and that there is another no real thing that could struck the limit the population that’s currently being needed treatment at this point.

John Barr

You never can say no because I don’t know the results but I would guess based on the headlines, if the headlines stay consistent, I don’t think it’s going to have an effect.

Vivian Cervantes – Maxim Group

Got it. It’s helpful. And then if we take a look at the base business for structural heart defect and we’re looking at growth rates that are in line with birth rates. The more developed countries that appears to be slowing, do you have plans in place to spoke it on regions of the world that may be pursued at more actively that have higher birth rate.

John Barr

Absolutely. It’s interesting that our fastest growth rates across the board or Asia-Pacific is no surprise. There, we’re really focused on China of course. We completely revamp the distribution model in India and another place, it’s growing rapidly. Brazil in South America is another target for us. So we think that the – what were sometimes referred to as a developing world although it’s developing very, very rapidly.

And even in Asia-Pacific, we have two markets that are growing very nicely, Korea, which we’ve been in for long time, only gave reimbursement for the first time. Last year, used the only be done on a private basis, now it’s being done in public hospitals and we’ve seen a terrific acceleration in the Korean market. And again that’s kind of a case study, where countries continue to develop their economies and then at a certain point, they begin to devote more resources to reimbursements. So we want to be well positioned there.

Japan was the last country to approve the product, that’s growing, continues to grow very rapidly. There, unlike the rest of the world, where 80% to 90% of ASDs were closed by percutaneous closure, in Japan, that rate is in the 30. So we have a ways to go which is a terrific opportunity to continue to grab share in surgery and so, I think for the ASO occluders, that’s definitely great market. But you also got to believe that particular country like China could be a fantastic market for PFO closure and also even more importantly for LAA closure because of the aging population and I believe the stroke rates were even higher than certain western countries.

So I think the entire product line is going to be an opportunity throughout the world but in the short term, I think the developing markets would be a nice vehicle for growth.

Vivian Cervantes – Maxim Group

Okay. Very helpful. Thank you.

Operator

And the next question will come from the line of Matthew Dodds, Citigroup.

Matthew Dodds – Citigroup

Good morning. Couple of questions. First, John, when you talked about the ACP and the feasibility in moving from feasibility to second phase. How long do you think that will take? So if you finished the feasibility at year end, do you have any idea what kind of timeline it might be or how long the valuation would take moving to the bigger second phase?

John Barr

Yeah. We have to follow the last patient for 45 days and of course, that is requirement. And my guess beyond that, it’s probably about 30 to 60 days so although hopefully would be in a position to file quickly with the FDA, I have answered all their other questions regarding preclinical testing, so probably a quarter.

Matthew Dodds – Citigroup

Okay. And then the other question, on the AVP 4, can you roughly break out…

John Barr

One point, Matt, I want to make sure that the 45 patients that we have in the feasibility also get followed and counted in our – in the pivotal phase.

Matthew Dodds – Citigroup

And then for AVP 4, can you give any rough estimate of what percent that is of your EU sales or how fast it can become a big component of that just to give us some idea of where that might go in the U.S. once it’s launched.

John Barr

No. I think that – I don’t think we will break it out for competitive reasons and but I think the best way to look at it is to look at the relative growth rates in Europe versus the U.S. in the last couple of quarters. And also you get a factor in this quarter was probably to stress a little bit in Europe because of the currency but you are talking probably differences in the range of 40% to 50%.

Matthew Dodds – Citigroup

Okay. In terms of year-over-year growth and then one last one, when you look at respect, is it fair to think that the enrollment going forward for a quarter is roughly in the 40 range and it’s bounced a little bit here and there with the last three quarters. It’s averaged 40 to 45. This quarter is the good barometer for where we think the enrollment is going to go over the next couple of quarters or just some of the thinks you’ve instituted could have been higher.

John Barr

I think it comes and goes. I mean, I think on a sustained basis, we’re in the range of 12 to 13 a month but we’ve had a great first half of the year. I mean, if you look through July, we’ve enrolled a 105 patients. Last year, the whole year, we enrolled a 135. We’re really pleased with the progress and the team is working with a good set of sites and I don’t see that changing but I think in the range of 12, 13, 14 a month is probably a good projection.

Matthew Dodds – Citigroup

Okay. Thanks John.

Operator

Our next question will come from the line of Larry Neibor, Robert W. Baird.

Larry Neibor – Robert W. Baird

Thanks. Good morning.

John Barr

Good morning.

Larry Neibor – Robert W. Baird

With so much of your growth coming from the vascular plug and cardiac plug and the PFO in Europe, can you give us some idea of how many countries in Europe where you have actual reimbursement for these products and what the potential increase growth would be as you gain reimbursement across the continent?

John Barr

In Germany we have partial imbursement. We’re in the process of filing for full imbursement later this year. We hope to hear in the fourth quarter. Spain is done on a regional basis. We have reimbursement in certain regions. Italy again on a regional basis we’re in the process, we’re probably closer on two or three of the regions there, but we’re continuing to do that aggressively. France is further out, there probably as most people know, the most challenging for new products. And then U.K. is on a – we do it on a trust basis, which like better terms somewhat regional and there the nice recommendation is going to be a big help.

I think that those are the major countries we focus on. I think that reimbursement would greatly accelerate the rate. I now – I couldn’t tell exactly what it would be. But the most important countries to watch in my opinion would be Germany and Italy, and third the U.K. because those are, for example, on our core occluders those are the majority of our business in Europe.

Larry Neibor – Robert W. Baird

Okay. Could you give us an idea what percent of the population there is covered by – effectively covered by reimbursement?

John Barr

Today or?

Larry Neibor – Robert W. Baird

Today.

John Barr

In the future.

Larry Neibor – Robert W. Baird

Today.

John Barr

Well, I couldn’t tell you off the top of my head. Again, Germany would be 100%, but it’s not full imbursement on the procedural basis. We – for them to begin to do the procedure they need a higher level of reimbursement, the hospital level, that’s where we’re. And actually the hospitals are also requesting this from the government. Europe, I mean, in Italy would be a minority of the population right now, U.K. the same thing.

And just to frame it, hospitals can’t do certain level of procedures, they can do, typically all hospitals in Europe are most, in Europe have a new technology budget and they can fund the certain number of procedures. So we’re talking about getting from one level to a high level. So procedures are being done literally everyday but to really accelerate that rate we need couple of reimbursement breakthroughs.

Larry Neibor – Robert W. Baird

One additional question, U.S. Septal Occluders business, you mentioned in hospital maybe tightening inventory might be a little lumpy in terms of procedure volume. What recurring situation in U.S., say about your potential to increasing prices, your core Septal Occluders in U.S. going forward?

John Barr

We’ll evaluate that year-end. We really haven’t provided any guidance on price increases. But typically as we go through our planning process, we take a look at it, geography and see where we can take some price increase.

And right now, as we’ve said, we’re in a sweet spot sort of from the device standpoint, in that we have very good ASPs with as you know excellent margins, we do not and U.S. do any consignment, which is typical for things like pacemakers and stents.

And so the balancing act is increasing price versus getting on the radar screen of hospitals and having to switch our model, and so we’re very cautious about that and, I think, procedure volume is going to be fine going forward.

Larry Neibor – Robert W. Baird

Thank you.

Operator

The next question will come from the line of Larry Biegelsen, Wells Fargo.

Larry Biegelsen – Wells Fargo

Good morning. Thanks for taking my question. There’s a little bit of static on my line too, so hope you can hear me okay.

John Barr

Unfortunately it’s been on a lot of – number of people lines, Larry, we apologies.

Larry Biegelsen – Wells Fargo

No problem. Brigid, what’s the tax rate you’re using for the $0.13?

Brigid Makes

What happened in the quarter, it’s about 36.6% for the net income and then for the adjustments we applied 35%. Again, as we noted, the tax rate was effected as – we received the tax benefit that we expect over the course of the year and adjusted for that. Obviously, we’re looking at on a consolidated basis, so we’re looking at it as a loss, the additional tax benefit increases the tax rate because we’re in loss position, so that’s good, but that is what how we get to the $0.13.

Larry Biegelsen – Wells Fargo

Okay. So it’s roughly between 35% and 36.6% is the overall tax rate, do you use with that $0.13?

Brigid Makes

Yes.

Larry Biegelsen – Wells Fargo

Okay. And R&D spending, it’s look like you had about $46 million run rate, I think the previous guidance was $40 to $41 million. You’re in the process of ramping up two PFO migrant trials in your LAA trial.

How should we thing about R&D spending this year and also, I know you’re not giving guidance for 2011, but if RESPECT were to continue through 2011, should we see, steady ramp in R&D spending? Thanks

John Barr

Yeah. I think the two biggest players in terms of the core spending right now would RESPECT and to a lesser extent PREMIUM, but PREMIUM is more over year-over-year comparison. RESPECT is, as I – I said math question, is going to continue that steady stage, I don’t think its necessarily going to ramp.

PREMIUM is doing well and we will hope, the only reason we’re not yet telling you where we are is because we want to make sure we can sustain it, so if we sustain it, we’re still at the same sort of rate, it’s going fluctuate a bit because we are, it’s driven per patient typically as how you most of the trial expense occurs. So the good news is the per patients rates, if they are – if we’re little bit higher that’s typically what’s going to drive in a variance to our run rate. So I don’t think we want to adjust that too much right now.

Now the offset on the expense line is, our G&A we’re managing very nicely, our legal expenses continue to come down with the resolution of Medtronic. We don’t see anything, that’s going to change that trend in the near-term. And I think, all-in-all, that’s why we’re not changing our guidance for expenses. I think that we still think we can come within that range, we’ve got it too. But if I’m over on R&D that’s generally a very good sign, because that means our enrollments probably faster than we expect.

Larry Biegelsen – Wells Fargo

But, I guess, John, my question you’re about $12 million this quarter. Is that, should we still see it go up sequentially over the next few quarters?

John Barr

No. I don’t think you’ll see it sequentially go up. I think it’s probably going to be in that range or little bit below it.

Larry Biegelsen – Wells Fargo

Okay. And Brigid, if I’m doing a math right, the second half kind of implied guidance, it’s like $112 to $121 million in sales and on FX – I’m sorry, ex-FX basis, it’s like 12% to 20% growth and maybe, my FX assumptions are wrong. But could you help us with the FX assumptions for the second half of the year?

And second, do you assume, does your guidance assume an acceleration in your constant currency growth rate in the second half of the year and if so, why? Thanks.

Brigid Makes

Well, again, what we commented is, currently FX is in the $130 range and we said it by – if it’s above $132 we were comfortable with the guidance and again, to back to the comment, our $120 – $221 to $226 million range had assume, our currency or euro rate of $132 to $138. So if we are in $130 range and we just said, we were at $125 for the rest of the year, we would expect to be in the $217 range. So I think we’re, you have to do, as if we stated $130 you have to make some assumptions there.

Larry Biegelsen – Wells Fargo

No. But…

Brigid Makes

I think from the quarterly flow, we talked about Q3 being comparable to Q2 currency adjusted and then Q4 tends to be a stronger quarter for us.

John Barr

And I think the two things that will help us would be hopefully AVP 4 approval in the U.S. and also continued progress on the ACP.

Larry Biegelsen – Wells Fargo

Just lastly Brigid, what is the FX assumption for the year-over-year I think you before had like plus 2% for the full year, at this point what should we assume for full year?

Brigid Makes

I don’t think we provided anything on that.

Larry Biegelsen – Wells Fargo

Okay. Then it must be my subject. Thank you very much for taking the question.

Operator

And the next question will come from the line of Joshua Zable, Natixis.

Joshua Zable – Natixis

Hey, guys. Congrats on a nice quarter. Thanks for taking my question. Can you hear me all right?

John Barr

Yes.

Brigid Makes

Yeah.

Joshua Zable – Natixis

Okay. Great. Just I have a bunch of follow-ups to a lot of other peoples here, I guess, the events have come in late. So, first of all, just starting R&D spend there, I know you went through it. But as we think about the rest of the year obviously with maintaining the guidance on the expense side, should we just think about the expense mix kind of waving a little bit more towards R&D and less on SG&A side, is that kind of the right way to think about it?

Brigid Makes

Yeah. I think, that’s probably correct.

Joshua Zable – Natixis

Okay. Great. And then just in terms of, John, I know, you talked essentially about ASPs and PFOs, I know there is, you talked about different factors in both but sort of for different reasons all sort of had kind of a little bit of a slowdown and then seem to pick up. So just to be clear, as we kind of look forward to the year, obviously maintain the guidance, but everything seems to be going okay, I know, there is a totally different products and different stuff going on. But basically as you look forward and right now, things have picked up since that slowdown?

John Barr

Yeah. And I think it wasn’t a slow, it was anecdotally in certain, certain areas. It wasn’t across the board in particularly in the U.S. I think that, again, it driven by in the U.S. because of our penetration, it’s driven by the birth rates, as somebody pointed out. We don’t see any change in the competitive dynamic here or in Europe, and Europe is, somewhat situational and sometimes time to vacation schedules and other things that cause ups and downs. But again, I don’t think, we’ve seen any change in the competitive dynamics and the only factors are the ones that I talked about earlier on.

Joshua Zable – Natixis

Okay. Great. And then just the product line was actually very strong, I know there is obviously a couple products, PDA, VSD, left atrial appendage, I know you guys don’t breakout. Can you kind of talk about the strength is that the LAA ramp in there or is something else going on?

John Barr

Yeah. Most of growth that would have been meaningful would have come from the LAA devices. But, again, we haven’t broken that out yet.

Joshua Zable – Natixis

Okay. Great. And then, Vascular Plug 4 you talked about approval in the U.S. in Q3, I know, you previously though you might get it in Q2, as you kind of think about the rest of the year, I know there’s lot of stuff going on in terms of currency, but just what kind of your assumptions for Vascular Plug 3. In another word, did you assume you launch in Q2, did you assume you’ll launch in Q3? And if you are kind of a little bit later, are you making up for that revenue somewhere else or there is just a minimal expectations reflect for in the guidance so that anything from Plug 4 is kind of gravy?

John Barr

We did assume in our planning, approval in Q2. So it did have an impact versus plan versus guidance, but probably not a significant impact. The longer it goes on, it could have an impact. But, again, we are hopeful that we will get it done this quarter.

Joshua Zable – Natixis Bleichroeder

Okay. Great. And then on the R&D front, John, help us talk about the Vascular Grafts. I know it tends to get about that pipeline there. You said, you’re looking for validation. Can you kind of talk about the timing? Are you kind of ahead of schedule here or maybe sort of when you think you could potentially be out in Europe?

John Barr

Yeah. Yeah, the Peripheral Graft is a little bit ahead. We hope to kickoff that validation process very shortly. Historically, we may have said that we were going to get CE Mark later this year, but the change in the medical device directed from Europe, have led us to the conclusion that we have to do some feasibility studies in Europe, very small probably. You are talking 20 or 30 patients and a couple of sides and following for a short period of time. So that may delay our CE Mark for the first half of next year.

We are really excited about our progress on the thoracic graft and that’s pretty much on track for where we wanted to be. We are hopeful to complete the validation by year end and kickoff the feasibility phase in Europe, probably, hopefully in the first half of next year. And then look to get an IDE Approval in the U.S. somewhere in the second half of next year.

Joshua Zable – Natixis Bleichroeder

Great. And then last question for Brigid here. On being real nitpicky, I know you very helpfully gave us gross margin XFX 85.8%. Obviously, without these levels it’s hard to pick around but down a little bit sequentially. And then year-over-year, it could be mix – I’m just wondering if there’s anything going on there, I know you said pricing is stable. But is that really just a mix issue, again, it’s not a huge move at all but just wanted to ask the question?

Brigid Makes

Yeah. I think you could definitely attribute to mix.

John Barr

Josh, just to give the perspective. Remember, last year we still were amortizing the distributor inventory and I think we reported 83.6%. But if acte [ph] is 85.9% and if you had currency this quarter, you’ll take out currency as 85.8 so it really didn’t move.

Joshua Zable – Natixis Bleichroeder

Okay. Great, guys. Thanks very much. Congrats.

John Barr

Thank you.

Operator

And the next question will come from the line of Elliot Davis, Davis Research.

Elliot Davis – Davis Research

Hi. Thanks for taking the question. Can you hear me, okay?

John Barr

Yes.

Elliot Davis – Davis Research

Could you just give us an update on when you think this RESPECT trial data will be announced? That will be great. Thank you.

John Barr

Yeah. Again, I caution everyone by saying that it’s an event driven trial. So it’s based on when you expect the events. I think back at the time of the IPL, we said somewhere about a year and a half. That was the timeframe that you believed our statistical models and underlying assumptions, so that’s where we are going to be. That would put us in the first half of 2011 and I don’t think we’ve changed our view on that and is it guaranteed, of course not. But I think that’s still a good range for us and a reasonable expectation.

Elliot Davis – Davis Research

And this is a follow-up. I mean, it seems to us that trial being extended for more time is actually good for you, because it allows you to sell your products without having to produce the data. So is there any outside force that may come into play here that will compel you to produce data?

John Barr

I think that on the – I guess I would agree with you that the longer it goes on the better. But for a different reason because I think – based on the NMT results, the fact that we can enroll a larger sample size, probably is a benefit. Because, again, I would suspect that their issue may have been being underpowered.

But we want to get the results. We want to – hopefully, have very positive results and really drive the adoption of PFO closure. We think would have an immediate impact in Europe. Again, targeting the neurology community and in Europe, in the U.S. Obviously, would – hopefully, support PMA Approval of the device and also get the neurology community excited about the potential for that group of patients.

Elliot Davis – Davis Research

Okay. And do you think that your trial has avoided the pitfalls of being underpowered that you think NMT trial suffered from?

John Barr

Yes. My assumption is correct. The ability to dynamically increase the sample size is a net benefit. So I don’t know – until they give us all the data, it’s hard to answer your question without absolute certainty. But I think overall, I think that I continue to stress that the adaptive designs and we are not using the same design, but the same underlying principle in our Cardiac Plug trial in the U.S. I think is really beneficial in areas where you are breaking – you are doing a breakthrough technology with hopefully a new standard of care.

Elliot Davis – Davis Research

Okay. Thank you.

Operator

And your next question will come from the line of Bob Hopkins, Bank of America.

Bob Hopkins – Bank of America

Thanks. Can you hear me, okay?

John Barr

Yes. We can, Bob.

Bob Hopkins – Bank of America

Hey, good morning. So first for Brigid, the euro this morning is about 132, so knowing that is it a fair statement to say that you guys are comfortable with the volume in your guidance, given where the euro is today?

Brigid Makes

Yes.

Bob Hopkins – Bank of America

And then, John, just a follow-up on the questions about powering in NMT. It would seem to be a reasonable assumption, given your thoughts on that study and it might be underpowered that you would expect you might have to enroll more patients than you originally thought. And if that would push back a little bit the timeframe for one, we would hear the data. Why wouldn’t that be a reasonable expectation in light of our comments?

John Barr

My assumptions mid next year assume we continue to enroll right up to that point. And so we would enroll – It’s hard to say whether that’s more patients than I thought but I think it’s still in the range of patients that we expected. And again, I would only point that it is a different design in terms of the primary influence and a different device. And that may also contribute. But I think, actually the results somewhat support our underline assumptions in terms of sample size. So we think, again, will be north of 900 I guess is the simplest way to do it. How far north? I‘m not sure.

Bob Hopkins – Bank of America

Okay. And then Brigid, a couple of little follow-ups. On the $0.13 number for this quarter, you had a trajectory discussion with one of the earlier questions, was that $0.13? Does that accrete towards 35% tax rate or…

Brigid Makes

Let me make it clarifying questions that are pointed. What we have to do is we book our tax rate based upon doing a year-to-date calculation of what our provision will be for the year. And then we have to do through-ups in the quarter. So the effective year-to-date tax rate is 36.6% and then the onetime items that we adjusted for – were adjusted at 35%. We are trying to keep that simple for calculation purposes.

Bob Hopkins – Bank of America

Okay. And then…

Brigid Makes

To give you the map for the current quarter, it’s going to look out but if you look – you got to look at it on a year-to-date basis.

Bob Hopkins – Bank of America

Okay. And then – I want to go back to the comments about the delay distributor order and how much that impacted revenues this quarter. Can you just walk us through sort of the onetime items in this quarter as it relates to either tender or distributor issues?

John Barr

That really is the only one and that will affect the year-over-year comparisons. They tend to move, particularly these large government tenders in places like South American. It can’t move for reasons that are completely outside, anything have to do with the company. I think other than the tax adjustment that’s probably the only two real onetime events that influence in other, of course other than currency.

Bob Hopkins – Bank of America

That was about a $1 million.

John Barr

Yeah. Give or take. And it’s a double whammy because there was about a $1 million bucks last year in sales and a $1 million that we didn’t have this year.

Bob Hopkins – Bank of America

Right. Okay. Thank you very much.

Operator

And the next question will come from the Charles Haff, Dougherty & Company.

Charles Haff – Dougherty & Company

Hi. Good morning.

John Barr

Good morning.

Charles Haff – Dougherty & Company

Thanks for taking my questions. And just following up on Bob’s question about the tender that was delayed, should we expect that the revenue mix for that tender order was pretty similar to your revenue mix for your whole company?

John Barr

Yes.

Charles Haff – Dougherty & Company

Okay. Great. And then second question was, were there – what were the legal fees related to the Medtronic settlement that maybe embedded in SG&A in the quarter?

John Barr

Very little to nothing.

Charles Haff – Dougherty & Company

Okay. Okay. Great. And then are you prepared to give the CapEx number for the quarter.

Brigid Makes

Yeah. I mean year-to-date we’re about a $1.7 I believe. So very, very small.

Charles Haff – Dougherty & Company

Okay. Great. And then – last question is, were there any changes to the size of the sales force in the quarter.

John Barr

Marginally. I think we’ve got in a couple of headcount in U.S. Probably, net adds, probably less than size and then Europe, again, probably five or six. One of the areas that we are adding as an example, as we are putting together a team in Europe of about four people to specifically target the electrophysiologists. So those hires were underway.

Charles Haff – Dougherty & Company

Okay. Great. Thanks for taking my question.

Operator

(Operator Instructions). We have a follow-up question from the line of Rick Wise, Leerink Swann.

Rick Wise – Leerink Swann

My question was answered. Thanks.

John Barr

Okay. Operator, I think we will wrap up the call and I want to thank everyone for participating today and your interest. And for any follow-up calls, please don’t hesitate to contact Rachael, Brigid and myself. Thank you very much.

Operator

Ladies and gentleman, this concludes today’s conference. Thank you for your participation. You may now disconnect. Good day.

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