Edwards Lifesciences Corporation (EW) Q2 2008 Earnings Report, Transcript and Summary

Greetings, ladies and gentlemen, and welcome the Edwards Lifesciences second 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, 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 second 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 Larry Wood, Corporate Vice President, Transcathther Valve Replacement. 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 reasonably 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 will turn the call to Mike Mussallem. Mike.

Thank you, David. We are very pleased to be reporting strong second quarter results, with all of our franchises achieving double-digit sales growth. This quarter was highlighted by notable results from our safety and transcatheter heart valves with better than expected sales of $13.6 million and continued impressive procedural success. Now; turning to results. On a reported basis total sales for the quarter grew 20% to $328 million and grew 13.3% on an underlying basis. Currency helped sales this quarter, while discontinued businesses slightly trimmed the underlying rate. Before I provide a more detailed review of our sales results, Larry Wood, Corporate Vice President of Transcathther Valve Replacement, will discuss the quarterly sales results and provide an update on our U.S. Partner Trial. Following my remarks, Tom will review the financial results. With that I would like to introduce Larry Wood. Larry.

Thanks Mike. I am very pleased to have the opportunity to report a strong quarter in sales in Europe, along with significant progress in our U.S. Partner clinical trial. Starting with our Transcathther Heart Valve sales, second quarter global sales exceeded our expectations at $13.6 million, nearly all of which was in Europe, with the remainder from the U.S. Clinical trial in Canada. Continued high procedure of success, combined with the expansion in acute centers, drove increased procedures and sales. In Europe during the second quarter, we implanted 350 valves, which is more than double the number of implants we had in the first quarter. Our selling price remained within our expected range of 15,000 euro to 22,000 euros. Our sales are increasingly driven by implants and less from initial stocking orders. We saw the implant to sales rate increase to nearly 80% in the second quarter, compared to about 50% in the first quarter. We've expanded from having more than 30 centers performing cases in the first quarter to having 50 centers performing cases during the second quarter. There are still many centers eager to join our program and we've expanded our training capabilities. We expect to continue to add at least 5 centers for the remainder of the year. I am very pleased to report that our year to date and our year to date commercial sales, the combined acute procedural success rate remained higher around 95%. With the transfemoral rate a little higher than the transapical approach. This is likely driven by the transfemoral approach being less invasive of the two procedures and the transapical patients tend to be sicker of the two groups. We believe our high acute procedural success rate is a direct result of our clinician's dedication to success and our world class training program. Just as a reminder, the acute procedural success rate that we report each quarter is focused on the procedural results. Specifically that the case was performed when the valve was placed and that it was functioning properly immediately post procedure. And regard to the 30 day and one year survival rates even patients that have a successful procedure are going to have significant mortality over time due to their advanced aging capabilities. Remember, the limited historical data suggests these types of patients have mortality rates between 30% and 50% in one year if left untreated. Regarding reimbursement, we expect most European countries to establish formal reimbursement in 2010. In the meantime, funding for procedures is a complex issue that is account and country specific. Although interim funding is not assured, we are pleased that hospitals are currently able to fund these procedures and we expect this to continue while as we make progress toward formal reimbursement. Based on our momentum in Europe, we are now increasing our global transcatheter heart valve sales guidance to between $45 million to $50 million for the full year. We expect third quarter transcatheter valve sales to be less than sales reported in the second quarter due to the normal seasonality of procedures in Europe. Turning to the U.S. partner trial, we now have 16 centers that are actively enrolling patients. At the end of June, we had over 300 patients enrolled in the partner trial which is right on track with the time line we presented our investor conference in December. By the end of 2008, we anticipate having 600 patients enrolled. We continue to believe our progress in the U.S. gives us at least a two year lead over the next closest competitor. During the second quarter, we had our first patient received a SAPIEN valve with the Ascendra delivery system within the partner trial. And our participating centers are in the process of adding Ascendra. This addition to the trial will give cardiac surgeons the opportunity to partner in this transformational technology and most importantly it will allow us to address even more patients. We are continuing our dialogue with the European regulatory agencies regarding the trial design for our next generation of transcatheter heart valve. We plan to start the trial before the end of the year in support of a mid 2010CE mark. We continue to anticipate that this will be a nonrandomized trial comparable to the study design of our first generation technology. Last quarter we began our 30 patient U.S. feasibility trial of the SAPIEN valve in the pulmonic position. To date we have performed seven cases and continue to enroll patients in this trial. At ECCS which is the European Cardiac Surgery Meeting in September and the PCC meeting in October, there will be a number of presentations on the Edwards SAPIEN valve. The data will include the latest follow-up on the early feasibility study and in addition we will be providing 30 day follow-up from our post approval registry from the European commercial launch. We also expect to perform live cases at both meetings. I look forward to reporting our continued progress. Now I will turn the call back over to Mike.

Thanks, Larry. Reported sales for heart valve therapy were $163 million for the second quarter, an increase of 23.8% which included a $10 million contribution from foreign exchange. On an underlying basis growth was 17.2% for the quarter, led once again by strong performance in international regions including transcatheter heart valves in Europe. In the U.S., valve sales growth increased to approximately 5% driven by both units and price. We're particularly pleased to see this progress in advance of our new product launches. Outside of the U.S., our base heart valve business continued to achieve strong double digit underlying sales growth driven by the expanding adoption of our magna heart valve platform. The strong uptake of our SAPIEN valve in Europe exceeded our expectations and was the primary driver of sales growth. This technology is generating additional market growth in Europe as patients who were previously untreated now have more options for therapy. The introduction of transcatheter heart valves has dramatically lifted market growth in Europe from its historical rate of 3% to 5% to approximately 25%. Turning to Magna Mitral. During the second quarter we submitted our response to the FDA regarding the incremental testing and analysis that they had requested. We believe that all of the FDA's questions have been addressed and continue to remain optimistic for a U.S. introduction during the third quarter of 2008. With regard to Magna Ease we are waiting for additional clarification on the Magna Mitral approval before submitting our response to the FDA's questions. We continue to anticipate a U.S. launch for Magna Ease in 2009 pending regulatory approval. Based on this valve's performance in Europe, we expect that Magna Ease will surpass Magna and become the market leading valve. In Japan, we received regulatory and reimbursement approval for our Magna aortic valve during the second quarter. We introduced this valve in June and are very pleased with our first month's performance. We expect this product will accelerate our growth rate in Japan in the second half of 2008, and based on this valve superior patient benefits we believe it will quickly become the number one heart valve in Japan. Turning to repair, sales growth in the quarter continued in the mid single digits led by our disease specific products. As planned, we unveiled our Physio II ring at AATS Conference in May and are pleased with the enthusiastic clinician response. We expect U.S. implants to begin in the third quarter and have moved up the European launch from 2009 into the fourth quarter. Our new Physio II ring represents the next generation repair product for degenerative mitral disease which is the largest segment in repair and where we've experienced the most competitive activity. And turning to Cardiac Surgery Systems. Reported sales for the quarter increased 54.6% to $24 million, primarily due to the continued strong performance of the CardioVations MIS product line. CardioVations grew over 20% on a pro forma basis, as we increased penetration into existing accounts and introduced MIS therapies into new accounts. In addition, our base cannula products were up about 5% on an underlying basis. We were pleased to have fully integrated the CardioVations product line into our Cardiac Surgery Systems franchise. We fully retained the CardioVations sales force, improved product quality, and increased manufacturing capacity to meet the rising product demand. CardioVations offers real synergies with our heart valve business and we are committed to leading the way in developing MIS valve products. Now; turning to our Critical Care business. For the second quarter Critical Care reported $117 million in sales, up 19.7% which included an $8 million contribution from foreign exchange. Once again, the underlying sales 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 performance in emerging markets, and share gains on 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. We believe this strategy will provide Edwards with a sustainable competitive advantage. Our most recent innovations are being well received. We are creating new market opportunities for FloTrac. During the second quarter, we released an enhancement that provides additional information in the operating room. Our next significant introduction is a substantial upgrade that enables this distance to provide enhancements targeted for the medical ICU. This innovation will continue to broaden the application of FloTrac. During the quarter sales of PreSep, our innovative central venous oximetry catheter for early detection of sepsis continue to ramp up. Detection and treatment of sepsis remains a clinical challenge, and PreSep is gaining adoption. In addition, PediaSat is our venous oximetry system for pediatric patients continues to be well received. The second element of our strategy is also contributing to our success. Improvements in our operational execution have enabled us to continue to take share in pressure monitoring products and hemofiltration. And recently, we initiated US sales of our hemofiltration products through distributor. These products contributed almost half of Critical Care's total growth. Total reported sales of vascular products were $25 million this quarter consistent with our expectations. Sales of our high margin based-vascular products experienced a small decline to $14 million. We are continuing to pursue the PMA approval for LifeStent and continue to anticipate receiving an SFA indication by the end of this year. Turning to transcatheter mitral repair. At EuroPCR in May, one year follow-up data from the Evolution I, feasibility study of our Monarc system was presented. The earlier results are encouraging and are prompting us to move forward with the Evolution II study. We look forward to providing additional details about the trial design at the upcoming TCT conference. Before we move to a discussion of our financial results, I would like to update you on the defense of our transcatheter heart valve patents. As you recall, we initiated litigation against CoreValve in Germany and in the US, and they countered by challenging the Andersen patent with a lawsuit in the UK. The UK trial was recently completed and we are awaiting a decision. In the mean time, we are preparing for our next proceeding in Germany scheduled for September. We believe in the strength of our broad transcatheter patent portfolio, and are committed to vigorously protecting our valuable intellectual property, as well as the interests of our clinician and inventors. Now I will turn the call over to Tom.

Thank you, Mike. In addition to the strong sales that Mike and Larry have already discussed, I am pleased to highlight our strong earnings. Our second quarter non-GAAP EPS was $0.66 which was the top of our previous guidance range. Reported earnings per diluted share for the second quarter were $0.67. During the quarter, we fully retired our convertible debenture which has brought our debt to capital ratio to historical low level of less than 14%. In addition, our balance sheet is stronger than ever with our cash position now exceeding our remaining debt. For the second quarter, our gross profit margin was 65.5% compared to 65.3% in the same period last year. This increase resulted from a more profitable product mix which was largely offset by the temporary impact of FX hedges and contract manufacturing. As a result of these items, along with incremental investments in quality systems, we now expect full year 2008 gross profit margin improvement to be between 50 and 100 basis points. Also, I will remind you that our foreign hedge exchange... our foreign exchange hedges will continue to suppress the gross profit margin through the third quarter. Looking forward, based on the strength of our improving product mix we continue to expect our gross profit margin to exceed 70% within the next few years. Second quarter SG&A expense were 38.6% of sales or $126 million. The $25 million increase versus last year was due primarily to a significant impact from foreign exchange, expected higher levels of sales related spending including the SAPIEN launch in Europe and compensation expense related to our strong sale performance. For the full year 2008, we expect SG&A to remain at approximately 38% to 39% of sales. R&D investments in the quarter were $35 million or 10.8% of sales, compared to $29 million last year. The increase level of spending was focused primarily on our transcatheter and surgical valve program as well as our critical care development efforts. As result of stronger sales performance, we now expect R&D as a percentage of sales to be between 11% and 11.5% for 2008. During the quarter, we recorded a special gain of $800,000 representing the reversal of previously accrued severance costs. For the second quarter, our reported tax rate was 23.8% compared to 25.4% a year ago. Excluding special items, our second quarter rate was 24% resulting in a year-to-date tax rate of 25%. We expect this new lower tax rate to continue for the remainder of this year due to a shift in the geographic mix of our earnings. When compared to the same quarter last year, FX rates positively impacted second quarter reported sales by approximately $20 million. In comparison to the foreign exchange expectation set during our last earnings call, the impact on the top and bottom lines was minimal. Free cash flow generated during the second quarter with $17.4 million, which we define as cash flow from operating activities of $29 million minus CapEx of $11.6 million. In the third quarter, we plan to discontinue securitizing our U.S. accounts receivable. Due to recent changes in the financial markets, these instruments no longer offer us an attractive financing alternative. Although terminating the U.S. program will not affect working capital, it will reduce free cash flow in the third quarter by approximately $50 million. We have a second program in Japan that we plan to retake. For the full year, we continue to expect free cash flow to be at the upper end of our $155 million to $165 million goal, excluding the impact of terminating our U.S. securitization program. As a result of our decision to redeem our $150 million convertible debenture, we issued approximately 2.7 million shares in the quarter. We subsequently repurchased 2.5 million shares for approximately $150 million to largely offset the issuance of these shares. As previously announced our board recently authorized a new $250 million share repurchase program. Given the current stock price, we now expect fully diluted shares outstanding to be approximately 59 million in the second half of the year. On the balance sheet, total debt at June 30 was $142 million, while at the same time we had a cash balance of $188 million. Including receivables in our asset backed securitization programs, day sales outstanding for the quarter was 67 days, a reduction of three days from the prior quarter. Inventories decreased $3 million from the last quarter to $137 million. For the second quarter domestic sales grew 16% to $140 million. And internationally sales grew 24% to $188 million. Turning to 2008 sales guidance, based on our second quarter results and improved outlook for the remainder of this year, we are increasing the midpoint of our full year guidance by $25 million. We expect our full year total sales to be between $1.24 billion to $1.280 billion. This revised range reflects expected performance improvements across all of the company's product lines. For heart valve therapy we are raising our 2008 sales guidance $15 million to between $605 million and $625 million. This includes raising our transcatheter valve assumptions to between $45 million and $50 million. In critical care, we now expect total annual sales to increase $5 million to between $455 million and $475 million. In cardiac surgery systems, we are raising total annual sales by 5 million to be between $85 million and $95 million. Lastly in vascular we now expect total annual sales to increase $5 million to be between $85 and $95 million which includes contract manufacturing of stents. All of these projections assume foreign currencies remain at current levels. For the third quarter 2008 we are projecting total sales of $295 million to $315 million. We estimate the third quarter diluted EPS will be between $0.53 and $0.57. We are increasing the full year estimate by $0.05 to between $2.50 to $2.58 excluding special items. This represents a 2008 EPS growth rate of approximately 20%. With that, I will turn it back over to Mike.

Thanks, Tom. Overall, we had a very successful first six months and we are expecting a strong second half of the year. We are continuing to drive strong core growth in our franchises and our transcatheter valve platform represents a truly transformational growth opportunity. We look forward to sharing our continued progress with you. Before we open it up to questions, I would like to encourage you to take note of several upcoming events. In October, the TCT meeting will be held in Washington, D.C. At this meeting several clinicians will present their experiences with our transcatheter valve technologies. In addition, we plan to host an analyst meeting, so stay tuned for more details over the next couple of months. Also on Thursday, December 11, we'll host our 2008 investor conference in New York. At this event, we will provide an update on our new technologies, as well as our outlook for 2009, watch for more information about this event later in year. And with that, I will 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 re-enter the queue and we'll 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. [Operator Instructions]. Our first question is coming from Mike Weinstein from JPMorgan. Please state your question.

Thank you. Good evening. And thanks you for taking the questions. Let me start with just couple items. One, you are obviously continuing to make a lot of traction on your ramp in Europe with the rollout of SAPIEN. Could you just describe for us little bit better the acute success around 95% that you described, just to make sure I understood the description you gave. That's the procedurally success, that doesn't indicate whether or not the patient survived half the initial procedures, is that right?

No. What that means just to clarify is when the case is performed, it means the valve was successfully placed and the valve was functioning appropriately and by all accounts the case was deemed a successful procedure. And we believe that's a leading indicator of how results are going to be in 30 days and further out. But keeping in mind that these patients have a lot of co-morbidity and often those co-morbidity can lead to mortality that are can truly unrelated to the valve procedure itself.

Okay. Let me ask just two other quick ones, first one is a financial question. The gross margins came in lower than people were expecting and highlighted that was due to FX hedges and contract manufacturing. Could you just maybe try and quantify what each of those were to the gross margin line?

Sure, Mike. It's not that far off of the expectations that we had last quarter, and particularly for this quarter. We changed a little bit more was the rest of the year where I now think that the third quarter is probably going to be in this range once again, and then the uptick continuing in the fourth quarter. FX was a small piece contract with a little bit of a difference in this quarter. But as I said, we weren't too far off where we thought we would land and try it to signal in the last call.

Okay. And one other financial question and then I'll jump back in queue. You talked about the CoreValve litigation, you obviously just went through the trial in the UK and you have a trial ahead of you in Germany. How much are you spending on litigation in terms... how much have hit with that quarter?

I don't think that there was a substantial impact on the quarter, Mike. We are certainly spending money, but I think actually that those... that might even be an accrual.

Now that expenses are capitalized as long as you are defending, your intellectual property, it is not hit the P&L. If you win the case, then its part of your asset base and that would be depreciated over the remaining life, so at this point Mike there is nothing in the P&L for those.

You're capitalizing your legal expenses?

Correct.

Okay. I will jump back into queue.

That's pretty normal. We've done this since the beginning in terms of defending intellectual property.

Thank you.

Our next question is coming from Kristen Stewart from Credit Suisse. Please state your question.

Hi. Good evening, good afternoon, whichever it is. Just wanted to touch basically, I guess a little bit more on your reference in the commentary there, if you are willing to break out how much of the procedures are really more transapical versus transfemoral? And then just a little bit more contracts around reimbursements outlook, I know you had mentioned several companies... several European countries to re-establish, reimbursement in 2010. I guess to what degree do you still feel comfortable on the run rate going forward during 2009 in absence of that?

Sure, Kristen. In terms of TAPF, I think year-to-date our procedures are probably been fairly evenly split between the two and we think that's really one of the strengths of our program is clinician can really decide looking at individual patients what's the best procedure of that individual patient and by having both the technologies available we believe we can treat the vast majority of patients. In terms of reimbursement, we certainly feel confident that in 2010 that the major countries will come on board with reimbursement. In the interim, there still continues to be a tremendous amount of excitement related to centers wanting to get involved in the program and they have been able to secure funding to pay for these procedures and we expect that to continue as we make progress towards formal reimbursement.

And then any additional color on the European next generation, I know you said mid 2010CE mark. How long they've a follow-up and how they give a study? Are you anticipating to get to that sort of time line?

Yeah I don't want to get too deep into that for competitive reasons. We would expect it to be a nonrandomized trial comparable to what we did for the first generation valve and we expect to start that trial before the end of the year. And remember as while we've already done three first [ph] demands with these, so we certainly remain confident around the valve itself. But I don't want to get too deep into the trial design for competitive reasons.

Fair enough. Thank you.

Thanks, Kristen.

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

Thanks for taking the question and good afternoon, guys. Just a bit on the guidance there with respect to heart valve therapy. If I take the midpoint there and I strip out what was your increased guidance on SAPIEN in Europe, it looks like the growth rate in the back half is slowing down versus to 10% versus... looks like the 13% in the core business, the surgical valve business you reported so far this quarter. Can you maybe comment on what your expectations are in terms of the competitive dynamics in the back half of the year?

Sure, Paul. I didn't cut the numbers that way so I don't know exactly how it turns out. But I can tell you certainly how we are feeling and that is we feel quite good right now that we've generated the results we did in the first half. And actually felt like we gained a little bit of momentum here in the U.S. here in the second quarter. Given that we don't have any new product approvals and haven't had that for sometime, and that we've got two competitive launches that we are against that came out in the fourth quarter of last year, we are feeling pretty good. And again, we are optimistic about having Mitral Magna approved in the third quarter. So, we just expect our U.S. performance to step up and frankly expect our international performance in base heart valves to continue as well because, we got that approval in Japan. Maybe the difference is foreign exchange Paul in terms of the way that those numbers work.

Okay. Thank you for that. And then maybe just in critical care, I think the UK Health Authority posted a small safety notice for your Fogarty catheter. Can you just comment on whether it's just limited to the UK and what the potential impact of that could be? Thank you.

Yeah you know what? I'm not fully familiar with exactly what was posted there, Paul. I can tell you I think we've reported the core vascular sales in the quarter was about $14 million that which was a slight decline. And this has been rock solid for us for a long time in terms of what the growth rate of that business is. And so we are not really projecting any change in our performance in the Fogarty catheters.

Okay. Thank you for that. I will jump back in queue.

Sure.

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

Hi, everyone and thanks for taking my question. I'd just like to focus on SAPIEN in Europe. Regarding reimbursement in 2010 is there any change from your expectations from the analyst meeting in December. Is it happening fast or slower than you thought? And Mike, you said at the conference, I think, and correct me if I'm wrong, that you expect the ramp of SAPIEN to continue in 2009. And maybe you could touch upon whether can you continue to add centers in Europe at about five per month through 2009? And is it still your goal to exit 2008 at about 70 centers? I know lot of questions there.

You are right. There is a lot of questions. Let's take them one at a time. Larry, you want to start with the reimbursement question?

Sure I think reimbursement is pretty consistent with what we communicated at the Investor Conference. I don’t think we have any changes there, I think we are just continuing to work through the process. Reimbursement ultimately is going to be will be driven I think by the procedural success and what the results are and the ultimate cost effect of the procedure and right now we think those all look very, very positive for us.

You know, to the others in terms of the number of centers that we expect to finish the year with, I think we said it there are about 50 centers Larry that did procedures in the second quarter. And that we expected to add approximately or more than five per month for the remainder of the year. So we probably end up a little higher than the 70 to 75 number that we gave you last quarter for full year. And in terms of how it's going to go in 2009, everything we know right now says that what the sort of the rate we are on continues. To be able to take it precisely to more than five centers per month, I'm not sure that the math necessarily works like that Larry because it gets... it's a little hard to predict that far out. You never know whether some centers fall out and so forth. So we'll be giving more a precise '09 guidance as we get closer to the year. But right now we think we are on a good trajectory and we don't see a reason why it's going to necessarily stop in 2009.

Thank you.

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

Mike thanks for taking the question. I wanted to again wrap on to some questions on SAPIEN. Maybe cutting the animals a little bit here, but what were the implants per center per month? It seems like it increased given that, Larry, I think you said the implants doubled and centers didn't quite double. But do I have that right, do we see implants per centers, per month pick up a bit and do you have those numbers?

It varies a lot center to center. Obviously, centers that have been in the program longer have more sustained referrals programs and what not. But I would say it's probably in the three to four range.

Is that up from the first quarter, it seemed to be, but I'm just wondering?

Yeah, and it's probably up a little bit.

Okay. And how many centers are doing transapical in both, partner in the US, as well as in Europe at this point in time? And I'm sorry if I missed that.

No. Partner, we're just getting strong with transapical. So we just had a couple of sites that have started, but the remaining sites they are in the process now of adding a center to the part of protocol in their individual centers and going through IRB process. So we see that as being obviously really positive news for the second half.

Okay. And an area that isn't often asked about, Mike I will turn to quickly cardiac surgery. CardioVation seems to be a real driver of that franchise and frankly augmenting the overall growth profile. What should we expect in the second half of the year out of CardioVations? And perhaps you could help us gauge where the run-rate in that business could be exceeding the year to help us with models for 2009 and beyond, notwithstanding the fact that you haven't given guidance yet. But it seems that business continues to do better than most of us are expecting.

Yeah. I think it is doing better. And thanks for asking, Jason. The CardioVations business grew a little bit more than 20% on an apples-to-apples basis compared to last year. So right now I'd say Cardiac Surgery Systems is tracking as a business, it's a little less than a $100 million. I think we projected or we said last year that '07 it was a little over a $20 million business. We think that it allowed an underlying basis grow more than 20% throughout this year. So we think this growth rate continues. And that probably gives you a good sense for what it's going to l look like as it goes into '09. So it's clearly pulling up the growth rate for otherwise what would have been a franchise that was growing in the mid-single digits.

Great, I will hop back in queue.

Thank you.

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

Hi, thanks for taking the question. I need to follow-up on reimbursement because I'm not clear on one of your answers. I understand what you are say being 2010 in your comfort that there will be reimbursement in place. But looking out through 2009, what is your comfort level that physicians in Europe have also secured funding through 2009?

Yeah, just to get into it a little bit, this as we've tried to explain here. It's complicated because it is account specific and it is country specific. And it's not that necessarily reimbursement is uniform. It's that hospitals are finding a way to pay, okay, and they are finding the procedure attractive enough that they want it, and they are basically approving the interim funding. And we don't see that trend stopping. But frankly it's difficult for us to predict exactly what's going to happen, Amit. We were working hard on the formal reimbursement. But our assumption is more of a status quo in terms of what's going on in 2008 and that will continue into '09. But frankly, it's not one of those that you have perfect visibility on.

Okay. And on the Cohort B Partner trial is that still slated to complete enrollment by the end of the year and I just have a one quick follow-up after that.

Yeah, we remain on track to hit our 600 patient by the end of the year, and we expect to complete enrollment in Cohort B by the end of the year.

Okay. And just lastly on the surgical valve business, can you split out unit and price growth with some numbers for us? I know you said 5% in the US, but could you give?

Are you talking about in the US or on a global basis, Amit?

Both if you could and what's driving price in the US?

Yeah actually, I would say on a global basis price is probably down 1% just from a mix perspective because we have more aggressive growth outside the US than we've had inside the US, and the US tends to operate at higher prices. Inside the US pricing is actually up probably 1%. And again, that's just the mix as people are buying our premium Magna products, as opposed to the other products that they purchased in the past. And so when I said that US heart valve growth was somewhere in that 5% range, than you can tell how much is units and how much is price. It's 1% of that is price, if that help you get there?

Yeah, cool. Thanks.

Sure.

Our next question is coming from Charlie Chong with Goldman Sachs. Please state your question.

Thank you. I just wanted to take a closer look at the guidance for SAPIEN. Can you talk little bit more about the seasonality that you'd expect here in the third quarter percutaneous valves. For some reason given that there are not many options for these patients. I have a hard time thinking that there might be elasticity in demand around the summer months for these patients. I can understand that doctors might be on vacation so they can't perform the procedure. But, is that the key driver here of the seasonality that you are talking about?

I think you understand it perfectly. Certainly in third quarter there is a very heavy vacation load in Europe. And as almost all of our sales are driven out of Europe, we get affected by that seasonality directly. So we would expect sales in Q3 to probably be less than that of Q2.

Okay.

It's related to those vacation schedules.

Okay, great. And just a quick follow-up to the guidance question; it doesn't seem to be a tremendous stretch to get to the low end of the full year range. In fact, only need to replicate what you did in the first half of the year and add a million dollar and get to that $45 million number. On the other hand if we were to disregard this anticipated seasonality in the third quarter, you just need to put up two more performances of what you saw in the second quarter get to the high end. So is there something about momentum here that we should be reading into. Maybe you can just tell us how you came up with this revised guidance and I have one follow-up for Tom if you don't mind.

Yeah in terms of losable amount, you definitely should not assume that. We are not trying to send that signal at all. We are just trying to give you what we think is a reasonable estimate for the rest of the year. We know that just looking at our traditional heart valve business how much things slow down in the third quarter. And even the balance of first half, the second half kind of sales and this causes us to be thoughtful. This is a brand new business for us and we are trying to give you our best estimate but no we are not trying to signal any loss of confidence.

And we are very excited about how we have done. When we started the year we established $20 million as a target for this year and felt that we had some upside in that. But I think it's fair to say this has exceeded all of our expectations.

Okay, great, and then just the last follow-up for Tom. When I take a look at where the tax rate ended up during the quarter versus where the full year tax rate guidance had been previously, I estimate that as much as $0.02 in the EPS performance came from tax. So, you gave us directional comments and where tax could go for the remainder of the year. But, could you be a little bit more specific. I was thinking the tax rate really comes in at 25% for the year because if I'm calculating this correctly, I think that more than half of the increase in the full year EPS guidance could be coming from tax. Would that be correct?

You know, first off there is the remaining piece. This quarter was a bit of the story and for the rest of the year this lower number; I say it's maybe $0.1 to $0.05. So it is part of the story.

Okay great. Thank you very much.

Our next question is coming from Sara Michelmore with Cowen and Company.

Yes, thank you. I'd go back to SAPIEN, I'm afraid. I think when you guys had done your Analyst Meeting back at the end of the year you talked about thinking about an average caseload per month at the centers that were up were about three cases a month. And if I just do the straight math from this quarter, you are tracking it about seven cases a month. And I'm wondering where you are seeing that fallout or some centers doing more. Is that a low number for an average seven cases a month? How are you thinking about that metric at this point?

I don't think we have seen seven cases per month. I think we have still been in that three to four range. So it's maybe a little bit better than what we had talked about at the Investor Conference. But, I think we are still pretty much in that range.

Okay. And you must be going up against core valves in some of these centers or at least running into them. And I'm wondering can you just talk us through how you think the product selection process goes assuming that these centers have a choice of two valves in Europe. What makes them select the Edwards products over the core valve products? Thanks.

A lot of this I think is driven by just the overall demand and excitement about the transcatheter valve technology in Europe in general. And so there is just a lot of centers that are interested in participating and having this technology in their centers. So, we do bump into core valve periodically and there are some sites that have used both technologies. But that's just sort of the nature of commercial devices. I think one of the strengths of our program is having both the transapical and transfemoral approach and we create a partnership between interventional and surgeons. Core valve does have an advantage as it relates to profile and so sometime that becomes a driver with some of these folks. And those are just... it's probably not one single issue. There's probably a variety of issues that drive product selection.

And just to add to that Sara, we don't know obviously what core valve sales are since we are not a publicly traded company. But, we wouldn't be surprised if they are doing volumes that are close to the Edwards' volumes as well.

Okay, that's really helpful color. Thanks.

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

Hey guys thanks very much for taking my question here, congrats on a good quarter. Just two quick ones again back to SAPIEN. You talked about sort of the used rates or the implant to sales rate being from 50% to 80%. Obviously I know it hasn't been out that long. But have you seen any... can you talk to us a little bit about reorder rates? I don't know if it's too early. Maybe some of the centers have initially stocked if they gone through their sort of inventory and inventory and if they are reordering and what kind of clip they are doing it?

We absolutely are seeing reordering Josh and I think that's been one of the really great things about the program is if I could take it on and I'd had the procedural success that we've seen in the program to date, sites get more enthused about it and they have been reordering. So, where we had about 50% stocking and usage rate in the first quarter, we saw that go up to about 80% in the second quarter which is good. Now, we'll continue to see stocking as we add sites for the rest of the year, but we are very pleased with our implant to sales rate right now.

Okay, great. And then just on the data, I know you mentioned that you're going to come out with some 30 day follow-up. Can you just; two parts of the question. One can you just remind us just to go over again when you are going to be releasing that. And two, obviously you guys have talked to the FDA about constructing this trial and it's complex one. And you talked about 30% to 50% mortality within the year for these patients regardless. Obviously you dealing with tough patients who have other co-morbidities and you obviously gave us the 95% success rate on the implant. But, can you kind of give us an idea what you would be looking for or what you would feel good as far as mortality rates go, when that data comes out just so we know sort of relative to obviously these sick people already what you guys would be pleased with and you would think would get you towards approval.

Sure. The data presentations will be coming out primarily at TCT that's where we'll roll out all the 30 day data along with some of the longer term data from the feasibility trial. So, that will come out at TCT and maybe a little bit of it will come out at EACTS which is in Portugal this year. I think the thing that's important to remember is the patients that fall into this group the historical data while it's not perfect so to suggest that you have about a 30% to 50% mortality rate at one year. So, we will be looking for is certainly having the improvement over that in our results. But it's really going to be the partner randomized trial that really going to bring light to that and as that data is a randomized study it won't be available for quite sometime.

Yeah, we are enthused with the results we were getting. We are not in anyway believing that 95% persists. We know that this is a sick group of patients. But, we are enthused that it's going better than we thought at this point Josh.

Great. Well, thanks very much.

As a final reminder, if you would like to ask a question, please press star-one on your telephone key pad at this time.

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

Thank you for joining on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying growth rates, and amounts adjusted for special items, are included in today's press release and can also be found in the investor relation section of our website at Edwards.com. If you missed a portion of the call telephonic replay will be available for 72 hours, and to access this please dial 877-660-6853 or 201-612-7415 and use account number 2995 and pass code 288895. I will repeat those numbers dial 877-660-6853 or 201-612-7415 the account number is 2995, the pass code is 288895. Finally an audio replay will be archived on the investor relations section of our website. Thank you very much.

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