Edwards Lifesciences' CEO Discusses Q4 2012 Results - Earnings Call Transcript

Feb. 2.12 | About: Edwards Lifesciences (EW)

Edwards Lifesciences (NYSE:EW)

Q4 2011 Earnings Call

February 2, 2012 5:00 p.m. ET

Executives

David Erickson - VP, IR

Michael Mussallem - CEO

Thomas Abate - CFO

Analysts

Steve [Busha] - Morgan Stanley

Raj Denhoy - Jefferies & Co.

Jason Mills - Canaccord

Larry Biegelsen - Wells Fargo

Michael Weinstein - JP Morgan

Glenn Novarro - RBC Capital Markets

Miroslava Minkova - Leerink Swann

Bruce Nudell - Crédit Suisse

Adam - Citigroup

Kristen Stewart - Deutsche Bank

Tom Gunderson - Piper Jaffray

Spencer Nam - ThinkEquity

Operator

Greetings, and welcome to the Edwards Lifesciences Corporation fourth quarter 2011 earnings conference call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Erickson, vice president of investor relations. 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 2011 financial results. During today's call, we'll discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, chairman and CEO; and Tom Abate, CFO.

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 expectations regarding sales and sales growth, gross profit margin, net income growth, earnings per share, SG&A, R&D, tax rates and free cash flow, diluted shares outstanding, foreign currency impacts, and other financial expectations including our assumptions regarding the timing and extent of the additional U.S. approvals, launches, and reimbursement for the SAPIEN Transcatheter Heart Valve.

These statements also include our current expectations for regulatory submissions and approvals related to a variety of new products and indications, as well as the timing, status, and expected outcomes of new or currently ongoing clinical trials; the expected impact, ramp-up, and benefits of new product introductions; and potential impacts of economic conditions and competitive products.

These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements.

Information concerning factors that could cause these differences may be found in our press release, our annual report on Form 10-K for the year ended December 31, 2010, and our other SEC filings, which are available on our website at edwards.com.

Also, a quick reminder that when we use the terms “underlying” and “excluding special items”, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release. Also note that we calculate operating leverage as gross profit minus SG&A and R&D expenses divided by net sales.

Now I'll turn the call over to Mike Mussallem. Mike?

Michael Mussallem

Thank you David. Our fourth quarter closed out a year of significant investment and major milestones for Edwards. Our successful partner trial results led to regulatory approval to begin offering our transcatheter heart valve technology to many inoperable patients in the US. And for 2011, excluding special items, we were able to achieve 10% net income growth while increasing R&D by 20% and making considerable investments in our US launch.

Now turning to quarterly results. Reported sales grew 10% to $430 million, which was consistent with the guidance provided at our investor conference. On an underlying basis, sales grew 8%. Sales outside the US grew 11% on a reported basis and represent nearly two-thirds of our total sales.

For heart valve therapy, reported sales for the fourth quarter grew 13% to $257 million, which included $93 million from transcatheter heart valves. Surgical heart valves grew 2% over last year on a reported basis and were unchanged on an underlying basis.

Outside the US, our surgical heart valve business reported 7% growth, driven primarily by strong sales in Asia and continued penetration of premium products. Pricing remains stable in each geography. However, strong growth in emerging markets changed the country mix, which slightly lowered our global average price.

In the US, sales declined this quarter due to the introduction of a competitor’s product in 2011, along with what we believe were flat procedural volumes. We expect the impact of competition in the US to diminish in the second half of 2012 with the annualization of that product’s introduction.

We continue to make progress on our Edwards INTUITY rapid deployment aortic valve system. We’ve submitted responses to the additional questions we received in late 2011 and now expect CE Mark approval during the first quarter. We will then initiate two European post-approval clinical studies, Cadence and Foundation. Additionally, we remain excited about our next general tissue technology, GLX, for which we anticipate receiving a CE Mark in the second half of 2012.

Turning to cardiac surgery systems, sales for the quarter were $27 million, up 8% on a reported basis and 7% on an underlying basis. These results was primarily due to growth of MIS products, which are recovering from the product availability issues earlier in 2011.

Late in the fourth quarter, we received both a CE Mark and a 510K clearance for our IntraClude aortic occlusion device, designed to reduce the learning curve for MIS mitral valve surgery. We continue to expect the limited launch in the first quarter as we collect additional clinical evidence. IntraClude is the first of several new products we expect to introduce into our MIS portfolio in 2012.

As a reminder, beginning this year, we will be reporting sales of surgical heart valves and cardiac surgery system products together in a product line called Surgical Heart Valve Therapy. In 2012, we expect to achieve underlying sales growth of 3% to 5% in this product line, driven by expected improvement in valve procedure volumes and continued momentum of our newest products.

Turning to transcatheter heart valves, fourth quarter sales were $93 million, a 43% growth rate over last year. Although the US launch was later than we anticipated, it was a significant growth driver. Economic pressure in southern Europe resulted in lower procedural volumes, which affected our growth rate.

Transapical sales were comparable to levels reported in previous quarters, although the impact of two recently approved products in Europe trimmed sales approximately $1 million this quarter. Transfemoral units accounted for approximately 60% of our sales, lifted by the US launch, which today is entirely transfemoral.

Product pricing remains stable outside the US and inside the US is consistent with our expectations. As you know, in early November we received FDA approval of our SAPIEN valve in the United States for certain inoperable patients. Total US sales in the quarter was just over $17 million, with about half from commercial sales and half from clinicals.

Approximately three-quarters of our commercial sales were stocking units from new centers that completed their training, and we continue to expect to train 150-250 new commercial sites in the first 12 months.

As we have previously stated, achieving and maintaining a high level of acute procedural success, just as we have in Europe, is our first priority, and will drive the pace of the SAPIEN rollout. While we’ve just begun, we’re very pleased with our high success rate.

Last fall, CMS initiated a national coverage analysis for TAVR, which is expected to result in a national coverage determination, or NCD. This early NCD process has resulted in inconsistent interpretations among the regional Medicare contractors. The majority of these Medicare payers are reimbursing on a case-by-case basis, while policies of others are still evolving.

This uncertainty has led to somewhat lower than expected sales. Edwards, along with physicians, hospitals, and medical societies are working to ensure that patients throughout the US have adequate access. We believe this reimbursement situation will improve as payers clarify their policies.

In the last hour, CMS has posted on their website a proposed decision memo for TAVR. This 88-page document appears to be very comprehensive, and while we welcome the accelerated timeline, we’ve not yet had adequate time to assess it. As a reminder, it should trigger a 30-day public comment period and suggests that a formal NCD could issue in the next 90 days. We support a well-written NCD that ensures adequate patient access.

Even with this temporary uncertainty, in the first quarter we expect to achieve commercial and clinical SAPIEN sales of $30 million to $40 million in the United States.

Earlier this week, at the SDS meeting, data from the continued access patients in Cohort A of the PARTNER trial were presented by Doctor Todd Dewey. In this much-larger group of patients, the data showed an improved transapical experience. Investigators observe a trend toward patients feeling better faster and having improved outcomes.

We believe this more recent experience adds strong new support to the transapical procedure as an important option for patients who are at high risk for surgery. We expect additional data to be presented at medical meetings during the year, including two-year data from Cohort A at ACC meeting in March.

We continue to plan for a mid-year 2012 PMA approval for Cohort A of PARTNER, preceded by an FDA advisory panel. We remain confident that the trial results clearly demonstrate the benefits of both TA and TF as less-invasive treatment options for high-risk surgical patients. We are preparing extensively for this panel meeting and are providing to FDA additional data and analysis of our clinical experience to support our case.

Turning to our PARTNER 2 clinical study, in January we completed enrollment in Cohort B, studying inoperable patients using our SAPIEN XT technology. Patients will be followed for one year, and we continue to plan for US approval in 2014. For Cohort A, the surgical arm, we remain on track to complete enrollment in 2013. As a reminder, Cohort A is a noninferiority study of up to 2,000 patients with a lower risk profile than those that were enrolled in the PARTNER trial.

Patients are being evenly randomized to receive the Edwards SAPIEN XT valve or surgery. Those undergoing transcatheter valve replacement are being treated either transfemorally or transapically.

As we unveiled in December at our investor conference, we have two new low-profile transcatheter valve platforms we’re very excited about, which we believe will enable us to further extend our leadership position. SAPIEN 3 is our next-generation balloon expandable valve that builds on all our knowledge and experience and includes a unique feature designed to further reduce perivalvular leaks.

We’re pleased to have recently completed successful first-in-man cases. CENTERA is our repositionable self-expanding valve, featuring a motorized delivery system designed for stable deployment and single operator use. European clinical trials for both these new products, which are delivered through a 14-French e-sheath are expected to commence in 2012.

We plan to initiate the pro TAVI trial at the end of this quarter, that will study the causes of stroke as well as our umbrella device. The results of this study should become available in 2012, and could support a 510-K for umbrella in the US.

With respect to the appeal regarding the Andersen patent dispute with CoreValve in the US, we expect a decision by the court in mid-2012. In December, we filed a request to extend the Andersen US patent out to 2017 and we expect our request to be granted.

In summary, we continue to expect 2012 underlying transcatheter heart valve sales to grow 70% to 90% over last year. This would result in sales of $560 million to $630 million, which includes $200 million to $260 million of clinical and commercial sales in the US. Our sales guidance assumes PARTNER Cohort A is approved and starts contributing to US sales in mid-year 2012.

Turning to critical care, sales were $133 million for the quarter, up 4.5% on a reported basis, which includes a 2.4% benefit from foreign exchange. Without approximately $5 million of discontinued products, the bulk of which annualizes after the first quarter of 2012, growth would have been lifted by 4.5%.

Driving the growth this quarter were strong sales of our advanced monitoring products, including our EV1000 monitoring hardware and FloTrac. Pressure monitoring sales contributed to global critical care growth as we continued to gain share.

We are currently gaining clinical experience in Europe on our latest in-hospital glucose system and plan to evaluate additional enhancements in mid-year. We continue to anticipate obtaining a CE Mark for this improved system before the end of 2012.

Total reported vascular sales, which is comprised of our Fogarty products, were $13 million this quarter, down slightly from the prior year. As a reminder, next quarter we’ll be reporting sales of critical care and vascular in the critical care product line. For 2012, we continue to expect full year underlying sales growth in this product line to be 5% to 8%, driven primarily by continued growth in our advanced monitoring products.

And now I’ll turn the call over to Tom.

Thomas Abate

Thank you Mike. This quarter we achieved diluted EPS of $0.53 and non-GAAP diluted EPS of $0.62, an increase of 13% over the past year. As we anticipated, our operating leverage improved sequentially to 20%, driven by reduced FX impact and the US THV sales. Including the benefit of a much lower tax rate, this quarter’s non-GAAP EPS exceeded expectations. Excluding this benefit, we would have achieved the low end of our EPS guidance.

For the quarter, excluding special items, net income grew 12%. For the quarter, our gross profit margin was 72.2% compared to 71.1% in the same period last year. This improvement was driven primarily by a more-profitable product mix. For 2012, we continue to expect our gross profit margin to be between 73% and 75%, building throughout the year as THV sales grow.

Fourth quarter SG&A expenses were $163 million, or 38% of sales, an increase of $21 million of the prior year. This increase was driven primarily by US transcatheter launch-related investments. We continue to expect SG&A to be between 36% and 39% of sales for full year 2012. Driven by launch-related expenses, the first two quarters will be approximately 40%, followed by a significant step down in the third quarter and then again in the fourth quarter, due to the expedient sales ramp.

R&D investments in the quarter grew 9% to $61 million, or 14% of sales. This increase was primarily the result of additional investments in clinical studies and new product development efforts in our transcatheter valve programs. For the full year 2012, we continue to expect R&D as a percentage of sales to be between 14% and 15%.

During the quarter we recorded a pre-tax $17.6 million special charge, comprised of three items: an $8.8 million charge to reflect the increased collections risk associated with our southern European receivables, a global realignment charge of $5.5 million primarily related to severance costs, and a $3.3 million charge related to a legal settlement. Additionally, during the quarter we recorded a $4 million favorable tax adjustment related to the release of reserves.

Our reported tax rate for the fourth quarter was 8%. Excluding the tax effect of special items I just mentioned, the tax rate was 15%, which benefited from favorable year to date adjustments in both the income mix and the R&D tax credit. For full year 2012, we estimate our rate, excluding special items, to be between 25% and 26%, versus 21% in 2011, full year.

This rate increase results primarily from the growth of our US-sourced income, which includes the expected THV sales and approved FX hedge outcomes. Our 2012 quarterly rates assume the federal R&D tax rate renewal will not occur until the fourth quarter.

FX rates positively impacted fourth quarter sales by approximately $6 million, compared to the prior year. Compared to our recent guidance, FX did not have a material impact on the quarter’s earnings. Look forward, at current rates we now expect a $40 million negative impact to 2012 full year sales when compared to 2011 rates.

Free cash flow generated during the fourth quarter was $62 million. We define this as cash flow from operating activities of $94 million, less capital spending of $32 million. This resulted in a full year free cash flow of $183 million, which was lower than planned due to higher-than-expected inventories.

During the quarter, we repurchased 560,000 shares for $40 million. For the full year, we repurchased 3.9 million shares for $303 million. For modeling purposes, we project diluted shares outstanding to be 119 million in 2012.

Turning to our balance sheet, we had total cash and cash equivalents and short term investments of $450 million, and total debt of $150 million. The short term investments of $279 million represent bank time deposits with initial maturities ranging from greater than three months to seven months.

These time deposits are highly liquid, and were included in error in part of our cash and cash equivalents in our 2011 interim statements. We are now reclassifying these time deposits as short term investments, and will reflect their purchases and sales as investing activities in our statement of cash flows for the full year 2011. This change has no effect on any other aspect of our financial statements or guidance. We are currently evaluating the manner in which we correct these previously reported amounts.

Our DSO at the end of the quarter was 65 days, an improvement of 5 days from the prior quarter driven primarily from collections efforts outside the US. Inventory turns were 1.8, a small decrease from the prior quarter.

Turning to our sales guidance, we continue to expect our full year product line sales range to remain unchanged from the guidance we provided at our December investor conference. For surgical heart valve therapy, we expect sales to be between $800 million and $830 million, which includes approximately $115 million of cardiac systems sales.

In transcatheter heart valves, we expect sales to be between $560 million and $630 million. In critical care, we expect sales of $580 million to $610 million, which includes approximately $50 million of vascular sales.

We continue to expect full year sales of $1.95 billion to $2.05 billion. Excluding special items, we remain comfortable with our previously stated financial goals of full year 2012 diluted EPS of $2.70 to $2.80,73% to 75% gross profit margin, net income growth of 35% to 40%, and free cash flow between $240 million and $260 million.

These goals assume a mid-year 2012 approval of Cohort A of the PARTNER trial. For the first quarter of 2012, we project total sales of $440 million to $460 million, and first quarter diluted EPS, excluding special items, will be between $0.47 and $0.49.

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

Michael Mussallem

Thanks Tom. As we look ahead, we see an exciting future for Edwards Lifesciences. We believe that our transcatheter valve technology has the potential to drive significant sales growth over the next decade. Our focused strategy on structural heart disease and critical care technologies creates multiple points of leverage and our commitment to innovation should enable us to expend our leadership and create value for patients, clinicians, and our shareholders.

Before I turn the call back over to David, although I’m certain you’ll have many questions about the recently published draft NCD, we’re unprepared to provide analysis at this time. This extensive document requires careful review and consideration. Therefore, we’re not going to be answering questions about this at this time.

And with that, I’ll turn the call back over to David.

David Erickson

Thank you Mike. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions, please reenter the queue and we’ll answer as many as we can during the remainder of the hour. Operator, we’re ready to take questions please.

Question-and-Answer Session

Operator

Thank you. At this time we will begin conducting a question and answer session. [Operator instructions.] Our first question comes from the line of David Lewis from Morgan Stanley. Please proceed with your question.

Steve [Busha] - Morgan Stanley

Hi, good afternoon. It’s Steve [Busha] here for David. Mike or Larry, I wonder if you could go into a bit more detail articulating the dynamics with SAPIEN in Europe. If we said, just for the sake of discussion, that the results in Europe came in $30 million below where it would have been. In a hypothetical, where the growth rate in the fourth quarter was the same as it was in the third quarter, understanding of course that wasn’t necessarily in the plan, how much of that $30 million was competition? How much was macro? How much was pricing if that’s an issue at all? And how much might have been a shift toward transfemoral?

Michael Mussallem

You know, I think there’s some confusion. I don’t know where your $30 million comes from, but I’m happy to walk through some of these pieces. As I indicated on the call, the new competition as it relates to TA, was worth about $1 million, and we don’t feel like we lost share to our other competitor in Europe. So that’s really not a factor. You know where I think sometimes people get confused is when they go back and look at our results and compare it to what we’ve done. So for example, we said there were $334 million worth of sales for the full year of 2011 in transcatheter heart valves. Some of that was US clinical, around $20 million that you have to back out. Some of that came from other parts of the world. That accounted for almost 10% of those sales. And there was another whatever it was, $9 million or so, of commercial US sales. So you need to back those pieces out when you actually compare a growth rate in the quarter.

Steve [Busha] - Morgan Stanley

Okay, we’ll do that, thanks. And then one follow up on Europe, could you comment on your expectations for the duration of the macro challenges there? Could you elaborate a bit also on how their manifesting there? Is it pricing? Sounds like that’s not the case. Does it manifest just as a receivables issue? Or is there something else?

Michael Mussallem

Are you talking about transcatheter heart valves in the quarter in Europe specifically? I’m going to assume that’s what you’re talking about. We mentioned that we were affected in southern Europe. And so in particular we saw growth rates decline in places like Greece and Italy and Spain, all of which were good markets for transcatheter heart valves, and so that was the driving force. Pricing’s been rock stable, and you know, our hope here is that this picks back up, that this is a temporary situation driven by some difficult economics in those countries.

Steve [Busha] - Morgan Stanley

But it sounds like, then, that it’s a temporary situation, and it’s volume. Is that fair?

Michael Mussallem

That’s what we’d like to think. I’d like to think that those countries don’t stay in the same sort of straits that they were in in the fourth.

Operator

Our next question comes from the line of Raj Denhoy from Jefferies & Co. Please proceed with your question.

Raj Denhoy - Jefferies & Co.

Wondering if I could ask about the - you know, I’m not going to ask for the NCD, but you did mention that there’s a little bit of reimbursement pushback right now. And understanding is that part of that was perhaps related to the fact that there wasn’t a national policy. Does the publication of the NCD, regardless of your views of what’s in it, does that have any bearing on the reimbursement situation out there right now?

Michael Mussallem

Yeah, I’ll share what our thinking is on that, Raj. It’s a good question. Before an NCD was opened, it seemed as though we had a fair amount of clarity and there was pretty clear coverage by these local providers throughout the clinical trial period, and we would have imagined that that would continue to in a very stable way going forward. When the NCD was actually opened - and it’s relatively unprecedented that an NCD or a national coverage analysis was opened even before approval - it created some of this confusion, and it caused some of these providers to say, gee, I don’t know what this means. Maybe I should wait. And a whole variety of interpretations of what that meant. We’d like to think, when we actually land on a decision, and we’re hopeful that the decisions are good ones, that it clarifies the temporary situation.

Raj Denhoy - Jefferies & Co.

Okay. And then just on your expectations here for a panel soon and approval for PARTNER A by midyear, you also commented about how you’re continuing to supply the FDA with information, whether it’s the continued access data that we saw early this week. You also mentioned the data coming out at ACC here. So there still is data being presented to the FDA, and I’m curious whether that could potentially have some impact on their ability to schedule a panel.

Michael Mussallem

I don’t know, frankly, what impacts their scheduling of the panel. We don’t have a date at this point. We believe it’s in the best interest of the technology and to help the FDA with their decision making to have as much up to date clinical experience as possible, and so we’re providing that. And you know, when the date goes out longer, it just allows us to probably even provide more. But I really have no insight into whether that’s driving any decisions on timing.

Operator

Our next question comes from the line of Jason Mills from Canaccord. Please proceed with your question.

Jason Mills - Canaccord

I wanted to ask about your training program, Mike, for TAVI, and the early days of commercialization. It’s gratifying to hear that you’re reiterating your guidance of 150 to 250. You had a principal investigator at SDS comment on the podium about his docs maybe getting to 200 by the end of 2013. I suppose I could have heard him wrong, but your commentary seems to suggest you’re confident in getting to 200 perhaps in the first year, which would sort of be exiting this year. Could you talk about over maybe the next 18 months what your thoughts are with respect to the ramp in new training centers, and any color you could provide around how it’s going early with some of the synergy you’ve gotten on board in the first three or four months.

Michael Mussallem

I’m not going to get into a specific count of how many people have gone through, but we said right along here that we have expected to train 150 to 250 new centers in the first year, and we haven’t backed off that at all. We’ve built capability, and we have the internal capabilities to certainly train that number of centers and more. So it really doesn’t have anything to do with our internal capability. So what I think what would be more of a factor is whatever comes out in the national coverage termination, whether there’s any limits. If there were limits, that could change the number, but otherwise I would expect that we would stay right on that plan, and we would hit 150 to 250 in the first year and escalate from that into the second year.

Jason Mills - Canaccord

Yeah, our initial read is it looks like it was a fairly flexible document, and inclusive. So we’ll look forward to hearing your analysis. I suppose on that front, should we expect to see a press release? What form in which do you plan to comment or provide guidance or thoughts on this NCD when and if you’re prepared for it.

Michael Mussallem

Yeah, it’s a fair question, Jason. You know, right after this call we’ll get into this and we’ll digital pretty deep. We’re not sure what the best way to communicate is. If we think that we can answer sufficient questions for investors with a press release that we would do it. If it was something that we thought was complex enough that it required a call, we would set something like that up. You know, in terms of actual response to CMS, of course, we would prepare an extensive response within this 30-day public comment period.

Jason Mills - Canaccord

Great. Last question. Your guidance for US TAVI sales in the first quarter, what percentage of that do you expect to be in the PARTNER 2 trial, the clinical setting, and what percentage either stocking orders or sell-through on the commercial side?

Michael Mussallem

It’s a minority portion of that. The clinicals probably account for, I don’t know, 20-25% of those sales.

Operator

Our next question comes from the line of David [audio dropped out]. Please proceed with your question.

David

Just wanted to see if you were going to provide backward-looking details on the breakdown of previously reported transcatheter sales in Europe versus clinical studies. Because I think one of the pieces of confusion in the quarter was the underlying growth rate there relative to what we’ve seen in the past.

Michael Mussallem

You know, maybe I can at least give you the headlines on it to get you close to it. The full year we reported at $334 [million]. Within that, US clinicals probably accounted for around $20 million. The rest of the world was probably around 10% of that number, so think $30 million, something plus or minus that range. US commercial, just under $10 million. So hopefully, with those pieces of data, it helps you back into what the baseline is.

David

Yes. That is a helpful starting point. And maybe just, while you were answering the previous question regarding the 150 to 250 centers, could you just maybe walk us through and remind us how you came up with that number, what sort of the top-down bill was to figure out what the right number of centers to approach was, maybe beginning with how you look at the overall addressable market, and why that is an appropriate number?

Michael Mussallem

We’ve always been driven by great results, and that’s going to continue to be our mantra and our top priority as we roll this out. We actually probably have the capability and possibly the interest in even going faster, given that we could stay at a very high procedural level. So we were at a number much larger than that at one time in terms of what we were thinking, but there was a little bit of pushback on the part of societies that said, you know, can you really maintain high quality at that sort of rate, and so this was through some discussions. We felt very comfortable that a 150 to 250 number of additional centers was going to be an appropriate rate for first year rollout. So it’s a bit of a negotiated number, if you will. I don’t know if that gets at your question?

David

Would you put a number on that, sort of, what percent of what you think the ultimate addressable number of centers is?

Michael Mussallem

That’s a great question. I mean, how many centers will actually be doing TAVR when the smoke clears five years or ten years from now is an uncertain number. We know that there are approximately, let’s say, 1200 or so centers that are doing open heart surgery today. And we would imagine that would be, you know, something in maybe half that or less than half that, that end up doing transcatheter heart valves in the long run. But this one is a very difficult number to try and pin down. It’s uncertain, and I think there’s a variety of views out there, and there’ll be some discussion between societies and regulators that will ultimately determine what that looks like.

David

Okay, and then lastly, for Tom, if you look at the pacing of earnings throughout the course of the year, which you gave very explicitly at the analysts meeting, it really is sort of a tale of two halves, first half versus second half, as the SG&A numbers start to ramp down. How should we think about the normalized earnings power of the business with the commercial US TAVI program? Is fourth quarter the right way to look at it? Is it a blend of the second half? Just to get a sense of when we sort of start to see a more normalized run rate.

Thomas Abate

Sure. I’d have to say if you’re looking forward, probably Q4 is your best indication, right? What you’re facing is a lot of investment that was made up front and a pretty dramatic ramp as we add centers each quarter, so each quarter we’re looking at a bigger sales number, obviously, and expenses not going as fast. So I’d say, you know, the exit rate’s probably the best indication, but I would think that you’ve still got an improvement going forward from there. We will continue to invest in everything, but I think those expense ratios will grow slower than sales for the foreseeable next couple of periods.

Operator

Our next question comes from the line of Larry Biegelsen from Wells Fargo. Please proceed with your question.

Larry Biegelsen - Wells Fargo

Just one clarification. Tom, the $17.6 million in special charges related to southern European receivables risk, that did not affect sales in the quarter, is that correct?

Thomas Abate

No. And Larry, only - I think it was 8% of that was receivables related.

Larry Biegelsen - Wells Fargo

Anyway, based on the number that you’ve given us, it does look like the OUS TAVI sales were relatively flat sequentially, up just slightly, which is different from what we’ve seen in the fourth quarter typically. Mike, I know you’ve gone through the reasons for that, but help us understand why you would expect it to recover. I mean, did they run out of budgets in the fourth quarter? And you see, you know, new budgets for 2012?

Michael Mussallem

It’s a good observation, Larry. Europe in total would have been growing at a pretty rapid pace throughout the year, something in the 40-50% range in terms of total market, and here in the fourth quarter it slowed down a lot. And that’s because we actually had countries that went into negative growth. They were actually lower in the fourth quarter of ’11 than they were in the fourth quarter of ’12. These were these southern European countries that actually we had a fair amount of volume in. It’s not the largest in Europe, but enough, certainly, to affect the growth rate. Now you’re asking me to see the future in terms of what’s going to happen in those countries. We know that there’s patients that certainly want transcatheter valve procedures, and we would expect this to begin recovering, but it’s difficult for us to predict exactly when that might happen.

Thomas Abate

And Larry, it wasn’t really flat. It was probably maybe more in the range of the 20s, 20% growth. And sorry, there were a couple pieces that make that hard to trace, but I’d say somewhere in the low 20s is not a bad number for Europe.

Larry Biegelsen - Wells Fargo

Tom, you’re saying 20% sequentially? Or 20% up year over year?

Thomas Abate

Year over year.

Larry Biegelsen - Wells Fargo

Okay. Hey guys, I know you haven’t had a chance to look at the NCD, but there’s one number that has been thrown around there before, and I’m wondering if you know offhand, how many centers in the US do over 50 aortic valve procedures per year? Does anyone know that offhand?

Michael Mussallem

Offhand, Larry, there’s around 400 centers in the US that do above 50 AVRs historically.

Larry Biegelsen - Wells Fargo

And last from me. The cap data that we just saw, the transapical cap data, I don’t know if this was asked earlier, but just to confirm, you will be providing that to FDA, and you would expect that to be part of a panel?

Michael Mussallem

Yeah, Larry, you have to promise that was question. We’re starting to string them out a little bit there, and we need to leave time for others. But yes, of course we would provide that cap data to FDA.

Operator

Our next question comes from the line of Mike Weinstein from JP Morgan. Please proceed with your question.

Michael Weinstein - JP Morgan

Mike, you had commented at the analyst meeting on the trajectory early on and your expectations, and you had said that you thought January would come in, for US SAPIEN sales, in the $10 million to $15 million range. Is that where it played out?

Michael Mussallem

It probably came in a little short of that. I think some of this temporary conversion caused it to be a little short of where we thought it would come in.

Michael Weinstein - JP Morgan

So in your mind, the pushback from a couple of those local carriers that you and I had talked about, that probably has changed the trajectory of the slope for 2012, but hasn’t changed where you think you will end up in total for the year?

Michael Mussallem

Well, you know, I think it ends up changing the trajectory here in the short term, until there’s a national coverage determination. And I’m optimistically hoping that this document that was published today starts providing some clarity. But in the interim period it appears that the ramp is affected by this uncertainty. But you can see, because we’re reaffirming our full 2012 numbers, we’re still feeling confident that as this gets cleared up that we’ll be able to get back on that ramp and stay in our range.

Michael Weinstein - JP Morgan

Okay. Let me just ask a couple quick of followups. And one of the questions people have is the play back and forth between the TAVI ramp and the surgical valve business, and it’s tough to extract out the impact of obviously competitors launch, how that’s impacted your business, but if we look at your constant currency, either your surgical valve growth over the course of 2011, or the total company growth ex-TAVI for 2011. So if I looked at total company, it was 8% in the first quarter, 4.9% in the second, 3.7% in the third, and 1.3% in the fourth. It does suggest that ex-what’s happening on the TAVI side of the business, the other part did decelerate. And could you just comment on the confidence level on that reaccelerating in 2012? Because the guidance does imply some reacceleration.

Michael Mussallem

It’s a good point, and I hear the stories that those numbers tell, but there’s a little more going on besides that. The first question of last year, for some inexplicable reason, we saw a very high procedural growth across the board, so that was that. Then we saw competitors come in for the first time in the second quarter. That suppressed growth rate for a while, and you can see that that had some impact during the year. And then toward the tail end of the year, we felt that the economy in general sort of slowed procedures. So you have three things going on there. You know, I think that when we anniversary this competition, that we’re going to get a lift out of our growth out of that. And we don’t think that people save up heart valve procedures forever. And so we expect there to be some lift. On top of that, just the introduction of transcatheter heart valves in the US we think actually is a stimulant to surgical heart valves in total. We think it’s going to bring patients into the system, and if our experience in the US is somewhat like our experience in Europe, there’s another reason to believe that the growth rates will be higher in surgicals going forward. There’s also we expect to get INTUITY. That probably adds another, I don’t know what, another 1% to the growth rate as well. So when you put it together, we think we’ve got pretty good reasons to believe that 3-5% is solid.

Michael Weinstein - JP Morgan

Okay. I know some others want to jump in, but let me ask one quick one on the NCD. And you haven’t had a chance to look at this, I appreciate, so maybe you can just give us the thought, but one item that did kind of catch me that I hadn’t heard of or thought of before was that the requirement for new centers to be considered for TAVR was that the interventionalist had to have experience doing at least 50 structural heart disease procedures prior to this. And, you know, I just don’t know where they would get that experience of doing 50 structural heart procedures unless they’ve been active doing ASDs, VSDs, PFOs. Is that something that you had heard of or surprises you? Because I would assume that that hasn’t been a requirement to date of centers that you’ve been going to.

Michael Mussallem

Yeah, you correctly anticipate that I’m not able to really analyze what they said. No, although there has been conversation right along, Mike, that this should be done by experienced surgeons and experienced cardiologists, and there have been different kind of numbers thrown out, this is the first time that I have heard of a certain number of structural heart procedures. So that is new from our perspective. But the good news is we’re going to have a comment period. We’re going to be able to get into this and really talk about the challenge, potentially, the logic associated with some of the assumptions.

Operator

Our next question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed with your question.

Glenn Novarro - RBC Capital Markets

Two questions. One, I just wanted to come back to international sales. And this is for SAPIEN, for TAVI, if you take out the US numbers for 4Q, your OUS sales were about $76 million. And to kind of get to the mid to high point of your TAVI forecast worldwide for 2012, it looks like the international number has to do between $90 million and $100 million, in that ballpark. So how do we get from doing somewhere around $75 million in international sales in 4Q ’11 to getting to $90 million plus per quarter in 2012? That’s my first question.

Michael Mussallem

I’m not sure I followed your math perfectly, so I apologize for that Glenn. You know, we do think that even though Europe has grown substantially, and we know that growth rate won’t persist forever. Just a little bit of the law of large numbers. There’s still going to be pretty good growth. We would imagine international growth would be in excess - just the market itself - in excess of 20%. So I don’t know if that ends up solving for what you’re trying to get to, from the $75 million to the $90 million, but we would think the market growth would do that by itself.

Glenn Novarro - RBC Capital Markets

Okay. Well, that’s what I have in my model, but it just, on a sequential basis, as we go from 4Q into 2012, does require a step up. Let me ask you just one other question on the advisory panel. At STS, Dr. Smith said he thought a panel would be April-May. Now, I don’t think he has an edge, but I’m just wondering, is an April or May panel more realistic? In other words, the capital data is going into the FDA, they want to review that data, and it’s for that reason that a panel maybe is a little bit later than expected?

Michael Mussallem

I was in the audience as well when Dr. Smith said that. You know, I have no reason to believe that he has any insight information, and I think that was his own estimate. Frankly, we really just don’t know. We’ve been estimating it will be in the first quarter, and for modeling purposes we’ve assumed that we will get the approval for Cohort A in midyear. And so if the panel comes a little early or a little later, really tough for us to be able to estimate it. It’s really up to FDA and the availability of the panel members. So I’m sorry, but I can’t give you much more insight.

Operator

Our next question comes from the line of Miroslava Minkova from Leerink Swann. Please proceed with your question.

Miroslava Minkova - Leerink Swann

I appreciate that you don’t have a comment on the national coverage decision, but theoretically, were you expecting that two surgeon [unintelligible] approvals would be required for an inoperable patient? And how would that change your adoption assumption basically?

Michael Mussallem

You know, I haven’t seen it, and so if you say that there’s surgeons in there, I’ll take you at your word there. For us, we frankly didn’t know what the FDA label would say. It might have also said two surgeons. We don’t think two surgeons is a big negative for this procedure. We think in general there are two surgeons that are going to be associated with this at all times. That’s what was trained. When we had the PARTNER trial itself, it took two surgeons. So we don’t look at that as a big negative.

Miroslava Minkova - Leerink Swann

Great, and finally, I know you’ve been asked a lot of questions on Europe, but I think what’s probably still confusing people is the currency is a little bit more negative than at the time you gave guidance. The euro has weakened. And your fourth quarter wasn’t [unintelligible] because of weakness due to macroeconomic conditions. I guess if maybe I could ask what gives you the confidence to maintain the overall TAVR guidance that you’re giving? Or said differently, were you assuming this kind of a tough environment in southern Europe when you did give the guidance last month?

Michael Mussallem

If you go back to our investor conference, Miroslava, we actually put a slide up that anticipated sales, and that sales number we actually said the bottom end of our range - and I forget what slide number it was - but we pretty much landed exactly on that number. So we had a pretty good idea of what the climate was by the time we got to our December investor conference. We did not have that same visibility back in October, but in December we were pretty close. Is that fair, Tom?

Thomas Abate

Yeah, and the FX got worse by about 20 since that time, and I’d say half of that probably is going to be hitting the THV Europe sales. So within $10 million, you should be close on FX impact.

Miroslava Minkova - Leerink Swann

So you’re basically assuming that some of these procedures that did not happen should come back, perhaps, as we go into the new budget year?

Michael Mussallem

I would say that we are still standing by our guidance for what we have for 2012. So of course it’s going to be a ramp. It’s tough for us to predict, but we think our guidance anticipates some of the natural FX fluctuation as well as some of the uncertainty that’s around when these countries restore procedures.

Operator

Our next question comes from the line of Bruce Nudell from Crédit Suisse. Please proceed with your question.

Bruce Nudell - Crédit Suisse

Mike, on a happy note, the cap data really showed amazingly good neurological outcomes. Do you have any feel yet of what the secret sauce on that was?

Michael Mussallem

We don’t is the short answer. I mean, obviously we think it’s a byproduct of experience. So a combination of factors. We think patient selection probably was better. We think operator experience in procedures was better. We think the devices were a little bit better, a little later on in the trial as well. So there’s a combination of factors. It’s tough for us to say which was the most important factor. And we expect to learn more about that in our pro TAVI trial.

Bruce Nudell - Crédit Suisse

And I guess a follow up, Mike. We’ve talked about this before. If unit growth in Europe is around 20% now, we thought ex-US unit growth in aggregate was about 30% for the market last quarter. Does that tell you anything about the idea of how many people are really sitting on the sideline? The ability to recruit unreferred patients now? The fact that the market probably at the beginning of the year ex-US was closer to 50%? Any thoughts on that?

Michael Mussallem

We continue to believe that there’s a lot of patients that are on the sideline, and it’s probably economic factors that’s the greater issue. When we see a country gain reimbursement, you see the patients in those countries come for the procedure, and we think that’s probably the more significant underlying factor that unlocks the ability of these patients to get treatment.

Operator

Our next question comes from the line of Amit Bhalla from Citigroup. Please proceed with your question.

Adam - Citigroup

Hi, this is Adam in for Amit today. I just had a question on rest of world. I know the growth rate there decelerated just as much as Europe, so I was wondering if you could go into a little more detail as to what happened there.

Michael Mussallem

In rest of world? I don’t know. Those numbers tend to be smaller. I don’t know if I could pick up a growth rate on that, Adam. Do you have something a little bit more specific? Because what we call rest of world - so again if you take out US, and you take out Europe, the growth in the fourth quarter was very similar to the full year growth.

Adam - Citigroup

Well, maybe just on any kind of segmentation by product. Was there anything in particular going on there that was different than expectations?

Michael Mussallem

Is this Edwards in total that you’re talking about, Adam?

Adam - Citigroup

Yeah, Edwards in total.

Michael Mussallem

Okay. Let me try to look more closely and see if there’s something that I can attribute it to. Yeah, just looking at this quickly, our quarter to date and our year to date growth rates in rest of world are very similar. They look like they’re within about a percent of each other. So it’s not something that’s jumping off the page. So we’re happy to work offline and see if there’s a more detailed understanding we can provide.

Operator

Our next question comes from the line of Kristen Stewart from Deutsche Bank. Please proceed with your question.

Kristen Stewart - Deutsche Bank

Real quick one, and then I’ll have a follow up. I know the cap data on TA was really superb. I was just wondering when might we be able to see the cap data on transfemoral.

Michael Mussallem

I don’t know that that’s going to be presented publicly before a panel. I don’t know if that’s available. That certainly is being worked up by us, and we would plan to bring that kind of data to the panel if we can possibly do that, but I don’t know that’s going to be in a public forum before then, Kristen.

Kristen Stewart - Deutsche Bank

Okay, so it won’t be something at ACC along with the two-year data?

Michael Mussallem

I don’t know that it will be ACC. Again, we’ll see what happens. As far as I know, ACC will just have the two-year data that’s particularly within the PMA.

Kristen Stewart - Deutsche Bank

Okay, and then I know that you have not looked at the NCD, but I was just wondering, in formulating your guidance for transcatheter valves for 2012, I was just wondering what you were thinking about in the context of potential risks to that, specifically in terms of centers having to qualify in certain criteria. Does this really add an element of risk? Because I imagine if I’m a center looking to start up TAVI, and I’m looking at all these criteria, I may just want to wait to see how this shakes out before really making the level of investment and buying the valves and getting all the training up and running. So maybe just talk through how you were thinking about that in terms of maybe applying different haircuts to the guidance. And then also just on the sales, it looks like they’re proposing to restrict coverage to patients with coronary artery disease, which is consistent with PARTNER, but seems to screen out quite a bit of patients if you look at the STS database.

Michael Mussallem

Well, you’re ahead of me when it comes to the analysis of what was published, Kristen, so we can’t really comment on that. We can talk about our assumptions. You know, obviously we gave a range, because there’s a range of possibilities. Probably the two biggest factors that are in our assumptions, we’ve assumed that we would train 150 to 250 hospitals, and so there would be a natural ramp that’s associated with that. Obviously that builds upon itself, and so it gets much bigger in the back half of the year. And the other thing that’s in that assumption is an approval for Cohort A in midyear. So if Cohort A were approved earlier or later, that would change the numbers. If there was something within the document that you’re referencing, that causes the 150 to 250 hospital ramp to change significantly, that would also have impact on our range.

Kristen Stewart - Deutsche Bank

So the 150 to 200 you didn’t necessarily expect any formal restrictions in terms of which centers you could go after. That was just your ideal centers?

Michael Mussallem

What we’re trying to do is to summarize that we thought we would train 150 to 250 centers. We knew that it wasn’t going to be a center-only kind of criteria laid out by the societies and CMS, that there would be some specific criteria or credentials for physicians into it. And we thought that that would allow 150 to 250 centers. And so that’s what we’ll be analyzing when we get into it.

Operator

Our next question comes from the line of Tom Gunderson from Piper Jaffray. Please proceed with your question.

Tom Gunderson - Piper Jaffray

On PARTNER 2, and its impact on your US guidance numbers, if we look at - you’ve already fully enrolled B - so if we look at A and it’s roughly 2000 patients, and it’s a one to one randomization, and you said in your prepared comments that you expect full enrollment in 2013, is the math correct to assume that somewhere around 500 SAPIEN XT patients would be enrolled in 2012 and that’s part of your guidance?

Michael Mussallem

I think that’s a reasonable estimate. Of course, remember there’s also a ramp associated with P2A, but I think that’s a reasonable estimate.

Tom Gunderson - Piper Jaffray

And then you mentioned to one of the other answers, but I call it the halo effect, where you get more SAVR just because you’re out there talking more and the valve teams etc. Is that a passive increase or do you have specific programs that you’re focusing on to capture as much of the valve market as you can because of the attention that TAVI’s getting?

Michael Mussallem

First, historically, it’s been passive. So what we saw in Europe - and I don’t know if you recall the slide that I think Larry presented at the investor conference that talked about the growth of the market both doubled after the introduction of transcatheter heart valves. I think it went from the 3 range to the 6 range. And then in particular, for Edwards, our growth rate stepped up from 5 to one that was more than 10, I think close to 13%. And so that happened in Europe. In the US, we do have some more active processes where we’re helping hospitals establish valve clinics. And this is a cooperative effort between our heart valve team and the transcatheter heart valve team to just help hospitals do a good job of treating aortic stenosis. And so there may be some positive effect, but I would say that the underlying effect is the more predominant one.

Operator

Our next question comes from the line of Spencer Nam from ThinkEquity. Please proceed with your question.

Spencer Nam - ThinkEquity

Just a couple of quick housekeeping questions I guess. First, on this NCD, is there going to be another decision document coming out from CMS in the next couple of months in terms of proposed rates and things like that? Should we expect that?

Michael Mussallem

This is the document that we were anticipating. I think they have something that was shown on their website that we anticipated this draft document might come at the end of the fourth quarter. So the fact that we’re getting it on the second of February just moves that up. And then there’s a natural part of this process, which is a 30-day comment period, and then actually the publishing of a formal document. We think that’s going to be the primary output from CMS. I don’t know that there’s anything else that’s going to come out besides that.

Spencer Nam - ThinkEquity

So your interpretation is that there’s not going to be a specific reimbursement rate related document following this coverage decision criteria?

Michael Mussallem

There already has been some determination early on here that we were mapped to some surgical DRGs. But the national coverage determination will actually - not anything that changes that mapping process.

Spencer Nam - ThinkEquity

And second question is this ACC two year follow up data. Is this just going to be a continuation of the data that we saw last year on Cohort A or is it going to be more select data from that analysis? And should we expect the data to be also included as part of the upcoming panel?

Michael Mussallem

No, I think what you’re going to see is that the patients that receive transcatheter heart valves - what was reported in the past was simply their one year data. These are the patients that were randomized in the trial, so that was 699 patients, I think, was the number that was in Cohort A, and then there was the numbers, just like for Cohort B, what we saw at the TCT, this will be what you see for Cohort A. You’ll see two-year data on that group of randomized patients. So for example, within that are the 104 or 103 TA patients, etc. That will all be extended out to two years. Is that clear? Did I answer that?

Spencer Nam - ThinkEquity

Yeah. No, that’s helpful. Thank you.

Operator

We have run out of time for questions. I’d like to hand the call back over to management for closing comments.

Michael Mussallem

Okay, thanks everybody for your continued interest in Edwards, and we appreciate your patience associated with the questions on the NCD. Tom and David and I are going to welcome any additional questions 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 relations section of our website at Edwards.com.

If you missed any portion of today’s call, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853, or 201-612-7415. Use account number 2995 and passcode 387244. Additionally, an audio replay will be archived on the investor relations section of our website.

Thank you very much.

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