Edwards Lifesciences Corporation (EW) Q1 2008 Earnings Report, Transcript and Summary

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

Welcome and thank you for joining us today. Just after the close of regular trading, we released our first quarter 2008 financial results. During our call today we'll focus our prepared remarks on information that complements the material included in the press release and financial schedules and then allocate the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO; Tom Abate, CFO and Treasurer; and Patrick Verguet, Corporate Vice President, Europe. Before I turn the call over to Mike, I would like to remind you that during today's call, we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include but aren't limited to sales, gross profit margin, net income, earnings per share and free cash flow goals for 2008, the regulatory approval and sales of Heart Valve Therapy products including Magna Mitral and Magna Ease, the competitive dynamics and fundamentals of the heart valve market, the continued adoption, expected sales and product enhancements of the FloTrac system, the timing, progress and results of the partner clinical trial, the market opportunity for transcatheter technologies and the adoption in Europe and expected 2008 sales of the Edwards SAPIEN valve. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements. Information concerning factors that could cause actual results to materially differ from those in the forward-looking statements may be found in our annual report on Form 10-K for the year ended December 31st, 2007 and our other SEC filings which are available on our website at edwards.com. With that, I'll turn the call over to Mike Mussallem. Mike?

Thank you, David. We're very pleased to be reporting strong first quarter results driven by robust sales growth in all our product lines, particularly Heart Valve Therapy and Critical Care. In addition, we're raising our full year 2008 sales guidance by $50 million and increasing our bottom line expectations. Our first quarter results were also highlighted by an impressive start to our SAPIEN launch in Europe with better than expected sales and outstanding procedural success. In addition, we continue to demonstrate confidence in our future by aggressively repurchasing shares. Now turning to our results; on a reported basis, total sales for the quarter grew 12.4% to $297 million, and grew 9% on an underlying basis. Reported growth was aided by foreign exchange and negatively impacted by discontinued businesses. Before I provide a more detailed review of our sales results and an update on the PARTNER trial, Patrick Verguet, our Corporate Vice President for Europe, will discuss the commercial and clinical results of transcatheter heart valves. Following that, Tom will review the financial results. And with that, I'd like to introduce Patrick Verguet. Patrick?

Thanks Mike. I'm very pleased to have the opportunity to discuss the results of our transcatheter heart valve business and the strong start we are seeing in the European market. Overall, clinician enthusiasm for our technology is very strong, which resulted in first quarter global sales of $8.1 million, $7 million from Europe, and the remainder primarily from the U.S. clinical trial. We are very encouraged by the steady increase in both sales and implants in Europe. We are ramping up our number of implants and exited the quarter with a run rate of approximately 75 valves implanted per month. During the quarter, our selling price remained within our expected range of €15,000 to €22,000. Importantly, in this high risk group of patients, our acute procedural success is approximately 95% this quarter, which we believe, is a result of our world-class training program and the clinicians' dedication to success. This is especially impressive, as we have expanded into more than 30 centers in 12 countries that perform cases during the quarter. Based on what we have seen at our sites, experienced teams typically perform these transcatheter procedures in 60 to 90 minutes. Edwards' transcatheter technology enjoys broad interest with hospitals, clinicians and patients across Europe. At centers they experience their implant rate is increasing which is an indication of the clinical need, the adoptability of the procedure and the centers' ability to obtain funding. There are still many centers eager to join our program and from an operations standpoint, we are adding clinical and reimbursement specialists to increase our start-up capability to five centers per month. In addition we continue to make progress towards securing four more reimbursements in key European countries. Based on our momentum in Europe, we are now increasing our global transcatheter heart valve guidance to more than $35 million for the full year. In the upcoming EuroPCR meeting next month, our transcatheter valve technology will be prominently featured in a number of sessions and live cases. In addition, Dr. John Webb will discuss his experience with our next-generation transcatheter valve and the RetroFlex II transfemoral delivery system. Overall, we are making great progress in Europe. To further enhance the deliverability of our second valve, we are introducing RetroFlex II in Europe this month. Judging by the rapid adoption of the procedure, it is clear that transcatheter valve technology represents tremendous opportunity that is already expanding the European heart valve market. Because it is so critical to long-term success and the importance of this therapy, Edwards will grow at a disciplined rate, driven by our ability to keep procedural success rates high. As this market continues to evolve, we believe that valve durability and performance which are two of Edwards' many strengths will become increasingly important to clinicians and their patients. I look forward to reporting our continued progress in Europe. Now, I'll turn the call back over to Mike.

Thanks, Patrick. Reported sales for Heart Valve Therapy were $147 million for the first quarter, which included a $6 million contribution from foreign exchange. This represented a 13.3% growth rate over last year, led by strong performance in international regions including transcatheter heart valves. On an underlying basis, growth was 9.6% for the quarter. As we anticipated, U.S. revenue growth was flat for the quarter, due to competitive product launches. Outside the U.S., we achieved strong double-digit sales for the quarter, driven by the expanding adoption of Magna Ease and Magna Mitral and the strong uptake of our SAPIEN valve in Europe, which exceeded our expectations. Although the broad heart valve market fundamentals are basically unchanged, the global market grew more than its typical 3% to 5% rate, as the European market accelerated with the launch of transcatheter heart valves. This technology is driving growth in Europe as patients who were previously untreated now have more options for therapy. And some centers who have adopted this technology have reported an increase in overall referrals. Regarding Magna Mitral, we are pleased with its clinical performance in Europe and continue to believe that this is also an important valve for U.S. patients. We have completed the incremental testing and analysis requested by the FDA and will submit our response this month. We believe we will fully address the outstanding questions and anticipate a U.S. introduction during the third quarter of 2008, although we are unable to fully predict a time line. Magna Ease, our next-generation aortic valve brings enhanced ease of use to Magna's best-in-class performance. Based on our experience in Europe, we expect this to become the market leading valve over the next few years. We received FDA questions regarding our PMA supplement in the first quarter and plan to submit our response this quarter. We continue to anticipate a U.S. launch for Magna Ease in 2009, and will provide a more detailed time line during the next quarter's call. In Japan, the approval of our Magna aortic valve is now expected in the second quarter, as we received and responded to additional questions from the Japanese Ministry of Health. We continue to believe this market leading valve's superior patient benefits will make it the number one heart valve in Japan. And turning to repair, we're looking forward to unveiling our Physio II ring at next month's AATS conference with the launch planned for the third quarter of 2008. Our new Physio II ring represents the next-generation repair product for the degenerative segment of mitral repair which is the largest segment in mitral valve repair, and where we've experienced the most competitive activity. Also, at the upcoming AATS conference, Edwards will be highlighting its 50 years of innovation in heart valve technology. There will be a series of presentations on our SAPIEN valve featuring the Ascendra transapical delivery system which has attracted strong surgeon interest. Separately, we're refining our Edwards I training initiatives and driving the integration of our innovative MIS technology. And turning to Cardiac Surgery Systems which is now primarily focused on minimally invasive surgical products, reported sales for the quarter increased 27% to $21 million, due primarily to the recently acquired CardioVations MIS product line. Our base cannula products were flat for the quarter, while CardioVations grew over 20% on a pro forma basis. We are very pleased with our progress on this integration. As patients continue to demand less invasive therapies, cardiac surgeons are becoming more interested in modifying their practice accordingly. We are committed to leading the way to in developing MIS valve procedures that enable surgeons to meet this demand [ph] and are increasing our R&D investment to expand the platform. We continue to expect the CardioVations transaction to be non-dilutive this year and accretive in 2009. Now turning to our Critical Care business. For the first quarter, Critical Care reported $107 million in sales, up 17.4%, which included a $5 million contribution from foreign exchange. Once again, the underlying growth rate exceeded 10%. Sales of new products led by FloTrac continue to be the biggest growth driver this quarter. In addition, our growth is becoming more diversified with increased adoption of PreSep, strong growth in emerging markets, and share gains in our pressure monitoring and hemofiltration products. Our dual pronged strategy of increasing innovation and improving operational execution has transformed critical care from a low single digit growth business to an 8% to 10% franchise in the last few years. This strategy provides Edwards with a sustainable competitive advantage. Our most recent innovations which are well received in the market include products like FloTrac, PreSep, PediaSat and our Vigilance II monitor. We continue to make great progress in creating new market opportunities for FloTrac. During the second quarter, we plan to make incremental... we plan to make an incremental upgrade to the FloTrac system to provide better information in the operating room. And in the third quarter, we expect to introduce a substantial upgrade that enables FloTrac to provide additional information in the medical ICU. These innovations will broaden the application of FloTrac. During the quarter, sales of PreSep, our innovative central venous oximetry catheter for the early detection of sepsis continues to ramp up. Detection and treatment of sepsis remains a clinical challenge and PreSep is gaining adoption. In addition, we expanded our launch of PediaSat into Europe. PediaSat is our venous oximetry catheter for pediatric patients. With the innovation of our new monitoring platforms, we have expanded our focus and include selling hardware and service in addition to disposables and we continue to see strong hardware sales growth in the first quarter. In addition, the second element of our strategy is also contributing to our success. Improvements in operational execution have enabled us to continue to take share in pressure monitoring products and hemofiltration and to create a vibrant service business. These three offerings contribute almost half of Critical Care's total growth. Total reported sales of vascular products was $22 million this quarter, consistent with our expectations. This includes approximately $1 million of end customer LifeStent sales recorded prior to the mid-January completion of the divestiture and $6 million of sales to Bard under our supply agreement. Sales of our high margin based vascular products experienced a small expected decline to $13.7 million. We are continuing to pursue the PMA approval for LifeStent which is currently with the FDA for evaluation. Now I'd like to provide an update on the U.S. PARTNER trial and our next generation transcatheter products. As we announced last quarter, we received approval from the FDA to add our Ascendra transapical delivery system to the PARTNER trial. Our current centers are in the process of gaining IRB approval and we expect transapical cases to start in the next month. Having Ascendra in the trial gives cardiac surgeons the opportunity to partner in this transformational technology and most importantly, it would allow us to address even more patients. To date, we have enrolled over 200 patients which is slightly ahead of our projected enrollment rate. We now have 13 centers that are actively enrolling patients and the remaining two centers have completed training and will begin enrolling this quarter. And we are also planning to add five clinical sites in the U.S. We are on track to complete enrollment as we've previously communicated and continue to believe that our progress in the U.S. gives us at least the two year lead over the next closest competitor. We continue to be pleased with our progress on the development of a next-generation transcatheter heart valve. During the first quarter, Dr. John Webb performed the first three human implants of our next-generation device, each of these procedures was successful with enhanced ease-of-use benefits and excellent valve performance. This next-generation balloon expandable valve features a cobalt chromium alloy frame that helps reduce the profile by fortifying fringe [ph] sizes without compromising strength. The valve's smaller delivery profile will make it available to an even wider group of patients. We are currently in discussions with the European regulatory agencies regarding the trial design and anticipate this being a non-randomized trial, comparable to what we did on our first-generation technology. We plan to start a trial before the end of the year in support of a CE mark. As anticipated, we began our U.S. feasibility trial of our SAPIEN valve in the pulmonic position during the first half of the year. Last year we announced that... last week we announced that Dr. Ziyad Hijazi in Chicago successfully implanted the SAPIEN valve percutaneously in the first three patients treated in this trial. The clinical study will enable physicians to offer a minimally invasive alternative to patients with a failing pulmonic valve. While this is a modest market opportunity, we are able to leverage our transcatheter valve platform and RetroFlex delivery system to address a serious unmet need in patients with congenital heart disease. Turning to transcatheter mitral repair, we remain confident that patients with functional mitral regurgitation present a very large and attractive potential market with few treatment options. In early 2007, we completed enrollment of a 60 patient evolution one feasibility study of our MONARC system for this condition. We recently completed follow-up on these patients and Dr. Jan Harnek will present an analysis of the data at EuroPCR. We will discuss our plans for an EVOLUTION II European pivotal trial at that time. As Patrick mentioned, at the upcoming EuroPCR meeting there will be several clinical presentations featuring a number of our innovative technologies, including our next-generation delivery system and transcatheter valve. In addition on Thursday afternoon, Edwards will sponsor a symposium on establishing a successful transcatheter valve program which will be chaired by Prof. Alain Cribier. Lastly, we're planning to host an informal analyst and investor reception during that week and details will be available soon. Before we move on to a discussion of our financial results, I would like to briefly comment about the proposed changes to Medicare reimbursement. Last week CMS released preliminary in-patient prospective payment rates which go into effect on October 1st, 2008. We are pleased to see the agency's changes are expected to be a small net positive to hospital reimbursement for heart valve procedures. As such, we are not expecting these changes to impact the company's results. And now, I'll turn the call over to Tom.

Thanks, Mike. In addition to the strong sales that Mike and Patrick have already discussed, I am also happy to report strong earnings. Our first quarter non-GAAP EPS was $0.56, $0.07 above the midpoint of our previous guidance range. Reported earnings per diluted share for the first quarter were $0.31. For the first quarter, our gross profit margin was 65.3%, compared to 64.7% in the same period last year. This improvement was driven primarily by a more profitable product mix and was partially offset by the impact of foreign exchange hedges. As we projected, we reported a lower gross profit margin in the first quarter as a result of foreign exchange hedges and the commencement of our LifeStent manufacturing agreement. Foreign exchange hedges are expected to continue suppressing the improvement in gross profit margin for the next two quarters. As a result, we now expect full year 2008 gross profit margin improvement to be at the low end of our 100 to 150 basis point guidance. First quarter SG&A expenses were 38.6% of sales or $114.6 million, consistent with our guidance last quarter. The $16 million increase versus last year was due primarily to the expected higher levels of spending for both the SAPIEN launch in Europe and sales related costs in the U.S. as well as a significant impact from foreign exchange. For the full year 2008, we expect SG&A to remain at approximately 38% to 39% of sales. In the... the quarterly amount will increase to approximately $120 million for the rest of the year, due primarily to the impact of current FX rates and to a lesser extent additional spending on THB in Europe. R&D investments in the quarter were $32.9 million or 11.1% of sales, compared to $28.8 million last year. The increased level of spending was focused primarily on our transcatheter and surgical valve programs, as well as our critical care development efforts. For 2008, we continue to expect R&D as a percentage of sales to be approximately 11.5%. Net interest expense of $400,000 was consistent with last quarter. For 2008, we now expect net interest expense of approximately $1 million, which reflects our recent use of cash for additional share repurchases. During the quarter, we recorded special items that resulted in a net $10.1 million pre-tax special charge. The main components were an $8.1 million loss from the sale of the LifeStent product line. Accounting rules require the write-off of all related assets and goodwill this quarter. Future milestone payments are expected to result in a total pre-tax gain from this transaction of approximately $55 million. The second component was a $2.1 million charge for the settlement of litigation related to our divested U.S. perfusion services business. Under the terms of the divestiture, this was our last outstanding case. Since the goodwill assigned to LifeStent is not recognized for tax purposes, the special items resulted in a $4.9 million net tax liability this quarter. This tax liability, plus the $10.1 million pre-tax special chargereduced net income by $15 million. For the first quarter, our reported tax rate was 47.6%, compared to 25.6% a year ago. Excluding special items, our first quarter 2008 tax rate was 25.9%. For full year, we continue to expect our rate to be approximately 26%. The foreign exchange impact on sales and earnings per share was consistent with the expectation set during our last earnings call. When compared to the same quarter last year, foreign exchange rates positively impacted first quarter reported sales by $13 million and lifted EPS by approximately $0.01. If foreign exchange rates remain at current levels, 2008 sales are expected to benefit by an additional $24 million. We expect the full-year bottom line impact to be negligible due to our hedging strategy. Free cash flow generated during the first quarter was $20.8 million, which we define as cash flow from operating activities of $29.9 million minus CapEx of $9.1 million. For the full year, we continue to expect free cash flow to also be at the upper end of our $155 million to $165 million goal. During the quarter, we used $100 million of our cash to repurchase 2.26 million shares of common stock, at an average price of $44.24 per share. Our purchases exceeded previous guidance, as we believe that the market valuation represented a particularly attractive opportunity. Last year's $250 million repurchase authorization has $150 million remaining capacity and we continue to believe our shares are attractive at current prices. On the balance sheet, total debt at March 31st was $213 million, which included $63 million of long-term debt and $150 million of convertible debt. Net debt at the end of the quarter was $50 million. As you may recall, on May 15th both the holders of our $150 million convertible debt and the company will have the option to redeem the bond. Accordingly, we expect the debt to be fully retired within the quarter, resulting in a reduction of 2.7 million diluted shares. This event, along with our first quarter purchases, is expected to reduce fully diluted shares outstanding to $58 million, beginning in the third quarter. Including receivables in our asset-backed securitization programs, days sales outstanding for the quarter was 71 days, an increase of five days from the prior quarter. Inventories decreased $13 million from the prior quarter to $140 million, due largely to the sale of LifeStent inventory. For the first quarter, domestic sales grew 9% to $136 million, and international sales grew 15% to $161 million. Turning to 2008 sales guidance, we are increasing total sales by $50 million to between $1.210 billion to $1.260 billion. This revised range reflects expected performance improvement across all the company's product lines including transcatheter heart valve sales and an increased foreign exchange benefit of $24 million. For Heart Valve Therapy, we are raising our 2008 sales guidance $20 million to between $590 million to $610 million. This includes raising our transcatheter valve sales assumption to more than $35 million. In Critical Care, we now expect total annual sales to increase $20 million to $450 million to $470 million. In Cardiac Surgery Systems, we are raising the total annual sales by $5 million to $80 million to $90 million. And lastly, in vascular, we now expect total annual sales to increase by $5 million to $80 million to $90 million, which includes LifeStent sales to Bard of more than $25 million. All of these projections assume foreign currencies remain at current level. For the second quarter 2008, we are projecting total sales of $310 million to $320 million. We estimate that second quarter 2008 diluted EPS will be between $0.62 and $0.66. We are increasing the full year estimate by $0.13 to between $2.45 and $2.53 including special items... excluding special items, excuse me. This represents a full year EPS growth rate of 15% to 19%. Let me remind you, given the normal pattern of our sales, we expect our third quarter profitability to be lower than the second quarter and followed by a significant increase in the fourth quarter. With that, I'll turn it back over to Mike.

Thanks, Tom. You know, this year we're celebrating our 50th anniversary of partnering with clinicians to develop life saving innovations. Over the course of 50 years, Edwards has been the innovator in the science of heart valves and hemodynamic monitoring. We were the first company to introduce the mechanical heart valve, the porcine heart valve and the pericardial heart valve. Today we are beginning the next chapter in this field with the commercial introduction of our transcatheter heart valve technology in Europe. To date more than 1,000 patients worldwide have already benefited from our pioneering transcatheter technology and we look forward to addressing the large population of patients who have few options for the treatment of their valve disease. And with that, I'll turn it back over to David.

In order to allow everyone a chance to ask a question, we ask that you limit your questions. If you have additional questions, please reenter the queue and we will answer as many as we can during the remainder of the call. Operator, we are ready to take questions, please. Question And Answer

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions]. Our first question is coming from Kristen Stewart with Credit Suisse. Please state your question.

I just want to say congratulations on what is a great quarter, particularly for the transcatheter valve line. Very impressive.

Thank you.

Wondering if we could just talk a little bit more in detail about your... I know you talked about greater than 30 centers, I think that's kind of what you talked about in February. Sounds like you're preparing to ramp up to five centers per month. I think previously you had said three to five. Just curious on where you see that number going now, given what you've seen so far and the really robust demand. Then I have one follow-up for Tom.

I'll ask Patrick to answer this, since we have got the authority here.

Thank you, Kristen. Thank you, Mike. When we say we're going to increase by five centers per month, we are going to do that gradually. And we are going to probably not do too much during the month of August. And so by the end of the year we will be probably 70 to 75 centers. That's what we are projecting as of now.

Any issues from a capacity standpoint in producing valves.

From what?

Capacity standpoint. I think what drives this, Kristen, is our ability to do training, to have proctors in place and to do this in a very thoughtful fashion and I think what Patrick's sharing is sort of anticipates all our capacity constraints when we say that. That's sort of assume things go well.

We currently have one center and we're going to open a second center for training.

And then, Tom, just a follow-up on the gross margin. Just wondering if you could quantify exactly what the FX drag was on the quarter and maybe what kind of the Bard impact was in manufacturing and then if you could tell us what LifeStent maybe sales were in the quarter.

Okay. Sure, Kristen. The recent moves have impacted not this quarter. Actually, the margin that we saw this quarter was right on track with the guidance we gave because the rates were pretty much throughout the quarter where they were when we set guidance. The current move is about 30 to 40 basis points in the remainder for the full year and primarily in the second and third quarter. So, I tried to indicate that the highest impact from currency was going to be in Q2s and Q3s with an up-tick then in Q4. Sales to Bard were $6 million and the PVS impact to the margin is somewhere... will vary based upon the actual sales, but it's somewhere in the 70 to 90 basis points and right now right at the middle of that range.

Okay. And just to clarify, you said foreign exchange has negligible effect on earnings this year, relative to kind of where your forecast was?

Yes, absolutely.

Great. Thanks very much.

Our next question is coming from Glenn Reicin with Morgan Stanley. Please state your question.

Hi. Glenn Reicin with Morgan Stanley. Thanks for taking my question. Can you hear me?

Yes. I can hear you great, Glenn.

Okay. Two questions. First, can you just give us what your expectations for FloTrac are this year? And then second which is much more complicated is, if I heard you correctly you said that your usage now is about... you ended the quarter with about 35 valves per month. That's about $1 million dollars of revenues. So, you shipped eight. And you ended the quarter with $1 million per month revenue run rate. So, what was usage in the quarter? I assume it's somewhere in that $2 million to $3 million range. And then tell us how the math works, how you catch up to the shipment sales where it's not just loading up on inventory, it's actually meeting between usage and inventory stocking.

Yes, thanks Glenn. Let me jump into it. First on FloTrac, we had planned for around $50 million worth of sales this year, which would be a nice ramp versus approximately $30 million we were at last year and that's pretty much right on track. And I think on the projections, I think you probably misheard Patrick. I think Patrick said that our exit rate for the quarter was around 75 valves per month. And so maybe Patrick you can give Glenn a feel for how the implant rate is comparing to the purchase rate.

Yes, Glenn. Thanks for your question. First of all, when we are asking the centers to order valves is to show us their commitment. And because they need to order valves to do cases, we are not stockpiling their shelves. When I look at the number of valves that we have implanted versus the number of valves that we have sold in Q4 last year, the rate was 25% of implant versus what we sold. When I look at the quarter, Q1 2008, we implanted 50% of the valves that we sold. But when I look just at the month of March, we ramped up to 70% of implants versus what we sold and the trends continue like that. What is good and impressive is that every month we are increasing the number of implants.

Does that answer your question, Glenn?

Yes. I'd love to know, though... okay, now we ramp up to 70 to 75 centers. Clearly, that number is going to come back down in terms of the usage as relative to sales, I would think, right?

Well, if you are asking are sales going to increase throughout the year? Yes, they will. I mean we are going to see the natural pattern where Q3 is a little lower, but no, we think sales are going to keep going north, Glenn, if that's under

$8 million [ph] in the first quarter, 8 times 4 is 32, right? So

That's right.

The actual number stays pretty flat, when I guess, we

I don't want you to misinterpret our guidance. We said more than $35 million, Glenn. We didn't say $35 million.

Okay. And at the end of the... I'm sorry. At the end of the year, I'm just trying to understand what you think that ratio will be in terms of usage relative to shipments.

It's probably hard to predict. I think what Patrick told you right now, it's ramped up to 70% here just in this quarter and we have a chance to look at April. That trend is continuing to go north. So hard to predict, but it's coming pretty close to in line.

Okay. Thank you.

I think we probably need to give some other folks a chance, Glenn.

Yes.

Our next question is coming from Larry Biegelsen with Wachovia Securities. Please state your question.

Hi. Can you hear me okay?

Hear you great, Larry.

Thanks for taking my question. First, I thought I overheard somebody... you say that you booked some sales for the U.S. clinical trial. Could you clarify that a little bit? I think it was about a $1 million. That was a surprise to me. Second, can you talk about any specifics on reimbursement for SAPIEN in Europe, any specific progress in any countries? And just lastly, update on the U.S. and German litigation versus core valve. Thanks.

Okay. Let's break it into pieces. I'll ask for Patrick's help on the second piece. First, yes, we said out of the $8.1 million, $7 million came out of Europe and the remainder primarily came out of the U.S. clinical trial. And indeed, we are charging for units in the U.S. clinical trial. There is a little bit of that that's sales in Canada. But the bulk is actually the U.S. clinical trial, Larry. The second question was progress on

On reimbursement.

Reimbursement.

Yes. Thanks for the question, Larry. We need to prove the clinical benefit of our technology to get the right reimbursement. And as of today, with our average selling price, we are exactly in line with what the governments are ready to pay for the clinical benefit. We use the terminology quali [ph] which is improvement of quality of life per year and we match with what is needed. And overall, I'm very satisfied with the progresses we are making in all the countries in terms of reimbursement.

And the last question you were asking about the core valve litigation, Larry, we expect there to be some sort of action in Europe in the second half of 2008 based on everything that we know and that the U.S. action actually would be 2009 or later.

Mike, one clarification. Is it normal to charge for a product in the U.S. clinical trial? Is that standard? It just came as a surprise to me.

I can't speak to what's normal. This has always been part of our assumptions, Larry.

Alright. Thank you.

Our next question is coming from Larry Keusch with Goldman Sachs.

Yes, hi. Good afternoon. Mike, just to switch gears here on the heart valve franchise with the conventional valves in the U.S. Could you talk a little bit about sort of a competitive impact in the quarter? I think if we strip out the transcatheter heart valve sales, we kind of get to underlying growth of about 7% which is sort of same as the growth in the fourth quarter, so just want you to touch on that.

Yes. Well, I think the dynamics of the market, Larry, are much as we would have anticipated. We had U.S. only grew... was essentially flat for the quarter and we had very strong growth outside the U.S. and this was very much as we expected. Inside the U.S., we have the impact of competitive activity. Remember, we have those competitive valves that have been launched. So overall, having a flat growth rate is not anything that is a surprise for us in the U.S., and we are anxiously awaiting getting some new valves approved here so that we can see that step-up. We are also looking forward to getting the valves approved in Japan. But I'm not sure... is there anything else about that I can get into for you?

Yes, I mean think part of what I wanted to explore a little bit is, as those competitors have been in the market, what sort of feedback are you getting. Is it still would you consider trialing or is there some real market share that's now moved? Are any of the competitors having any issues, that sort of stuff?

I think it's very much as we expected Larry. I think the U.S. heart valve market, we believe, grows in the 3% to 5% growth rate. So, when we are flat in the U.S. in a quarter that does infer that there is some share loss. And so, I think that comes as no surprise. The pricing in the marketplace we would say has been very stable. As a matter of fact, Edwards' price is probably flat to slightly up and we haven't really seen any surprises out of competitor pricing.

Okay. And then the last question is coming back to the percutaneous valves. As you look at the experience in Europe to date, maybe you can touch a little bit on are these procedures really being done with both an interventionalist [ph] and a surgeon together? And sort of maybe talk a little bit about the mix of the RetroFlex versus Ascendra.

Thank you, Larry, for your questions. This is Patrick. The first answer is yes, cardiologists and cardiac surgeons are working together and they know that it's for the benefit of the patient. And the second point, it's difficult to predict where we are going on transapical and transfemoral. You must remember that we really launched transapical during the month of January. So in January the mix was 5% transapical, 95% transfemoral and we ended up the quarter with ratio of 60% transfemoral, 40% transapical. And with those two points, I don't know what I can predict. But both procedures are going up every month.

Okay, perfect. And I just missed this, so if you could just clarify it. Again, the pricing in Europe was... I heard €15,000 to something higher than that.

From 15 to 22.

15 to 22 euro, right?

Yes.

Correct. Thank you.

Thank you.

Thanks Larry.

Our next question is coming from Tim Lee with Caris & Company. Please state your question.

Good afternoon. Thanks for taking the question. Just one quick follow-up on SAPIEN in terms of the training. I mean can you give us a sense of how long the current backlog is? I think at the analyst meeting you said about a two month backlog to get trained. Is that frustrating any clinics and are they looking at any competitive devices because of that.

So may be the way to answer the question, Patrick, is how far ahead are we booking training when you talk about people being booked into our training center, may be it gives him a sense for what the backlog and does it lead to frustration among clinicians. Is that the question, Tim?

Yes, thank you.

Okay. We try to manage the frustration of our customers. What I see as of today is that we are fully booked until the end of the month of October. And as I said previously, we are opening second training center. So, we should not be constrained by training capacity.

Okay. And just one quick follow-up on Larry's question in terms of the product mix, is there any pricing differential between the transfemoral and transapical delivery systems?

No. The answer is no.

Great. Thank you.

Thank you.

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

Thanks for taking the question. Mike, can you comment on just the surgical repair segment for a minute, talk about growth rates and any dynamics that are taking place there. And then on critical care, last quarter you had a bunch of hardware console upgrades. Did any of that take place in this quarter?

Yes, the repair grew for us in the quarter mid-single digits, Larry. So it's a little lower than we would like it to be and that's why we are really looking forward to the launch of Physio II, which we think will give us a boost. In terms of the second question, you asked about heart fail... hardware in critical care. Yes, just the way it worked out, because of... I think it has to do with the way hospitals budget, they had a particularly large fourth quarter. So we didn't have numbers that were as big as the fourth quarter when it came to hardware sales, but we have seen very nice growth. I think we're up something in the order of 20% versus Q1 last year.

Are you able to break out that repair segment growth by a U.S. and O-U.S.? And then just I think

Yes, I think the U.S. is a little bit less. So, the U.S. is probably in the four range, and the global is probably in the six range.

If I could just ask Tom a quick one, what's share count assumption for the second quarter, I think I may have missed it.

We put out the third quarter. The second quarter will have some of the benefits of the activities in the first. I'd say if you use between 60 and... a little bit over 60 million shares, a good number.

Thank you.

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

Thank you. I appreciate it. I was hoping, first, just on the upfront comments on the SAPIEN experience in Europe. There was a comment that acute procedural success was approximately 95% this quarter and I was hoping for starters you could define acute procedural success.

Yes. Thanks for your question, Mike. Acute success is that immediate success of the procedure when it is executed.

Just to provide a little bit more color. So, what it says is we make an attempt. We make an attempt to do a procedure, what it measures is whether we have successfully deployed the valve. So, if we convert it to surgery, it counts as a failure. If we don't deploy the valve for some sort of reason, say we have an access problem of some sort it doesn't count as a success. What this count is that we have successfully deployed the valve and the valve is working. It doesn't really have a long-term component to it, though, Mike.

Is this based on the definition of, we were able to get there, we delivered the valve, and there were

And it's working and the patient is fine. But what it doesn't speak to Mike is what's happening 30 days later or 60 days later.

What about the acute experience of the patient in the hospital?

Yes, you know what, we really don't have a measurement, a data point on that. Patrick can speak to in general, just on an anecdotal basis. But we were trying to give you something quantitative. And then Patrick, you might speak to what do we think our hospital stay is like for those patients.

Not the hospital stays as much as it is what's... I'd like to understand, if you're giving out acute procedural success and trying to understand exactly what that is, and then what the success rate is of the patient. What's the adverse event rate of the patient in the hospital? Follow-up we are not going to know at this point.

Yes. There is going to be data presented at EuroPCR, and I think there will be a chance for you to get much deeper on that, Mike. In general, I'll tell you that we are very pleased. And it's... we are not really seeing any sort of problems. We are not really trying to avoid an issue here by speaking to acute procedural success. It actually feels like it's going very well right now.

Okay. Let me switch gears. I just want to understand, make sure we're all getting the same math relative to SAPIEN revenues with you guys raising guidance for the year. I know from the centers that we have talked to and all the feedback we've gotten from Europe that as a center starts up and does their training, there is an initial order which sounds like it's on average about eight SAPIEN units before they can start training. Is that right?

Between four and eight.

Between four and eight. Okay.

Yes.

And so, if we think about getting the 75 centers, I'm just trying to do the math here. So if it's between four and eight and we say that the average there is six, getting the 75 centers and the numbers that generates that should be somewhere itself should get you, let's say $10 million to $15 million worth of revenues, just from getting the centers up and online.

Yes.

Is that right? And then if we think about it... and then from the U.S. you're assuming I guess you will pick up $4 million of revenues, $5 million of revenues from the U.S. from the clinical trial?

That's fair.

Okay. Then the balance of that is implants and reorder rates, right? If we think about beyond the initial here, here is your stocking order. The reorder business that you are expecting is that incremental beyond what we just described?

That's correct.

Okay. I just want to make sure that we have a good way to think about it.

Yes.

And then this last question, just on the valve business in the U.S., Mike, you said you're flat and that's probably encouraging to some people who are thinking that the impact from the competitive launches might have been worse than that on your business. Any change in tone as you progress through the quarter and prior to getting your new products on to the U.S. market. Is the pressure increasing? Was it about the same over the course of the quarter? And then I'll drop. Thanks.

It feels about the same, Mike. We were... like we said, we thought we were planning the year somewhat conservatively to say we had a U.S. growth rate for the year planned at zero to 2% and that anticipated having some Mitral Magna approved in the back half of the year. So to be flat at this stage of the game actually is not unexpected and we are not really seeing any competitive dynamics that are unusual compared to what we might have thought.

Okay, great. Thank you, Mike.

Yes.

Our next question is coming from Paul Choi with Merrill Lynch. Please state your question.

Hi. Thanks for taking the question. Mike, just to clarify your earlier comments on the PARTNER trial, I think you said you had 13 centers trained and you plan to have two more start enrolling this quarter, but then you are going to have five on top of that? Is that correct?

That is correct, Paul.

Okay. So you will have a net total of 20 centers... 20 centers overall, correct?

That's correct.

Then on that, would you be willing to allocate in terms of where those new additional centers will be focusing on? Will it be more allocated towards the Cohort A, which includes the surgical arm or more on the medical management side? So would you be willing to perhaps push forward the enrollment schedules you guys have described last December at the analyst meeting.

It's a good question, Paul. And the way it actually works is we don't steer the centers. So, what the centers do is they will take a look at all high risk surgical patients that come in and then, based on the assessment by clinicians and then later an assessment of their ability to get access through a femoral artery, that we're able to [ph] determine where they end up in terms of which arm of the trial. So separately from that, I guess what we indicated here is that we are very much on track with what we suggested as our earlier plans, which was to have Cohort B, 350 patients completely enrolled by the end of 2008 and Cohort A enrolled by the third quarter of 2009. We said we're about 200 patients. We are 200 patients into it at the end of the first quarter. And if we just sort of fast forward, we think there is certainly a chance for things to go better, but right now we're pleased with where we are. I would suggest that we will probably be in the neighborhood of 300 patients enrolled by mid-year and probably 600 patients enrolled by the end of the year.

Okay. That's very helpful. Thanks. And then just on the incremental sales force you guys are adding to accelerate center additions in Europe. Can you just quantify for us perhaps the number of actual people you will be adding in terms of headcount and its impact on SG&A versus your prior guidance?

Yes, I can... the guidance number is about $1 million dollars in terms of increased spending per quarter, Paul, that you should anticipate and, Patrick, maybe you can translate that to number of people.

Yes. Number of people exactly, we have currently 14 clinical specialists supporting cases, and we are going to increase by a few more people. But we have anticipated that because of the results, the takeover [ph] results were good, we have anticipated and recruited those people during the first quarter. So, we're going to add too many people. They are just coming now.

Thanks a lot.

Our next question is coming from Jason Mills with Canaccord Adams. Please state your question.

Thanks, Mike, congratulations on a very fine quarter. First, Tom on your second quarter guidance in terms of sales, specifically, trying to... the $310 million to $320 million, obviously much higher than where consensus is. So, I'm wondering where you see the most notable strength. If we are bringing up SAPIEN, obviously from the previous guidance it's a couple of million. It seems to us with continued strength in critical care, the SAPIEN increase, there is still strength somewhere else, perhaps it's CardioVations. I'm just wanting to put my finger on it, because to get to the top end of your range there is seemingly strength in other areas of your business, you really haven't talked about much in the plethora of questions in this call. Any color you can provide there?

Sure. Absolutely, Jason. You're perceptive there. Critical care, I'd say, if you look back at how we did in the first quarter, also had a strong quarter. So, I would look at Q1 and proportionately you would see that. Also, cardiac surgery system as a result of CardioVations was a piece of the story, as was a piece of the vascular picked up a small piece also. So, I tell you, it's pretty well balanced with the largest piece being continuation in heart valves and critical care. Also, remember that FX as a result it didn't affect the recent moves, had little effect on this quarter on guidance. Next quarter, it's going to step up. So that's a piece of the absolute number. I think it's $19 million in the quarter.

And remind us, Tom, where... presumably it's heart valve and critical care, but where specifically you will see the largest bump in terms of nominal dollar increase to any franchise.

Well, to get specific, it would most likely in heart valves, we said surgical is right on track, so it would be THB, and in critical care, FloTrac continuing to perform, and then CardioVations for the third piece.

CardioVations. Great. And then, Mike, back to you with respect to the surgical valve business, both in the U.S. and worldwide, you mentioned the repair is sort of mid-single digits for you this quarter. You have products coming down the pipe. Could you talk about what the market is growing specifically, it seems in the quarter if you were only growing mid-single digits in repair that you actually had a fairly nice quarter in tissue valves, understanding it was flat in the U.S. and you did benefit from some currency. But you had to grow sort of in an upper single-digit range, including the currency. Where can we sort of see tissue valves ex-repair go throughout the year? And with repair products coming down the pipe, can we start to see sort of teen, mid-teens, low to mid-teens type growth in that business as we move throughout the year?

Yes, I don't know if I can get to it specifically. We are enjoying very strong heart valve growth. I'm talking valves now, not repair.

Right.

Outside the U.S. We are seeing that certainly in emerging markets. We had good growth in Japan and nice growth in Europe, for that matter. And as you properly note, with... because there is a little bit of pressure in repair, it suggests that things aren't going so badly in valves in the U.S. But the thing that really is going to step up our growth rate most substantially is going to be the new products approved in the U.S. And when that happens, we think that we are going to see the base heart valve growth rate step up substantially, and that will make a difference. Some of that will come with Mitral Magna. We also very much look forward to Magna Ease. That's probably going to be a greater impact when that comes, Jason, if that makes sense.

I'm sorry, Mike. Just to lap onto that last thing. I missed what you said about the timing gaining the approval for Magna Ease. Could you help me out with that one?

Yes. What we said is that we answer... we are in the process of answering questions. We've got questions on Magna Ease in the first quarter and that we plan to submit our responses to those this quarter. We still are talking about the launch in 2009, but we said we will be able to have a more detailed time line at next quarter's call. We are just going to know more at that time.

Okay, great quarter. Thanks, Mike.

Thank you.

Thanks.

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

Hi, guys. Congratulations on a great quarter and thanks for taking my questions here. Most of them have been answered, but I just want some clarification, just I know we talked a lot about the SAPIEN and I know Mike did a good job earlier of walking us through. I thought I heard something about 75 valves implanted per month. Maybe I was confused with the number of centers. Can you just comment, did I get those details right and kind of the math there.

Yes, Patrick can clarify a little bit more. What we were trying to do was to give you a sense for how it's going and because we are on a pretty good ramp right now, what Patrick was sharing was how did we exit the quarter. So in other words, if you looked at the month of March, what did that look like. And that was the 75 valves per month. Well, that was the rate of valve implants in the month of March and what we were suggesting is it was lower in January and February, and it's on a ramp going north. Does that answer the question?

Yes. And then the expectations to get into 75 centers then by the year-end?

Yes, that's disconnected. But Patrick can provide clarification. That's his estimate of how many centers we'll have trained.

Yes, we are currently training three, four centers per month and we are going to ramp up to five centers per month. That's why I believe that by the end of 2008, we will have 75 centers trained. Might take a few months for them to do cases in the regular basis but we're going to exit the year 2008 with this number of centers, maybe more, but I'm very confident with 75.

Okay, great. And then just Mike, just quickly on the FloTrac, can you just review the updates to the new products and whether it's going to be software or hardware upgrades?

Yes, indeed what we've talked about is the fact that we are going to have a couple of incremental improvements and updates to FloTrac this year. One that will be in the second quarter and that will be to provide better information for the operating room and one that will be in the third quarter which will help us really address medical ICUs. Both of those are software updates. So what you can picture is it's a field retrofit where, if an account chooses, they can acquire the additional software at a nominal rate.

Great. Thanks for taking my questions and congrats again.

Thanks, Josh.

Thanks, Josh.

Our next question is coming from Tim Nelson with FAF advisors. Please state your question.

Hi, guys. A little more granularity, if you will, on the reimbursement issues with SAPIEN. Has there been... most of the sales so far are stocking orders and/or initial implants. But have there been reorders or have there been any resistance of accounts that you started to buying more, given the fact they can't find funding. Talk about the reorder rate and where the limit is without reimbursement.

Tim, thanks for the question. When a center orders valves, they put them on the shelf. And as soon as they have done their first case, they reorder. That's the way it is as of today.

So what you can picture, Tim, just to bring this to life, when you talk about four systems, thing about the fact that if a center is going to do transapical and transfemoral cases which we ask them all to be prepared to do and there is two size of valves, 23 millimeter and 26 millimeter, then just to have one set of each requires four. If they think they are going to do some volume here, they will buy two sets. That's why it's either four or eight. It tends to be the level that people order at. And as Patrick says it's much like the way we sell our heart valves. Somebody places an initial order to put those on the shelf and then when one gets used they replenish and that's the way the business will operate.

But without reimbursement is there a limit? I mean, that's coming out of the hospital general funds right now. Any reason to think that there is a limit to what they will reorder if they can't get reimbursement?

As of today, we don't see constraints. Of course, you will find some hospital who can only do X number of valves per year. But it is not limiting our sales. And that's why I am saying we are confident with this more than 35 this year.

Okay, great.

Thank you.

This does conclude the Q&A session. I would like to turn the floor back over to management for any closing comments.

Okay. Well, thanks all for your continued interest in Edwards and Tom and David and I will welcome any additional questions by telephone. And with that, back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the 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 and use account number 2995 and passcode 279431. Let me repeat those numbers for you. 877-660-6853, or 201-612-7415, account number 2995, passcode is 279431. Finally, an audio replay will be archived on the Investor Relations section of our website. Thank you very much.

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