Moderator: Mr. David Erickson April 22, 2004 5:00 pm ESTht.edwards.com/presentationvideos/irpdfs/1stqtrtranscript.pdf · Porcine valves still have significant market share. Although

EDWARDS LIFE SCIENCES

First Quarter Earnings 2004

Moderator: Mr. David Erickson

April 22, 2004

5:00 pm EST

Operator: Good afternoon ladies and gentlemen, and

welcome to the Edwards Lifesciences First Quarter 2004 Earnings conference call.

At this time all participants are in listen only mode and a

brief question and answer session will follow the formal presentation. If you would like

to pose a question please press star, 1 at any time to place your line in queue. If

anyone should require operator assistance during the conference please press star, zero on

your telephone keypad. And as a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. David

Erickson. Thank you. Mr. Erickson you may begin.

David Erickson: Welcome and thank you for joining us

today. After the close of the regular trading we released our first quarter 2004 financial

results and on our call today we’ll focus our prepared remarks on information that will

complement the material, including the press release and the financial schedules and then

allocate the remaining time for Q & A.

Our presenters on today’s call are Mike Mussallem,

Chairman and CEO, and Corinne Lyle, CFO.

Before I turn the call over to Mike I’d like to remind you

that during today’s call we will be making forward looking statements that are based on

Edwards Lifesciences First Quarter 2004 22.04.2004. 5:00 pm EST

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http://www.edwards.com/AboutUs/WhoWeAre/CorporateOfficers.aspx?ItemId=21F58C06-1C24-4AE6-9EF0-ECE4F1BD2D1F

estimates, assumptions and projections. Although we believe them to be reasonable

these statements involve risks and uncertainties and actual results or experiences could

differ from the forward looking statements. These statements include sales growth, R &

D investment, net income, earnings per share and free cash flow goals for 2004, expected

sales growth in the heart valve therapy product line, the market opportunity for

percutaneous therapies, the timing of clinical trials and regulatory approvals, the impact

of foreign exchange, and other risk factors that may be found at the end of today’s press

release and in our SEC filings.

With that I’ll turn the call over to Mike Mussallem. Mike:

Michael Mussallem: Thank you David. We are very

pleased to share with you our first quarter results.

Highlights of the quarter include strong sales growth let by

an acceleration in US heart valve sales and the completion of the PVT transaction which

fortifies our leadership position in the emerging percutaneous valve market. I’ll begin by

discussing our sales results then I’ll turn it over to Corinne Lyle who will cover the rest

of this quarter’s financials.

On a reported basis total sales for the first quarter increased

10.6 percent to 235 million dollars driven by strong heart valve therapy and critical care

sales. Foreign exchange, offset by discontinued businesses, contributed 12 million


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dollars to the growth this quarter. Sales growth was strong in every major market except

for Japan which on a reported basis grew a modest 3.3 percent lifted by currency and

heart valve therapy growth but offset by lower results in cardiac surgery systems and

critical care.

Turning to our product line results let me remind you that

beginning this quarter we have re-categorized our product lines in order to provide

greater visibility on our heart valve business. The results for this quarter and the

comparisons to the year ago numbers incorporate this new reporting format.

On a reported basis sales of heart valve therapy products

grew 15.7 percent this quarter with foreign exchange contributing approximately 5.5

million dollars of growth. This quarter’s results were driven by strong double digit

growth in Perimount tissue valves and our heart valve repair products in all markets,

partially offset by the continuing decline in Porcine valve sales which were down more

than 20 percent. Most importantly sales growth in the US is accelerating as a result of

our decisive, competitive responses.

New products were a significant contributor to our sales

success this quarter. In addition our new Why Compromise clinical education program

clearly demonstrates the superiority of our Perimount valves in several important clinical

areas including durability and hemodynamics.


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The new sales reps we recently added have been fully

trained and are also beginning to make a contribution to sales.

Our recently introduced heart valve therapy products are

beginning, are being very well received by our surgeon customers. Global sales of our

Magna valve grew to more than 10 million dollars and we believe total Magna sales this

year will exceed 50 million dollars. Magna is commanding a 20 percent price premium

over our leading aortic Perimount valves and we continue to believe that Magna will

become the leading tissue valve in the US within the next few years.

The Tricentrix holder system continues to stimulate double

digit sales growth of our Perimount valve for the mitral position where mechanical and

Porcine valves still have significant market share. Although sales of our newly launched

IMR repair system had little impact on this quarter, this system designed for the unique

requirements of ischemic mitral valve repair is growing in popularity as additional

clinicians incorporate this therapy into their practice. These new products, along with a

robust pipeline of additional surgical heart valve therapies, demonstrate Edwards

continued commitment to innovation and enable us to further strengthen our market

leadership.

We continue to be excited about our new ThermaFix

calcification mitigation process which has been shown in lab tests to reduce calcification

up to 44 percent better than our current tissue treatment. During the second quarter we


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will begin providing this treatment to users of our Magna valve and will expand its use

more broadly in our Perimount products during 2005.

One of the most important surgical heart valve innovations

is BioPhysio. By the end of this year we plan to begin first human implants of this novel

valve which combines more than 20 years of Perimount tissue technology with Dustin

Klaus hemodynamics.

Percutaneous heart valve therapy is certainly the most

transformational and market expanding opportunity for the treatment of valve disease.

Our recent acquisition of PVT builds on our decades of leadership in tissue and valve

technology, catheter expertise and trusted relationships with leading cardiac surgeons.

The combination of Edwards and PVT establishes the strongest and most comprehensive

program of catheter based heart valve therapies.

Because the percutaneous treatment of valve disease

represents such a significant growth opportunity, we’ve created a special unit inside of

Edwards that is singly focused on these therapies. Stan Rowe, who was the CEO of PVT,

has joined Edwards and is heading our entire percutaneous heart valve program which

includes the leading approaches for mitral repair and aortic replacement. He brings with

him a wealth of experience in interventional therapies and the integration of PVT is

moving smoothly and rapidly and the merged team in Irvine and Israel is already working

together effectively.


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Now I’ll share with you our plans for gaining regulatory

approval for these percutaneous programs. Although we are in the midst of discussions

with the various regulatory agencies, we’d like to share some of our current thinking on

milestones, clinical trial designs, and timelines.

The first of our two mitral repair programs, the coronary

sinus approach, is on schedule and continues to make good preclinical progress. We

expect to begin the clinical feasibility stage of this program with the first patient implant

this year. The first procedures will be conducted at leading international centers with the

US clinical trials commencing in 2005.

Our Edge to Edge program is also proceeding well and the

first clinical use of this device is expected as early as the end of this year. We have

developed this emerging technology in collaboration with Professor Alfieri in Italy, who

has successfully used a similar procedure in a surgical setting on over a thousand

patients.

If clinical results are favorable for each of these mitral

products, we anticipate European regulatory approval could be received as early as 2007.

The PVT aortic valve is currently being used in

compassionate cases in Europe and the clinical results from the patients to date have


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generated valuable feasibility data. We have demonstrated that a heart valve can be

successfully deployed and anchored using a catheter based system and we have further

demonstrated excellent hemodynamic results that even exceed the performance of

surgical heart valves.

To demonstrate long term patient benefit we are currently

working with various regulatory agencies to design the protocols for a multi-center

European clinical trial that will comprise approximately ten sites. Starting in the third

quarter of this year we will begin enrolling 100 to 150 high risk surgical patients with

severe aortic stenosis. Assuming a six month follow up period we would expect to obtain

a CE mark by the end of 2005.

We are also currently in discussions with the FDA to

determine the regulatory path in the US which we expect will initially consist of a filing

focusing primarily on device safety for a humanitarian device exemption or HDE. This

will be followed by a PMA for broader indications. The HDE application will include

data from approximately 50 patients and we expect to receive HDE approval by the end

of 2005. This assumes that we’ve completed patient enrolment by the beginning of 2005,

collected six months follow up data, and submitted our filing to the FDA in the third

quarter of 2005. The receipt of an FDA – of an HDE will allow us to offer this life

saving device in 2006 to as many as 4 thousand patients per year.


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The path to broader commercialization in the US will begin

with our submission of an IDE by the end of this quarter. We expect the first step of this

process to be a feasibility study comprising about 30 patients at three sites with three

months of follow up data. Enrolment in this phase of the trial would begin during the

fourth quarter of this year and results submitted in the first quarter of 2005. This data

will allow us to commence the pivotal trial, which should result in a PMA approval by

the end of 2007.

The interventional community continues to be extremely

enthusiastic about percutaneous heart valve therapies judging by their eagerness to

participate in our upcoming clinical trials. We are continuing to work closely with

cardiologists and our surgeon customers to make these technologies available to patients

and to encourage broad adoption of these emergent therapies.

Sales of our cardiac surgery systems product line including

cannula, EMBOL-X, TMR and perfusion products were 2.5 million dollars lower than

the same period a year ago. Positive global sales growth in TMR and cannula was offset

by lower sales in perfusion and Novacor in Japan as well as FX. The prior year

comparable was driven by the initial launch of the Novacor therapy in Japan.

Double digit US TMR sales growth was driven by strong

laser sales as more centers adopt this angina therapy. Our confidence in maintaining this

growth rate was reinforced by the recent establishment of guidelines by the Society of


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Thoracic Surgeons to assist heart surgeons in their use of TMR therapy. This first ever

practice guideline referenced our technology, and signifies an important milestone in

substantiating CO2 TMR as an important emerging therapy.

During the quarter we transferred manufacturing and

ongoing product development of our Optimase laser system for treating atrial fibrillation

to PLC. By moving Optimase to a focused organization that specializes in laser

technologies we believe we can further enhance the product line and we remain on track

to introduce the redesigned Optimase system in the second half of this year. This

agreement enables us to accelerate the development of this therapy on beating hearts and

we expect to begin first human use of these market expanding products in the third

quarter.

Now, turning to critical care, reported sales grew 13.2

percent in the quarter with FX contributing 5.2 million dollars to the growth. This

quarter’s growth was due primarily to strong pressure monitoring product sales resulting

from market share gains and overall strong performance from both the US and emerging

global markets. The expected decline in base catheter product sales tempered the growth

rate.

An exciting new market expanding area that we are

investing in is Minimally Invasive Cardiac Output, or MICO, which represents an unmet

clinical need in critical care. We have completed extensive market research and


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determined that MICO could double the addressable patient population as well as double

the growth rate of our critical care franchise in a few years. The transfer of recently

acquired technology that makes MICO possible has gone extremely well. Pilot systems

of this technology are presently in clinical trials and we continue, and that’s going to

continue throughout the year. Upon successful completion of these trials and receipt of

regulatory approval we anticipate product introduction in 2005.

On a reported basis, vascular sales for the quarter grew 8.6

percent comprised almost entirely of foreign exchange gains. Sales of base vascular

products were essentially flat and the current limited offering within our peripheral stent

product line was only a minor contributor.

Earlier this month we announced our decision to

discontinue the Lifepath AAA program as of June 30th which allows us to focus our

resources on other technologies that can have a more meaningful impact on our future

growth and profitability.

We will continue to pursue our previously announced

patent infringement litigation and later in the call Corinne will discuss the charge

associated with our exit decision.

The introduction of our LifeStent products is continuing in

both the US and Europe with the launch of additional sizes during the first quarter and the


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roll out of balloon expandable products is proceeding on schedule. The release of more

sizes by June of this year will round out our balloon expandable offering. Although sales

were modest (less than half a million dollars) this quarter, clinician response to these

stents has been favorable and it’s meeting our expectations.

In our self-expanding stent line we’ve completed

adjustments to the delivery system and expect to launch the full line of product sizes in

the third quarter. This keeps us on track to reach the lower end of our 10 to 15 million

dollar sales projection for 2004 principally in the back half of the year. We are in the

process of building an experienced US sales team and to date we already have 17 on

board. We expect to phase in additional sales reps over the course of the year as more

product sizes are launched. This summer we expect to start enrolling patients in our

resilient clinical trial aimed at establishing the safety and efficacy of our self-expanding

stent in the Superficial Femoral Artery, or SFA. We believe the superior flexibility and

radial strength of our stent make it particularly well suited for the demanding

requirements of this part of the anatomy.

One other development in the vascular area this quarter was

the receipt of an IMD approval for Phase 1 clinical trial of a novel angiogenesis therapy.

This trial will use sanguinal ZFP technology to stimulate the growth of normal blood

vessels for the treatment of peripheral artery disease. We expect to begin patient

enrollment in the second quarter at the National Institutes of Health in Bethesda,

Maryland.


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Other distributed product sales for the quarter were 11.9

million dollars. A small sales decline in Japan was more than offset by foreign exchange

gains. We recently made the decision to discontinue sales in Japan of certain low margin

cardiology products in September, which represents approximately 3 million dollars in

annualized sales.

In summary, based on the momentum we’re seeing in our

heart valve therapy and critical care product lines we now expect to be at the high end of

our previously stated goal for 2004 total sales of 915 to 940 million dollars. For heart

valve therapy we also now expect annual sales to be at the high end of our previously

stated expectation of 400 to 450 million dollars. This takes into account the earlier re-

entry of our competitor into the Japan market. For the full year we expect to attain a 10

percent underlying growth rate.

Cardiac surgery system sales are expected to be

approximately 115 million dollars, consistent with our earlier guidance. For critical care

we expect sales to be at the high end of our 290 to 300 million dollar range. We expect

vascular sales to be approximately 65 million dollars and other distributor product sales

to be approximately 45 million dollars.

Finally we were pleased to announce earlier this week that

Alex Martin will be joining Edwards as the new President of our North America region.


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Alex brings with him a wealth of cardiovascular sales and marketing experience,

especially in interventional therapies.

And with that I’ll turn the call over to Corinne.

Corinne Lyle: Thank you Mike.

To begin I’d like to provide a summary of the impact of the

PVT transaction as well as go over other special charges in the quarter. Total special

charges in the quarter were 92 million dollars, with the largest charge being 81 million

dollars for in process R & D related to the PVT acquisition. This charge was determined

by an independent third party valuation of in process R & D and intangibles we acquired.

The final valuation of the intangibles results in an annual amortization expense of

approximately 7 million dollars which is included in the R & D line.

In addition, while we had previously assumed our tax rate

would increase to 27 percent to reflect the non-deductibility of this amortization, the

review of the purchase resulted in a re-characterization of the tax treatment of the asset

and a return to a 26 percent effective tax rate. These changes offset each other resulting

in no net impact or earnings guidance.

We also recorded 9 million dollars to exit the Lifepath

AAA program primarily related to inventory and clinical costs.


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The third charge was for 2 million dollars related to our

recent decision to discontinue three low margin distributed products in Japan later this

year.

For the quarter Edwards’ gross profit margin remained

essentially unchanged at 58 percent compared to the first quarter of last year as a

favorable impact of higher manufacturing volumes and the absence of low margin

businesses was offset by the costs of currency hedging. Going forward we expect

hedging costs to come down significantly and we are confident that gross margins will

increase beginning in the second quarter, resulting in at least a 100 basis point

improvement in gross margin for the entire year.

First quarter SG & A expenses of 76.5 million dollars

increased compared to the same period a year ago, due almost entirely to the

strengthening of the euro and yen. Cost reductions we made in 2003 have enabled us to

increase investment in our US sales and marketing efforts in heart valve therapy and

peripheral stents. For 2004 we continue to expect SG & A as a percentage of sales to be

slightly above 33 per cent.

In the first quarter we increased R & D investment by 10.5

percent over last year to 21 million dollars. This increase is attributed mainly to the

amortization of intangibles and additional spending related to the PVT acquisition which


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was completed in late January. We expect R & D investment for 2004 to be slightly

below 90 million dollars, which includes the higher PVT related amortization expenses.

Operating performance before interest and taxes grew from

33 million to 38.8 million dollars, or 17.8 percent over last year. Higher average debt

balances resulting from the PVT acquisition caused interest expense to increase to 3.7

million dollars this quarter and we expect quarterly interest expense to remain fairly

steady for the rest of the year. As I mentioned earlier, due to the re-characterization of

the tax treatment of the PVT assets we expect our effective tax rate to be 26 percent for

2004.

This quarter changes in foreign exchange rates compared to

the same quarter last year lifted sales by approximately 7 percent. If foreign currencies

remain at Q1 levels we would expect to see 3 to 4 percentage points of sales growth

attributable to FX for the full year.

During the quarter we repurchased approximately 5

hundred thousand shares of common stock for approximately 15 million dollars. Of the

current 2 million shares authorized through the end of the first quarter we had

repurchased approximately 1.6 million shares. Debt increased to approximately – Debt

increased by approximately 79 million dollars in the quarter primarily due to the 125

million dollar acquisition of PVT and our debt to cap ratio at quarter end was 37 percent.


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Total accounts receivable decreased by 5 million dollars

from last quarter, including receivables that are part of our asset backed securitization

program. For the quarter days sales outstanding declined two days to seventy-three days.

Inventories decreased 6 million dollars to 115 million

dollars primarily due to the right off associated with AAA inventory and inventory turns

improved to 3.5 from 3.1 in the fourth quarter.

Finally free cash flow for the year for the quarter, which we

define as cash flows from operating activities minus Cap Ex was 30 million dollars which

reflects more consistent management of our working capital. We are also now

anticipating that our free cash flow for the year will be in the 95 to 100 million dollar

range.

And with that I’ll turn it back to Mike.

Michael Mussallem: Thanks Corinne. Before we open it

up for questions I’ll make a few more final comments.

We remain committed to our previously stated financial

goals. In particular we expect to be at the high end of our goal for total sales of 915 to

940 million dollars; fund investments in R & D at or above the underlying sales growth


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rate; delivering that income growth of 13 to 15 percent, excluding the impact of the PVT

transaction; and exceed our 90 to 95 million free cash flow goal.

Additionally we are comfortable with the First Call mean

EPS estimates for the second quarter and full year 2004. Our strong first quarter results,

led by accelerating US heart valve sales, set the stage for an exciting year for Edwards

Lifesciences. Many of our recently introduced new products such as Magna and

Tricentrix are gaining momentum in the marketplace. In addition the anticipated launch

of our differentiated peripheral stents later this year should contribute meaningfully to a

strong year of sales growth. And right now our development of percutaneous heart valve

therapies puts Edwards at the forefront of the most innovative and transformational

opportunity in the treatment of heart valve disease.

Finally I would like to mention that if you are attending the

upcoming AATS meeting in Toronto next week, we’d like to invite you to join us for an

informal lunch with Edwards’ management and some leading cardiac surgeons. The

luncheon will beheld on Monday, April 28th from 12.30 to 2.00, and for more information

please contact our Investor Relations Department.

And with that we are ready to take our first question.

Operator: Certainly. Ladies and gentlemen at this time

we will be conducting the question and answer session. If you would like to pose a


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question please press star, 1 on your telephone keypad. A confirmation tone will indicate

that your line has been placed into the question queue and you may press star, 2 if you

would like to remove your question from the queue. For participants using speaker

equipment it will be necessary to pick up your handset before pressing the star key.

Thank you.

Our first question of the day will come from Tim Nelson of

US Bancorp Piper Jaffrey.

Tim Nelson: Great quarter, good to see valve growth

going again. Could you characterize the domestic and US growth rates in valve a little

more specifically? How are we doing with share in the US? And also talk about repair

versus tissue growth.

Michael Mussallem: Sure. In the US we saw, you

know, our pericardial growth was in the, was over 10 percent so it was sort of low to mid

double digits. If we take a look at that on a total global basis it was a very similar

number, maybe slightly higher. So what we had was similar growth in pericardial valves

across the board.

If you look at repair Tim, actually repair on a global basis

was in excess of 10 percent as well but actually it was far lower in the US and I would

attribute that primarily to the fact that our team in the US was so focused on launching


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Magna and the growth of Tricentrix it was probably just a little less time invested in

repair growth.

Does that give you what you’re looking for?

Tim Nelson: Yes, it’s helpful. Let’s talk a little bit about

Magna. You’ve upped your guidance significantly here didn’t you? I think at the

analysts’ meeting we were talking about a much lower expectation for Magna.

Michael Mussallem: Well Magna has gone very well. I

think, I’m not sure exactly what we’ve talked about in the past in terms of Magna.

Tim Nelson: 20 million I believe was the number.

Michael Mussallem: Yes, we’re – I think we are a little

higher than that Tim but we’re guiding now to 50 million dollars and probably 40 of that

will be in the US and 10 of it would be outside the US, but we’re on a pretty good ramp

there.

Tim Nelson: And the 20 percent price premium, that’s the

US price premium I would assume, or is that …


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Michael Mussallem: Well yes, that is the US premium.

We’re certainly getting that but we’re getting that sort of premium around the globe. And

obviously it’s a different starting point in the US if you compare it to an aortic price

that’s probably between 45 hundred and 5 thousand dollars and it’s 20 percent higher

than that, whereas that would be a lower ASP outside the US.

Time Nelson: And that it without the ThermaFix on it, is

that correct, or is that?

Michael Mussallem: That’s correct.

Tim Nelson: And will there be another price bump when

ThermaFix is on there?

Michael Mussallem: There will probably be a small

premium on ThermaFix when that is introduced.

Tim Nelson: OK, good. And the IMR ring, is that

expected to contribute more? You said it’s slow this quarter. What are your

expectations for that later on in the year?

Michael Mussallem: Yes, you know this is one that is

still not incorporated in most people’s practices. So there’s a certain amount of training


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that will take place that will go on in the future. We do expect it to be popular but right

now it’s still very small. But we’re excited about the prospects.

Tim Nelson: OK, and remind me again how many sales

people you added in the US in the first quarter?

Michael Mussallem: I think probably in the first quarter

we added maybe 5 or 6, although there were probably some changes as well Tim. We

probably need to give some other folks some chance to ask some questions.

Tim Nelson: OK, I’ll get back in the queue. Thanks.

Michael Mussallem: All right, thank you Tim.

Operator: Thank you. Our next question will come from

Glen Navarro of Bank of America Securities.

Glen Novarro: Hi guys.

Michael Mussallem: Hi Glen.

Glen Novarro: Can you give us the organic growth rate

of the tissue valve business for this quarter? I know you gave us the absolute dollar


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amount but we don’t know what the, for currency, but we don’t know what the currency

contributed a year ago, so first the organic growth rate of the valve business. And then

also in Japan, I think, I mean Medtronic I think launched like right around March 1st so

maybe can you give us a little feel for how you did in Japan in that month when

Medtronic was coming back. Did they impact the business at all? Thanks.

Michael Mussallem: Sure. Yes, the heart valve business

on a global basis Glen grew 9.3 percent for the quarter on an underlying basis OK, if you

take currency out of it. And I think you can find that in the schedule that’s attached to the

release in the back.

In terms of Medtronic’s return yes, they returned in March.

We would guess that their number of implants was probably in the 50 to 100 range. As a

matter of fact I think our guys in Japan think they know exactly what the number is,

which accounted for probably a half million dollars worth of sales in the month, and

therefore in the quarter. So our estimation is pretty much where we thought it was in the

past. You know when we do our modeling we pretty much have modeled it that they

would get, you know, maybe approximately half of the business they had previously,

which would be something in the neighborhood of 5 million dollars. That’s sort of the

way we’re looking at it now.

Glen Novarro: OK, great. So no, nothing out of

expectations with respect to the adoption from the Medtronic valves?


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Glen Novarro: OK, great. I have other questions but I’ll

get back in queue.

Michael Mussallem: OK, thanks Glen.

Operator: Our next question will come from Catherine

Martinelli of Merrill Lynch.

Catherine Martinelli: Great, thank you. Good evening

everyone.

Michael Mussallem: Hi Catherine.

Catherine Martinelli: Mike, I just wondered if you could

spend a couple of minutes on the PVT side, specifically with respect to the trials. I was

just trying to get a sense for what the challenge will be for demonstrating efficacy in the

European study if you are looking at high risk patients, and the probability that a lot of

them won’t survive because of their underlying ailments. And then the follow up in the

US, the IBE study, just in terms of how you view that being structured; will patients


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randomized to a surgical approach or how would you be thinking about what type of

patients you’d be putting the devices into?

Michael Mussallem: Yes, thanks for that Catherine. And

again a lot of this is still work in process but I can give you a sort of high level as to what

we’re thinking. When we talk about the European trial we’re talking about being able to

move beyond the compassionate cases that we’re in right now and move to folks that are

high risk surgical patients. And that we believe in the European trial will give us the

opportunity to have follow up data that demonstrates their ability. As it relates to the US

trial we believe that we’re going to be strongly encouraged to have a randomized trial

and, you know there no certainties but right now the belief is that we will randomize

versus balloon aortic valvularplasty.

Catherine Martinelli: And since that has had I guess

maybe a checkered past will that make it a more challenging study?

Michael Mussallem: Well there are still a number of

balloon aortic valvularplasties that are done every year in this country. I don’t remember

the exact number but it must be more than a thousand. And so it is routinely done for

those patients that don’t have great alternatives for that and again this, early on this is

going to be a better treatment for that same group of patients.


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Catherine Martinelli: OK that’s very helpful. And then

just quickly, any comments on what we should be expecting for the share comp going

forward? I know you still have shares left to buy back but it was up sequentially. And

are you still on track for Q2 ThermaFix launch? Thanks.

Michael Mussallem: OK. Well, so in terms of the

ThermaFix launch what we’re going to do here is probably roll this out on a more

deliberate basis than you might be suspecting, so it will go to some Magna customers and

actually the broad roll out will occur more in 2005. So hopefully that answers that

question. Maybe Corinne can speak to share comp.

Corinne Lyle: Catherine as you know as share price goes

up our fully diluted shares go up as well from the Treasury Stock accounting methods so,

but right now for assumptions purposes we are assuming maybe 100 thousand additional

shares per quarter but. And we also will continue to repurchase shares opportunistically.

Catherine Martinelli: Right, thank you.

Operator: Our next question will come from Michael

Weinstein of JP Morgan.

Michael Weinstein: Thank you, how you doing?


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Michael Mussallem: Good Mike.

Michael Weinstein: Good. Just to clarify a couple of

questions on the valve numbers. The 9.3 percent that’s global constant currency, is that

the number you’re citing?


Michael Weinstein: OK. Mike could you give us, just so

we can try and get a sense of the impact Magna is having, what maybe unit growth will

look like versus revenue growth, either in the US or globally? Do you have that?

Michael Mussallem: Yes, we might be able to give you

some sense for that, you know. Out of the sales on the Perimount side I would guess that

price probably accounted for maybe 20 to 25 percent of that total growth number.

Michael Weinstein: That’s on the Perimount side, so you

say Perimount was…

Michael Mussallem: No the combination of Perimount, I

put Magna in there Mike, so it’s all part of that family the way we look at it.


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Michael Weinstein: So you’re saying 20 to 25 percent of

the tissue valve growth, is that the way you’re looking at it?

Michael Mussallem: Yes, well you can’t – not really

because we left Porcine out of that because there was a pretty hefty Porcine decline, but

out of the Perimount growth that was, you know 20 to 25 percent price.

Michael Weinstein: OK, and just I’m trying to…

Michael Mussallem: And we indicated that Porcine was

shrinking, had shrunk about 20 percent and you know, at this point Porcine is probably

20 million dollars worth of sales on a global basis annualized, half that in the US.

Michael Weinstein: That was, I’m maybe mentally trying

to do this here. The contribution to overall valve therapy growth from price,

differentiating it from exchange would be, I’m going to try and back into this but maybe

you have a thought on that.

Michael Mussallem: Yes. You know it’s – I could try

and…

Michael Weinstein: We can circle back, that’s no

problem.


27

Michael Mussallem: OK.

Michael Weinstein: And then I want to focus on the

whole PVT effort and just some of the current properties, just following up some of

Catherine’s questions so we can understand it better. First on the CE mark, most of these

trials you’re talking about a six month follow up. What’s the primary end point that

you’re planning on there in Europe?

Michael Mussallem: Yes, you know what – at this point I

can’t tell you exactly what that’s going to be Mike. I can tell you that right now we do

estimate that sort of this number of patients would be in this range or we might - a

hundred patients, but the primary end point is not one that I guess I’m prepared to speak

to.

Michael Weinstein: OK. And then Europe is probably

less of a question but as we look at both the HDE and the initial 30 patients in the IDE

here in the US (I think you said six month follow up on the HDE and three month follow

up on the IDE, correct me if I’m wrong) how do you know that that’s the right amount of

follow up and really, how does the FDA know that’s the right amount of follow up at this

time? How is it six months and not say twelve months, twenty-four months?


28

Michael Mussallem: Yes, I don’t think at this point that I

can say that I know what’s the proper amount of follow up. I can tell you that there’s

ongoing discussions that are going on. I think you heard it right, the feasibility study

might be one that has 30 patients and basically we’re trying to determine safety with that

study and then once you get into pursuing the PMA that follow up is probably more like

twelve month follow up Mike, so I don’t know…

Michael Weinstein: Eventual PMA.

Michael Mussallem: Yes.

Michael Weinstein: And just without I guess sharing

with us what the maybe with the exact design of the trial and the end points would be,

philosophically can you just walk through what you learned at six months and why six

months might be sufficient and what might the push back be there. And that might be

some of the questions here today. Obviously you marketed your valves based on having,

you know, 15, 16, 17 years’ worth of data and that’s what sold you know your valves is

there data going out so far. But you know we’re talking about trials here that are going to

have six month follow ups so help us understand the, what’s different here.

Michael Mussallem: Yes, you might think of it this way.

You’d have to remember first the group of patients that are being treated. These are high

risk surgical patients that today are not surgical candidates, and so they don’t have the


29

option of getting a 20 year fix of their valve because they’re, for the most part they have

been refused for surgery. So by being able to have a patient that goes out that long

there’s the belief that you understood a tremendous amount of the risks just in the first six

months and after that you’re really testing the durability of the valve. So you understand

the tremendous amount of that is the valve still functioning, are the hemodynamics

excellent, you know, and you probably have a very good chance of predicting what the

long term performance is going to be. And when you consider the options what these

patients had before it’s a great choice. We’re not suggesting that this becomes a choice

of surgical patients switching over and getting this sort of device, so we frankly don’t

think this is going to impact surgical volumes during the decade because as you suggest

six months follow up is not much to be able to infer anything about the durability of this

procedure.

Michael Weinstein: And just a follow up, when do you

think you’ll have the answer I guess relative to the HDE and IDE; exactly what the

follow up period is going to be required? Is that, do you have the HDE answer? I

assume in the next few months or do you feel that you have that now?

Michael Mussallem: Well you know, in terms of what

some of the nearer term milestones are we said that by the end of this quarter it’s our

intention to put, to submit our IDE for the feasibility study and we expect to get some

feedback shortly after that submission. So we should get a lot of feedback related to that.

At the same time we will be learning quite a bit about our European study later on this


30

year, because again it’s our intention to begin enrolment of that soon, in the second half

of the year. So I think we’ll learn a lot in that regard and as we work through our

feasibility study with the FDA I would imagine that we are able to bring a great deal of

definition to the pivotal study as well for the PMA approval. So I expect, I guess maybe

the more direct answer Mike is over the next six months I believe that there’s going to be

a tremendous amount of definition that becomes available.

Michael Weinstein: OK, I’m going to ask one final

question just to clarify one last thing and I’ll drop, I promise. The randomization to

balloon valvularplasty, that’s something in itself, that idea, that concept, this is the right

control, is that something that you’d put in front of the FDA at this point?

Michael Mussallem: Yes.

Michael Weinstein: Thank you, appreciate it.

Michael Mussallem: OK, thanks Mike.

Operator: Our next question will come from Alex Arrow

of Lazard Asset Management.

Alex Arrow: Thank you, this is actually Lazard Capital

Markets. Good afternoon.


31

Michael Mussallem: Good afternoon Alex.

Alex Arrow: Hi Mike. First question, the share gains that

your new approach to the heart valve competition from Medtronic that you spoke about.

Can you characterize that as, did you gain valve share from Medtronic that you’d

previously lost or was it that you gained more share from the mechanical side from St.

Jude and you were simply doing that faster than you had before? Can you say whether

this new ad campaign and the new sales reps was really a success because of share from

Medtronic or from St. Jude?

Michael Mussallem: Well, thanks for that Alex. I don’t

know, I suppose we’re not going to know that till we see the reporting of results. We

would say in general our feeling is that the heart valve market hasn’t changed much and

that it probably in general is about a 5 percent grow or so. We believe that we have

gained market share versus where we were for example at the end of the fourth quarter, I

don’t think we’re back to the levels that we were at the first of last year but I think we’re

making progress and we like the direction that we’re headed in.

Alex Arrow: Was it the ad campaign, was it the extra

seven reps, can you say what it was that did the trick?


32

Michael Mussallem: You know what I think it’s the

combination of all those things and certainly new products were a very important part of

it. So the combination of having this line up of new products was very important and

also just the fact that we had intense focus on this and focused more than ever in

comparing our products and their attributes to our competitor’s products.

Alex Arrow: OK, on the critical care side of the business

you mentioned that the growth was offset by the decline in the base catheter business. At

some point the base catheter business is going to either go to zero or get to some base

level that it’s not going to decline any further. Can you give us some color on, you know,

how soon or when we might expect the decline in the base catheter business to no longer

be an issue?

Michael Mussallem: Well, you know, it’s a good

question Alex. I mean part of the decline in the base business is due to the fact that

there’s less invasive surgeries that are done and so you may end up with just less flow of

people through surgery and through critical care units that might use the base Swan, but

at the same time the people that end up there are much sicker. And so although the base

has been declining and our advance has been growing our business is still, will have to be

maybe 45 percent base business so it’s still quite substantial. But I think the other thing

that is most noteworthy is on the horizon is our MICO technology which we think is very

much market expanding and goes right at this poor issue.


33

Alex Arrow: OK, thanks. And my last question, I know

you can’t say whether the FDA will say OK to the balloon angioplasty as a control for

PVT but can you say whether you feel like that’s any more likely now than you did a

quarter ago, the last time we spoke about this? I mean is it, as you, obviously that would

be an advantage if they do accept balloon angioplasty and do you think this…

Michael Mussallem: Well I can just say what we believe.

I really can’t speak for the FDA. We believe that that would be an important and

adequate control, and we believe that that would be an excellent test for this valve. And,

you know, right now we wouldn’t be talking about it if we didn’t think it had a good

opportunity of being accepted.

Alex Arrow: OK, thanks.

Operator: Thank you. Our next question will come from

Sheetal Mehta of Bear Stearns.

Sheetal Mehta: Good afternoon.

Michael Mussallem: Hi.

Sheetal Mehta: Just have a couple of quick questions, just

following up on the PVT questions. First regarding the pivotal trial or I guess the PMA


34

application, is it going to be an issue that you’re using an equine valve because equine

tissue has not been approved by the FDA yet, and do you have the data to support that

type of tissue in humans?

Michael Mussallem: Well the big answer is no, we don’t

think it’s an issue that the valve, including the equine pericardium is part of the total

system. And that’s what will get tested as part of this trial, and that’s already been tested

in the lab and has demonstrated that it is quite durable in lab tests. And so we wouldn’t

be at this stage to be able to go to a clinical trial if we hadn’t adequately, if we don’t get

the, adequately address those sorts of questions at FDA. So that will be all part of the

process.

Sheetal Mehta: OK. There’s a couple of other quick

follow ups. Can you give us an update on what, if anything, you have decided to do with

your other intravascular aortic replacement program? Is that going to be consolidated

into PVT or two tracks running, what do you guys see?

Michael Mussallem: Thanks for that. Actually you know

we have teams actively engaged in that. At this point in time we are still pursuing that

program with vigor and so we’re still sorting out just exactly how we want to play that

out. Whether it will be one generation versus another, and we will keep you informed as

we make decisions on that.


35

Sheetal Mehta: Great. And then finally just kind of a nit-

pick question with regard to the HDE, one of the stipulations of an HDE is that you can’t

sell products for more than 250 dollars unless you have some type of, I think, external

audit of some sort. Is that going to be an issue? I’m assuming it’s not going to be.

Michael Mussallem: Well I hope it passes because

certainly we couldn’t provide this product for that sort of price so it’s our belief that we’ll

be able to get full value for the product in an HDE sort of application.

Sheetal Mehta: OK, great. Thanks so much.

Michael Mussallem: Thanks Sheetal.

Operator: Thank you. Our next question will from Larry

Keutsch of Goldman Sachs.

Larry Keutsch: Hi, good afternoon.

Michael Mussallem: Hi Larry.

Larry Keutsch: Mike can you just remind me for clinical

trials for a new valve, not a percutaneous valve but a traditional valve, how long the

follow up is?


36

Michael Mussallem: I ought to say that it’s about 800

patient years that’s associated with an approval for a new valve. But it could happen with

just one year follow up is actually all that’s required within that. So it’s a body of

patients but really only one year follow up is necessary.

Larry Keutsch: OK, so I guess what I’m just thinking

about here is if you’re using a valve material that’s not approved in the US and you’re

thinking about that as the entire system for your percutaneous device, why wouldn’t that

have to be the exact same 800 patient years, etc. for that system?

Michael Mussallem: Well I think, you know, it might

end up turning out to be that Larry. I think the issue here is that this is a different product

and a different application. You’re going into a, it’s cath lab procedure versus a surgical

procedure which certainly has lower mortality and morbidity reported or associated with

it, or at least we believe that that will be the case. And that in itself is a substantial

argument in that regard. Plus you have these patients here that don’t have other great

clinical options, and so when you’re evaluating that, you know to deny that sort of

therapy to these patients that don’t have options because the valve doesn’t have the

durability of surgical valves is one that I think is open to serious question.

Larry Keutsch: OK, and just so I understand. So that

makes total sense to me on the HDE side where these are clearly non-surgical candidates,


37

but isn’t the IDE and the goal of this product to move it into more mainstream patients,

and the minute you get a non-HDE, a traditional PMA approval, isn’t it basically open to

anyone? And so why wouldn’t the FDA be, again thinking about, along the lines of

being conservative?

Michael Mussallem: Well you know the indication that

we will go for will likely be something like high risk surgical patients Larry, and so we’re

not going to argue that this is the alternative, an alternative to surgical patients. And so

we’ll be going first on our PMA will be pointed at this population of high risk surgical

patients.

Now if over time we are able to demonstrate long term

results and we’re able to log, you know, two years, three years, five years and so forth,

then it starts opening up other questions about whether it becomes an alternative. But

that’s more of a longer term issue.

Larry Keutsch: OK great, and then just two very quick

questions for you. Just the comment that you made about being at the higher end of the

915 to 940 year end sales, obviously currency is probably stronger than you were guiding

to at the time of the fourth quarter. In fact I think you said it was 2 to 3 percent perhaps

impact and then I think you’re saying 3 to 4, so I’m just trying to get a sense of is the

move in upward range of guidance due to currency? And then the other quick question

is under the HDE can you actually make a profit on those products that are sold?


38

Michael Mussallem: Yes, a couple of things, you know.

One is currency certainly helps us toward the upper end of that range. A couple of other

things that help us is one, we’ve already accomplished Q1 and so with 235 million dollars

worth of Q1 we can do the math in terms of what that does to support that effort. And

also I guess we’d say that the results, you know, sort of the results we have on our heart

valve side probably happened a little sooner than we thought it would. So it’s a

combination of those factors.

In terms of the HDE, could we make a profit off

that? I think we could, yes, but you know this will play out once we have more definition

around that, but that would be our expectation.

Larry Keutsch: OK great, thank you.

Michael Mussallem: Thanks.

Operator: Our next question will come from Dan

Andrew of William Blair.

Dan Andrew: Hi Mike, just briefly can you talk a

little bit about the experience in Europe with the PVT product as you’ve kind of


39

accumulated some of these patients in the last six or twelve months, and what you’re

seeing in these patients?

Michael Mussallem: Yes. You know what we

have been treating in patients, Dan, have been really compassionate cases. These are

extraordinarily ill patients that have very short prognosis for continued life. So what we

are able to demonstrate are a number of things that are very interesting. You know, we

can learn a lot about the procedure itself, about the placement. We can prove that we

really can replace an aortic valve with a catheter based system. We can prove that you

can put it in place without emboli being generated, that there’s no blockage of the

coronary arteries. That we do get a solid fixed placement; that we do get consistent

results, and one of the things that’s most remarkable then is following the cases we are

able to measure hemodynamics like effective orifice area, and to see what the pressure

drop is across the valves. And we see remarkable improvement there, and that’s been

very consistent. So we are able to learn all those things Dan but what we’re not able to

learn is very much about the long term durability of these products.

Dan Andrew: So I’m going to guess then, to put it

bluntly what’s the failure mode for these valves? Is it the valve itself or the patients other

illnesses in every case I guess?


40

Michael Mussallem: Yes, we, these patients – a

number of these patients have passed away and they have not passed away because of the

valve. That’s just not been the case. It’s always been some other sort of issue.

Dan Andrew: What’s the longest odds you’ve got

in terms of patients?

Michael Mussallem: I think we have one in the

six, seven months range at this point right now.

Dan Andrew: OK, great. Thanks.

Michael Mussallem: Thanks.

Operator: Thank you. Our next question will

come from Greg Simpson of Stifal Nicholas.

Greg Simpson: Good afternoon guys. Mike, not

to beat a dead horse (and that’s not an equine valve joke) but to talk about PVT a little

bit. Your comments on valvularplasty and the design of the trial and things like that, you

know we’ve heard from several sources that the FDA, either you’re holding a meeting or

already held a meeting very recently with a number of thought leaders from both the

interventional and the surgical side. Has that meeting taken place and, I mean, without


41

getting you in trouble with anybody, specially the FDA, how much of what you’re saying

here is based on your communication with that agency? And if that meeting has taken

place, anything that’s come out of that?

Michael Mussallem: Yes, actually there’s a

meeting that’s actually going on today so I don’t know what the heck is going on there

Greg, to tell you the truth. So there’s, I think that’s the meeting that you’re in particular

referring to. But separate from that there are other meetings that we have had with FDA

and other regulatory agencies, so we’re trying to guide you here is there are not final

decisions made, and I’m not trying to suggest that it’s a done deal, so please, if you took

that away that would be a mistake. What we’ve been strongly encouraged by many of

you is to try and give you some feel for what the regulatory pathway looks like, what the

clinical trial design might look like. And so I’m sort of out there trying to do my best to

give you some guidance of, you know, as much as we know right now and how it might

go. And, you know, our belief here (and we could ultimately be wrong here) but our

belief here is that it will be a randomized clinical trial and that it may be randomized to

balloon aortic valvularplasty as a likely choice. Although, you know, we won’t know

that until we get the real decisions.

Greg Simpson: All right, good enough. Thanks

Mike.

Michael Mussallem: Sure.


42

Operator: Thank you. Our next question will

come from Keay Nakae of Wedbush Morgan.

Keay Nakae: Hi Mike. If in fact you were

successful in a study randomized against valvularplasty, how then would you characterize

market opportunity in terms of number of patients you could treat per year potentially?

Michael Mussallem: That’s tough to estimate.

We could estimate the number of high risk patients that are out there but it would be

tough to know just exactly what the interventional community would do over time. And

a lot of that would depend on I suppose the clinical trial results and their confidence

that’s associated with that. You know we, our belief is that out of the folks, the people

that can have surgery today is that there’s probably an equal number of patients with

severe valve disease that don’t see surgery. So you know, that gives you some sense for

what the opportunity is. Now some of that is because they get refused for surgery and

some of it would be that the patients actually refuse it themselves, but it gives you a sense

for that market as a starter.

Keay Nakae: All right. And then moving on to

another study, the resilience study, can you give us any color there about what the design

of that might look like? I think previously you were thinking it would be a randomized

study as well.


43

Michael Mussallem: Yes, I don’t know that we

have anything there to share in terms of the trial design. Let me see. I don’t. I think I

remember but I hate to speculate here and I could be wrong about that, so if you don’t

mind Keay we’ll get back to you on that.

Keay Nakae: No that’s fine, and the finally a

question for Corinne. At this point what percent of your exposure are you hedging?

Corinne Lyle: We have been about two thirds

covered historically and we intend to keep that kind of hedge ratio going forward.

Keay Nakae: OK, thank you.

Operator: Thank you. We have time for one final

question and it will come from Jason Mills of First Albany.

Jason Mills: Wow, in under the wire! Hey guys.

Michael Mussallem: Hi Jason.

Jason Mills: Mike, going back to the PVT and

back to primary end points, I’m wondering if you could remind us what typically the


44

primary end point is for a normal tissue valve FDA approval to clinical trial, and if that

might be a similar end point to look at for PVT as well? Or if not maybe if it would be

extension of life measured in terms of months or years, or would it be some sort of a

hemodynamic data point or, you know, flow? Could you help us out just a little bit there

and maybe what we could see as far as an endpoint?

Michael Mussallem: Yes. The principal end

points that are used today are hemodynamic that would speak to effective orifice area and

pressure drops across the valves. So those would be typical and I wouldn’t be surprised

if those turn out to be similar sort of end points for this sort of trial.

Jason Mills: OK, that’s helpful. And would a

secondary endpoint then, maybe be measuring the extension of life, or that would be

something that would be measured, is it measured today? I guess maybe not, during that

year. It’s hard to get at since this is a sicker patient population that really have months to

live as opposed to years potentially with a surgical patient. Could we see that being a

secondary endpoint, and if so what kind of an extension would we need to see?

Michael Mussallem: I wish I could help you more

Jason. These are not end points today that are used for surgical heart valves and I

wouldn’t expect it to be the case here as well. But I assure you that as we have more

definition there that we will be forthcoming.


45

Jason Mills: OK, and Corinne maybe a question

for you as we think about all the trials that you’re doing in these areas and in the

resilience and others. What can we look at? I know you haven’t given guidance yet for

2005, I’m not asking for all of it, but on the R & D side what could we look at next year

over 2004? I assume it’s an order of magnitude higher than sales growth but any other

color there?

Corinne Lyle: No, I think that we are committed

to growing R & D above our sales growth but you know look for R & D approaching 10

percent as a percentage of total revenues.

Jason Mills: OK, that’s helpful. One final

question Mike, and I apologize if you went over this. BioPhysio, can you remind me

what US and European launch timing is going to be for that again?

Michael Mussallem: Yes, again we are just going

to be starting the PMA trial at the end of this year, and you know that by the time we

collect all our data I’m not sure exactly how fast enrolment will be. You know, this is

probably a three year process. Europe I would expect to happen faster than that, maybe

in two years from when we start.

Jason Mills: OK guys, thank you very much.


46


47

Michael Mussallem: OK. Thank you very much

for your continued interest in Edwards. Corinne, David and I welcome any additional

questions by telephone and with that back to you David.

David Erickson: Thank you for joining us on

today’s call. If you missed any portion of it 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 pass code 100591. I’ll repeat all those numbers: 877-660-6853 or 201-612-

7415. The account number is 2995, the pass code is 100591.

As an alternative to this an audio replay will also be

archived on the Investor Information section of our website at Edwards.com. Thank you

very much.

Operator: Ladies and gentlemen, thank you very

much for your participation in this afternoon’s audio conference. You may all disconnect

your lines at this time and have a wonderful day. Thank you.

Documents

Moderator: Mr. David Erickson April 22, 2004 5:00 pm ESTht.edwards.com/presentationvideos/irpdfs/1stqtrtranscript.pdf · Porcine valves still have significant market share. Although