Edwards Lifesciences Corp (EW) — Q3 2017 Earnings Call Transcript

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2017 financial results. During today's call, we'll discuss the results included in the press release and the accompanying financial schedules and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO; and Scott Ullem, CFO. Before we begin, I'd like to remind you that during today's call, we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to, financial guidance and current expectations for new product approvals, benefits and launches, clinical and regulatory timelines, competitive matters, trends in therapy adoption and foreign currency fluctuations. These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in our press release, our 2016 annual report on Form 10-K and our other SEC filings, all of which are available on our website at edwards.com. Also, a quick reminder that when we use the terms underlying and adjusted, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release and on our website. Now I'll turn the call over to Mike Mussallem. Mike?

Thank you, David. We're pleased to report strong third quarter performance that continues to deliver double-digit overall organic growth, driven by robust sales of our innovative therapies. Total sales grew 13% on an underlying basis, which was in line with our expectations. Sales were lifted by strong global growth in TAVR and are consistent with our projection of a plus $5 billion market opportunity by 2021. We continue to aggressively pursue breakthrough structural heart therapies with the potential to drive significant future growth and help an even broader group of patients. Before we get into the product line results, I'd like to say a few words about the impact from recent natural disasters in the Caribbean and the U.S. Edwards has significant operations in Puerto Rico and the Dominican Republic, which are the principal manufacturing locations for our Critical Care products. Our Puerto Rico facilities sustained some flooding, which temporarily affected manufacturing operations there, until we resumed full production a couple of weeks ago. None of our heart valve manufacturing is conducted in those areas. Most importantly, all of our employees have been accounted for and are safe. And although a number have reported significant damage to their homes and loss of personal belongings, Edwards and our employees across the globe are generously making contributions in support of our people there. I was able to personally visit the area recently and was very inspired by our employees' resolve and eagerness to return to work, so they can continue to help patients. While a number of the procedures in Houston and Florida were postponed during the hurricanes, fortunately, we believe a substantial number of these patients have since been treated. The majority of these affected hospitals have resumed normal operations, and we estimate the total impact on our third quarter sales was a couple of million dollars. Turning to Transcatheter Heart Valve Therapy, adjusted global sales were $498 million, up 20% on an underlying basis over the prior year, including the anticipated adjustment for the consumption of stocking inventory in Germany. Growth was driven by continued strong therapy adoption, both inside and outside the U.S. Globally, our average selling price remained stable. In the U.S., transcatheter heart valve sales for the quarter were $312 million, representing 20% growth versus the prior year. We estimate that the procedure growth in the U.S. was about the same. These results were consistent with our expectations and the typical seasonal slowdown. Strong adoption continued to fuel an increase in procedures broadly across our network of hospitals, led by our best-in-class SAPIEN 3 valve. We continue to be encouraged by the strong international adoption of TAVR, particularly where overall therapy penetration is still relatively low. Outside the U.S., our underlying growth rate was an impressive 21%, with a strong contribution from Japan, where TAVR was introduced more recently. We estimate procedure growth in Europe was in the low teens compared to last year, with Edwards' growth about the same. We estimate our competitive position this quarter remained unchanged. Consistent with our previous comments, our results reflected little benefit from a competitor's product recall earlier this year and others were the primary beneficiaries. Growth in European countries with lower TAVR adoption rates continues to outpace countries where the therapy is more established. Turning to our near-term product pipeline, we recently introduced our CE Mark pending SAPIEN 3 Ultra System at the PCR London Valves meeting. The system features advancements designed to help TAVR heart teams simplify procedures, save time, and reduce the chance of complications. The Ultra System also adds a taller outer skirt on the valve, which is designed to further improve its outstanding performance. We expect to initiate a launch in Europe by the end of the year and plan to introduce this system in the U.S. in late 2018. At the London Valves Conference, excellent six-month clinical data results were presented on our CENTERA system, continuing the positive trends seen in the 30-day data presented earlier this year. We expect to launch this premium self-expanding valve system in Europe by year-end, and we'll use that experience to inform our U.S. and global plans. Enrollment in our PARTNER III low-risk trial was progressing and our goal remains to have this randomized trial enrolled around year-end. And as a reminder, our groundbreaking EARLY-TAVR Trial, the first of its kind to study severe aortic stenosis patients without diagnosed symptoms, continues to enroll. In summary, we expect our full year THVT underlying sales growth to be around the midpoint of our previous 20% to 25% guidance. This reflects significantly better results than our original sales guidance of 15% to 20%. Turning to Surgical Heart Valve Therapy. Sales for the quarter were $196 million and were up 2% on an underlying basis, consistent with our expectations. Growth was driven by strong performance of our INTUITY Elite valve system and the solid growth in our core products outside the U.S. This growth was partially offset by the continuing shift from our surgical aortic valves to SAPIEN 3 valves in the U.S. and Europe. Our INTUITY valve was recently approved for Medicare's new tech add-on payment effective October 1 of this year. This recognized INTUITY as the new technology that provides substantial clinical improvement over conventional valves. We believe many hospitals will be helped by this add-on payment over the next year, and this should simplify adoption of this rapid-deployment valve that shortens minimally invasive and complex procedures. Our INSPIRIS RESILIA aortic valve has been launched in Europe, and we're looking forward to launching this platform globally. Our newest surgical valve features RESILIA tissue and is designed for potential future valve-in-valve procedures. We believe this offers an ideal platform for active patients and patients seeking alternatives to mechanical valves, which carry the risks associated with blood thinners. We continue to plan for a 2018 launch in the U.S. and Europe. In summary, surgical heart valves, we continue to expect full year underlying sales growth of 3% to 4%. In Critical Care, sales for the quarter were $145 million, and grew 5% on an underlying basis. This performance was driven by solid growth of our core products and our Enhanced Surgical Recovery Program, particularly in the U.S. and Asia Pacific. We expect the global launch of HemoSphere, our next-generation advanced monitoring platform, to be a significant contributor to our longer-term success. While sales were minimal this quarter, the launch is expected to continue to ramp into 2018. HemoSphere is designed to provide greater clarity on a patient's hemodynamic status to enable clinicians to make timely, potentially life-saving decisions. This system is modular and designed, and we plan to add enhanced surgical recovery capabilities to this all-in-one platform in the future. We are in the process of introducing our acumen software suite with our new FloTrac IQ smart disposables in Europe. This is a low blood pressure or hypotension probability indicator to alert physicians in advance of this dangerous condition. In summary, we continue to expect full year underlying sales growth in Critical Care to be at the high end of 5% to 7%. Turning to our structural heart programs. We are enthusiastic about the opportunities in our transcatheter therapies to treat patients suffering from tricuspid and mitral disease. Today, I will cover some select updates, and you can expect additional updates at next week's TCT Medical Conference and a more complete overview of our portfolio at our investor conference in December. Physician enthusiasm continues to be strong around tricuspid therapy. At TCT, we expect updates on Cardioband in the tricuspid position and our FORMA system. During the quarter, we are pleased to begin treating U.S. patients in the Cardioband mitral IDE trial called the ACTIVE trial. In Europe, we recorded approximately $1 million in commercial sales this quarter, which are reported in the THVT product line. We continue to believe that the annular reduction provided by Cardioband can be an important first-line repair therapy for many mitral patients. We've begun treating patients in the CE Mark trial called CLASP for our PASCAL transcatheter mitral repair program and are actively expanding this trial into multiple centers. We continue to treat patients and incorporate learnings with our Edwards CardiAQ mitral valve replacement system. We have decided to sharpen our focus based on our recent clinical experience and now plan to commercialize the valve system that incorporates a number of significant enhancements. This system features several important advantages, including a smaller profile to enhance transseptal delivery via the femoral vein, rather than between the ribs. We believe this strategy accelerates our progress to achieve our goal to introduce a true transcatheter therapy that stimulates adoptions and serves a much broader group of patients. We are refining our CE Mark timing and will provide an update on our investor conference. This change has financial implications, which Scott will discuss in a few minutes. Overall, while still early, we remain excited about our portfolio of transcatheter mitral and tricuspid offerings. We are aggressively investing in R&D, operations, and commercial infrastructure to support these emerging therapies with significant upside potential. Separately, clinical data collection remains on track for Harpoon Medical minimally invasive chordal repair system. Edwards has an option to acquire this technology, and we expect to make a decision by the end of the year. And before I turn it over to Scott, following a thorough analysis of our global supply chain, we recently made a decision to close our small heart valve plant in Switzerland and absorb these operations into our evolving global network. We plan to support the impacted employees and appreciate their dedicated service. We expect to wind down operations in early 2018 and are recognizing a $10 million charge this quarter. And now I'll turn the call over to Scott.

Thank you, Mike. I am pleased to report another quarter of double-digit underlying sales growth, which generated strong earnings per share growth. Adjusted sales were $838 million, up 13% over 2016. These results were consistent with our expectations and the typical seasonal slowdown. In addition, adjusted sales include $17 million of Germany de-stocking sales. We continue to expect 2017 to be an excellent year with underlying sales growth above our original expectation of 10% to 14%. Our operating margin expanded over 2016 and is on track to achieve attractive levels this year. Adjusted earnings per share growth was 24%. Adjusted EPS was $0.84, and GAAP EPS was $0.79, which includes the $10 million charge related to closing our small manufacturing plant in Switzerland that Mike discussed, as well as other customary adjustments consistent with prior quarters. As we previously discussed, forecasting earnings per share is less because of the new accounting for stock-based compensation. Adjusted earnings per share would have been $0.88 this quarter, based on the excess tax benefit we estimated in our guidance last quarter. For the quarter, our gross profit margin was 74% compared to 72.8% in the same period last year. This improvement primarily reflects the benefit of a more profitable business mix, led by growing sales of TAVR, as well as a favorable comparison of supply chain expenses. Partially offsetting these benefits were expenses associated with flooding from Hurricane Maria in Puerto Rico and the planned closure of our manufacturing plant in Switzerland. We continue to expand our full year 2017 gross profit margin, excluding special items, to be at the midpoint of 74% and 76%. Going forward, this is a good near-term modeling assumption, anticipating mix improvements, offset by planned capacity improvements. We'll discuss those expectations at our investor conference in December. Turning to selling, general and administrative expenses. Third quarter expenses increased 7% over the prior year to $245 million or 29.8% of sales. This increase was driven by personnel and sales related expenses, primarily in support of our transcatheter heart valve therapy product line. We continue to expect full year SG&A, excluding special items, to be between 28% and 29% of sales for the full year. Research and development investments in the quarter increased 26% over the prior year to $143 million or 17.4% of sales. This increase was primarily the result of continued investments in our transcatheter valve programs. We continue to expect R&D, excluding special items, to be between 16% and 17% of sales for the full year. During the third quarter, we recorded a $17 million net reduction in the fair value of our contingent consideration liabilities. This reduction was primarily the result of the cardiac plants Mike mentioned earlier, which reduced the likelihood of a European regulatory milestone payment. Our reported tax rate for the quarter was 19.7%, down from 23.7% in the prior year period. This quarter's rate benefited 350 basis points from the new accounting for employee stock-based compensation. However, as I mentioned earlier, this benefit was lower than we estimated in our guidance last quarter. We continue to expect our full year tax rate, excluding special items, to be between 17% and 19%. Foreign exchange rates increased third quarter sales growth by 0.4% compared to the prior year. At current rates, we now expect de minimis impact to full year 2017 sales compared to the prior year. Free cash flow generated during the quarter was $269 million. We define this as cash flow from operating activities of $311 million, less capital investments of $42 million. Our capital spending reflects investments we are making to increase valve manufacturing capacity. Turning to the balance sheet. At the end of the quarter, we had cash, cash equivalents and short-term investments of $1.4 billion. Total debt was approximately $1 billion. Average shares outstanding during the quarter were 216 million, which is consistent with our assumption for the fourth quarter and full year. Now turning to our 2017 guidance. For 2017, we are reaffirming all of our full year sales guidance ranges. For Transcatheter Heart Valve Therapy, we continue to expect sales at the high end of $1.7 billion to $2.0 billion. For Surgical Heart Valve Therapy, we expect sales of $780 million to $810 million. And for Critical Care, we expect sales to be at the high end of $560 million to $600 million. For total Edwards, we continue to expect sales at the high end of our $3.2 billion to $3.4 billion range. We also remain confident in our full year guidance for adjusted earnings per share to be between $3.65 and $3.85. Lastly, we continue to expect free cash flow, excluding special items, to exceed the top end of our $625 million to $675 million range. For the fourth quarter 2017, at current foreign exchange rates, we project adjusted sales to be between $855 million and $895 million, and adjusted earnings per share to be between $0.84 and $0.94. And with that, I'll hand it back to Mike.

Thank you, Scott. We're very pleased with the performance achieved across all our product lines and believe our future remains bright. Our innovative TAVR therapies continue to deliver value to patients, and our transcatheter mitral and tricuspid valve technologies continue to represent exciting opportunities for breakthrough therapies. Overall, we're confident that our important innovations will result in a continued strong outlook as we deliver valuable solutions for the patients we serve. And with that, I'll turn the call back over to David.

Thank you, Mike. Before we open it up for questions, I'd like to remind you about two upcoming events. First, there is an informal Q&A with Dr. David Cohen at TCT in Denver next Tuesday. If you haven't RSVP-ed, please do so this week. Second is our 2017 Investor Conference on Thursday, December 7, in New York, which will include updates on our latest technologies, as well as our outlook for 2018. More information about this event will be available in the coming weeks. We're ready to take questions now. In order to allow broad participation, we ask that you please limit the number of questions. If you have additional questions, please re-enter the queue, and we’ll answer as many as we can during the remainder of the call. Operator, please go ahead.

Thank you very much. I appreciate you taking the question. So, let me just touch first on the TAVR business. So, the TAVR business grew on an underlying basis, 20%, 21% this quarter, 25% in the first nine months of the year and the midpoint guidance for the 20%, 25% range for the year would seem to imply about 16% growth in the fourth quarter. So, I guess one is that right? Is that what you meant to imply? Two, can you just talk about your view of the TAVR market this quarter? Obviously, the U.S. market was down sequentially, which was a little bit below Street expectations, but the OUS business was stronger. And just how should we think about TAVR market growth clearly over the next, let's call it, 1.5 years before we potentially get to a readout on PARTNER III and how you think about the market growth for the next big catalyst? Thanks.

Thank you for the question, Mike. The calculations you made regarding the remainder of the year seem accurate. That was the message we intended to convey. It is indeed correct that sales growth is slower in the second half of the year compared to the first half. We were actually surprised by the remarkable sales growth in the first half; it was exceptional from our viewpoint. At the start of the year, our expectations were lower. The second half has unfolded as we anticipated. This is a long-term growth platform, and we are pleased that several years after its introduction, we are still experiencing strong growth. Notably, the growth outside the U.S., especially in Europe where we began our introduction ten years ago, at 20% is impressive. We maintain a long-term perspective, projected the market opportunity to exceed $5 billion by 2021, and believe this year’s performance aligns with that outlook. I do not expect to see the same heavy growth rates of 60% that we experienced last year; we anticipate a shift to more moderate growth. We will provide specific guidance at our investor conference in December, but your characterization is correct.

Okay. And then Scott, it's probably been several quarters since you guys haven't reported a quarter and then raised guidance for the full year. Could you just maybe try and tease out some of the different moving parts that you're running through in your prepared commentary? Obviously, the hurricanes had some impact on the business, but can you just kind of run through some other items you think may be holding back earnings in the third and fourth quarter? Thanks.

Yes, we are very pleased with our year-to-date performance and are happy that the third quarter met our expectations. These expectations are quite ambitious, as Mike mentioned, and significantly higher than we initially anticipated for the end of the year. I don't believe there's anything hindering our ongoing growth. There will be some adjustments in the fourth quarter regarding gross margin, with reduced support from foreign exchange that will affect earnings per share, but that's accounted for in our guidance and may not be particularly significant. Overall, the fourth quarter is aligning with our earlier predictions from this year, and we believe we are on the right track.

Okay. I’ll let someone else jump in. Thank you, guys.

Thanks, and good afternoon. Mike, I just want to start with a couple of product questions and maybe a quick follow-up. On CardiAQ, I appreciate the update. Can you just give us a general sense of this sort of reformulation of the product? What rough sense would have in terms of the delay and then the CE mark trial or assuming we stopped and you restart it? Should we be thinking more of a six-month delay to restarting that trial or 12-month? And for the December Analyst Day, is there a chance we get an update on the next-generation SAPIEN platform? And then I have a quick follow-up.

Thanks, David. We're not ready to provide specific timing for the CE mark. We will be prepared to discuss that at the investor conference. The main point we wanted to make today is about our strategic shift, which we believe necessitates these significant enhancements that will be meaningful for us. Overall, we think this will shorten our path to long-term success, even if it may temporarily delay sales. We believe this trade-off will be viewed positively by investors. Regarding the next-generation SAPIEN valve, we won’t delve into specifics for competitive reasons. We are excited to be launching both the Ultra System and CENTERA before the end of the year, and we anticipate considerable customer enthusiasm around these launches. As you pointed out, we are also working on next-generation systems that could be even more exciting, though we are not quite ready to share those details yet.

And then Mike, just want to come back to the U.S. market dynamics again. Obviously, you try to quantify what the hurricane impact was and it seems sort of minimal, but given the fact that other companies that have reported so far, their earnings have actually shown some rather weak U.S. utilization numbers and each quarter for Edwards in the U.S. market has not been particularly predictive of, let's say, the next quarter from a sequential growth perspective. Is there anything from a share perspective or utilization in certain accounts or the rate in which accounts came on board here in the third quarter that surprised you in any way? Thanks so much.

Thank you, David. The share positions have remained quite consistent and stable both in the U.S. and internationally compared to last quarter. There isn’t much news on that front. The competitive landscape hasn't shifted as much as we anticipated, but that may change in the future. Specifically, the exit of Lotus from the marketplace didn't seem to benefit us significantly; it may have given an advantage to our competitors, but overall, there aren’t many other significant changes happening. We believe the market continues to grow well, and we are growing in line with that growth.

Great. Thank you very much.

Good afternoon. Thanks for taking the question. Let me ask the ubiquitous 2018 question maybe a different way it sounds like Mike based on your recent comments in September, public comment you expect the TAVR and the critical-care business to grow at a similar rate next year as 2017. I guess, the question is, are you willing to talk a little bit about the contribution from mitral and tricuspid next year and big picture should we think about 2018 as a transition year before we see the low-risk data at ACC presumably in early 2019? And on the P&L it sounds like you plan to invest in a dedicated mitral and tricuspid sales force next year in Europe, which will I don't have set any leverage in the P&L is that fair? Thanks for taking the question.

Thank you, Larry. First, we are not ready to provide specific guidance for 2018. You are aware of our critical-care, heart valve, and transcatheter aortic businesses, all of which have clear growth patterns. We believe these areas will continue to grow and maintain their leadership. Regarding transcatheter mitral and tricuspid, I don’t expect 2018 to significantly impact sales. Instead, it will be crucial for us to progress towards key milestones, create value, and establish important evidence, making it more of a foundational year than one focused on immediate sales growth. Our emphasis will be on the potential long-term growth of these platforms. Additionally, we are cautious with our investments. While some investments in R&D and field resources are necessary, we will attempt to balance those expenditures and not overextend ourselves, although some will represent advanced investments. Thus, there shouldn’t be a substantial overall impact on the 2018 plan from these activities.

Thanks for taking the questions, guys.

Hi, thanks and good afternoon. So just first of all just a clarifying question on the TAVR business and THV sales in the quarter because of what happened in Germany I think there's maybe a little bit of confusion so just to be clear in the third quarter your worldwide THV sales adjusted for Germany were $498 million and that compares to on an apples-to-apples basis $510 million in the second quarter. Is that right?

So, Bob, it's Scott. The $498 million is adjusted for $17 million of Germany stocking, and in comparison to the second quarter of $510 million, let me confirm that we're providing the correct apples-to-apples number. Yes, it's $510 million when also considering the sales adjustments from the German stocking.

Okay. And then just, Mike, to clarify your comments on the U.S. market, because obviously that one change this quarter was your competitor did get approval for intermediate risk, so you think that you basically held share despite that approval and that the market growth rate will be around this 20% level?

Thank you, Bob. We believe that the share has remained fairly stable without significant changes. It's always challenging to make accurate estimates since our reporting cycles differ. However, we estimate that our growth is generally aligned with the market, and we have incorporated those approvals into our guidance.

Okay. And then maybe one quick comment on Japan, that's a clear bright spot in the quarter, how sustainable is that growth in your view? Just give us a sense of market dynamics in Japan currently?

Yeah, the adoption in that country is still early; they continue to go add centers as we had expected and we continue to believe that right now they're primarily just treating high-risk patients, so the opportunity for expansion is still significant there. Hard for us to quantify, but we could talk about that one more in December as well.

Great. Thank you very much.

Sure.

Thanks. Mike, just a couple for you to start on the mitral program and it's been hard to tell, obviously, this year from the revenue piece of what's going on with Cardioband but you guys along the way have been making some investments to lay the foundation there. Can you just give us an update at this point of what your European transcatheter mitral sales organization looks like how many people have you actually added this year?

Yeah, I'm not sure the exact numbers, Chris, but yeah, we have been adding people to the Cardioband organization in Europe. Maybe one of the things that's not apparent here is we believe that Cardioband is not only applicable in the mitral position but also in the tricuspid position. So, in addition to our field resources and, well, all of our resources for that matter supporting Cardioband mitral cases they're also supporting Cardioband tricuspid cases and we think Cardioband could be an important contributor there. We don't get any sales credit, no commercial cases for the tricuspid cases those are still commercial at this time. So, we've ramped up. There's probably maybe a few more resources, but basically where we want to be right now that sort of leveling out here in the fourth quarter.

Okay. And then one for Scott just following up on Larry's question about the potential to drive operating leverage next year and I know we'll get into this in a lot more detail in December. But it seems like you guys have been in investment mode of one form for every year for the last several years. Are you trying to signal that you're thinking about 2018 differently from what we've seen in the last couple in terms of the level of investment that's required and therefore the potential for operating leverage, or is it just shifting to new priorities as they come along?

No, we are going to continue to invest aggressively in the business especially around research and development. We've made a lot of progress over the last two years just in leveraging SG&A as we've gotten more global. We’ve continue to drive that SG&A is a percentage of sales ratio down. We're looking for opportunities to continue to get more efficient. That said, we're going to invest as Mike said in field resources to support our transcatheter mitral and tricuspid therapies, but I think overall our operating margin continues to look very favorable. It's improved over the last couple of years and it's an area of focus, but, again, primary focus at Edwards is driving top-line organic growth.

Thanks.

Thank you for taking my question. I have one inquiry regarding U.S. growth. You mentioned earlier that you were somewhat surprised by the performance of the smaller, newer centers entering the market and expanding geographically in the U.S. I would like to know if you could provide any insights or details on how that progressed in Q3.

Yeah. We continue to have new centers joined. We probably have, I don't know, maybe a dozen new centers joined in the quarter. So, we were probably in excess now of 550 centers and we do get contribution from those. And so, we're actually seeing a contribution across the board from large centers to small. It seems as though when new centers come in, that they unlocked a group of patients that maybe weren't being seen by the centers that were already present, maybe because people were their own networks or they just didn't have an insider referral pattern that found them into a TAVR Center. So, we are getting a contribution from that. But as you can imagine, the numbers are getting large. And so, this validates for us the under treatment that's going on in TAVR and gives us confidence that this is going to have quite a bit of a runway in front of us.

To follow up on the market, there seems to be a perception that we face an immediate risk with this last indication and that we may not see another data catalyst until early 2019. However, entering the intermediate-risk market did not significantly increase the number of patients eligible for treatment in the U.S. I would like your thoughts on whether we can expect a rapid increase in patient numbers, or if this is a group that will gradually expand over the next two to three years.

Yeah. Thanks, Matt. Yeah, we've tried to talk about this before. We really believe that there's a dramatic under-penetration of patients. So, when we looked at severe aortic stenosis patients in 2016 with symptoms, we felt that less than 20% were being treated. And so, we have a big opportunity. And even though we have the intermediate risk approval it takes time for clinical practice to change it takes time for the guidelines to change it takes time for referral patterns to change and that's been happening. And overall, we're pleased we've seen some nice growth. But we're not coming close to the full potential that was unlocked with that indication let alone what's still in front of us. So, we continue to have work on that. So TAVR's still underutilized. The new data on that we continually present. I think is very helpful in terms of making the argument and we've got some data actually coming up at the upcoming TCT where they're going to highlight the economics which will be interesting to see how contemporary economics compare to the economics that were last measured within the PARTNER trial.

Thanks for the color.

Hi. Thanks for taking the question. Mike, can you hear about okay? I am on a cell phone.

Yeah, Jason. Hear you fine.

Super. So, start with mitral. I'm sure you've had a chance to take a look at least of course you look at intrepid Medtronic announced first patient enrollment. Perhaps, interest in your comments, just supposing the inclusion, exclusion criteria and as far as you've have a chance to really evaluate one versus the other to Cardioband and your broader thoughts on moving towards commercialization of products in the United States for a functional mitral regurgitation? And sort of how those algorithms will play out? I know it's probably hard to discern at this point, but just interested in what you learned or what observations are coming out of the commencement of both of those trials?

Yeah. Thanks, Jason. Yeah, I'm not sure going deep into the inclusion or exclusion criteria or deep into trial design is all that insightful. But I think the portfolios themselves and the strategies are more interesting. We're going to drill deep on that when we get to our investor conference. But broadly, you can see that our competitors feel comfortable moving forward with a transapical system and we have chosen a different tack here. We really believe that transapical is going to be necessary to unlock this. And so that's going to be important. We also think that repair is going to play an important role in mitral therapies and we're pursuing a couple of technologies very aggressively there. We'll talk about exactly how that might all come together. But in the near term, mitral is primarily a repair marketplace and we have – there has to be some pretty impressive data presented to make the case that replacement technologies are ready to unseat them. And so, what we stay focused on is the really the long-term in terms of being able to treat the most patients with therapies and really cause the practice of medicine to change. Right now, these mitral patients just do not get treated. Surgery is not considered an interesting alternative. And until we have catheter-based technologies, which are safe and effective, it's not going to change. And we do think it's going to be a toolbox, which is why we have a full portfolio. And we are feeling very good about what we're able to see. We're on steep learning curves, so we're gathering a lot of experience with all of our systems, and that's informing our strategy. So, we'll try and paint a more comprehensive picture when we're together in December, but maybe that's a good starter.

It is. Thanks Mike. I’ll look forward to that. And then as a follow-up, on the TAVR side, going back to Mike's question initially start the call, it looks like fourth quarter sort of in that mid to high teens range, 16%, 17% but what was interesting in this quarter as you pointed out U.S. business grew a little bit slower perhaps than you may be expected in the OUS business outperformed. Do you expect that trend to hold in the fourth quarter? Do you think that U.S. will reaccelerate and perhaps grow a little bit faster than international markets? And then Scott just as a squeak-in for you gross margins your guidance seems to be prior we’re going to see a step up in the fourth quarter and I want to make sure I got that right. Thanks, guys.

Yeah, thanks Jason. I may have sent an inappropriate signal if I suggest that the U.S. was below our expectations. It was right in line with our expectations. Remember when our surprise was early in the year when we projected what we thought would happen across the TAVR world in 2017, we originally had a projection of 15% to 20% growth and that was based on growth both inside and outside the U.S. Do I think the U.S. will get slower? Well, I think there's a lot of large numbers where some of that is probably going to be likely. One of the things that is impressive is that the OUS where penetration is low is continuing to be strong, but I don't expect any certainly big dramatic changes, Jason, if that's what you're asking.

And, Jason, it's Scott. Regarding fourth quarter and gross margins actually we think that the gross margins may be under pressure in Q4 versus Q3 if foreign currencies stay at their current levels. We had a little bit of benefit from FX in the third quarter and at current rates we would probably not see that same benefit.

Okay. I'll get back in queue. Thanks, guys.

Hi. Good afternoon. Wonder if I could just ask if there's any additional color you can give us on the PASCAL trial, the CLASP trial I think you told us today, where is that in terms of enrollment and when do you expect to get that product approved in Europe?

Thank you, Raj. I want to highlight a Lancet article published in August regarding our early feasibility results in the PASCAL study. This study involved around 23 patients and focused on feasibility, concluding that there was a notable high rate of technical success and a decrease in mitral regurgitation. We are encouraged by the attention this new technology is receiving. Additionally, expect a presentation at TCT where the same Lancet group will share six-month results. The trial is listed on ClinicalTrials.gov and is a more extensive 100-patient study with a six-month primary endpoint, which you can reference for more details.

Okay. Fair enough. And maybe I'll ask one on surgical valves, don't get asked that very often. But in terms of the new technology add-on payment for INTUITY, any thoughts around what that can do to growth for that product adoption of that product in the United States?

Yeah. We're really pleased that we got the new technology. We think it's going to have a positive impact. It went into effect October 1 of this year, and it's going to help hospitals, remember, when hospitals try to adopt these new technologies, often, it's really a burden on their cost system. So, for Medicare patients, this helps defray some of that. And so, what it allows people to do is to get involved with an innovation like INTUITY and we think that it's going to provide, hopefully, some longer-term impact because they're going to have a chance to experience the product and have we think some very positive results associated with it and want to continue.

That's helpful. Thank you.

Good morning, guys. Thanks. First question was on the U.S. TAVR market, specifically with regards to OR capacity. Just curious if you could share with us you said you have visibility what percentage over portion of ORs you guys have out there active today or your approach theatrical limit in terms of the procedures they handle for TAVR? And I'm wondering if you think to the extent this is an issue you'll see any alleviation of those capacity constraints on a timely fashion? Just trying to figure out if demand side here is starting to hit limiting items? Thank you.

Thanks, Isaac. I appreciate the question. And we’ve been asked that before. We continue to feel the same way. We just don't see this capacity as an issue as it relates to the TAVR. We see places where within an existing system, they're able to do six or even seven TAVRs in a day, so it's remarkable the way we are able to expand the capacity. And the bigger question is their ability to add teams, and hospitals can be pretty resourceful. I think they find – most hospitals find that they're able to be profitable and they will make the addition teams. So far, capacity is not really been an issue for us.

Okay. Thanks. And then maybe just a follow-up on the competitive landscape as we look into 2018 and beyond, what's your best guess when you think about how a lot of your U.S. customers behave in terms of how they're going to think about maintaining the training required for multiple platforms? Is there sort of rule of thumb here you can share with us regards to whether or not two or three or more platforms start to become problematic from a training perspective and just kind of curious what that means, if whether or not that would change in the event that pricing were to become more aggressive from some of the new entrants?

We believe that most hospitals prefer to have more than one system available, either for anatomical reasons or competitive reasons. Typically, they will have what we consider a primary product, or one valve, that they tend to use most often because they feel comfortable with it and see good outcomes. We expect this trend to continue as the main factor affecting hospital choices. It's likely to be uncommon for hospitals to have three or four systems available for the reasons you've mentioned.

Understood. Thank you.

Hi. Good afternoon. Mike, I had a question about the fourth quarter. Are you just basically assuming that the U.S. market decelerates below 20%?

It's tough to know. It's probably that's the case. There may be a little bit of share in there, but it's probably moving in that direction over time. So, I don't expect that there's going to be a big share shift necessarily in the quarter. So, I would expect the market to grow probably in line with our expectations. So, I don't know, the 15% to 20% range is probably moving in that direction.

Okay, perfect. And then just changing gears to PARTNER III. What's the average age of the patients in that trial? And also, is there an update in there to really allow for aggressive use in younger tricuspid patients?

Unfortunately, we are not able to determine the age of the patients, and I am not allowed to access that information. The data set has not been set up yet, so I cannot share any characteristics. The PARTNER III study is expected to support expanding the indication without a specific age limit, so I am unsure if that will be significant. Regarding bicuspid patients, I do not have a clear answer at this moment. We are conducting a registry specifically for that patient group, and hopefully, we will gain some insights from it.

Thanks so much.

Thanks. Good evening. I was hoping to ask about the SAPIEN 3 Ultra valve files and what we should expect regarding data. With the added features of a taller outer skirt, what should we anticipate for the PBL rate moving from SAPIEN 3 Ultra?

We are excited to launch the SAPIEN 3 Ultra. It will have a CE Mark, and we expect to see the data after that. I anticipate some of the data will be available around the middle of next year. The device includes several features that could enhance its performance. The taller skirt is expected to improve acute results, while the new material for the skirt may support tissue in-growth, which we believe will lead to better long-term outcomes. We are optimistic about this valve platform and expect to provide updates over time, starting with some data in the middle of next year.

Great. And it sounds like the U.S. approval will be in front of potential low-risk approval. I wanted to ask about the low-risk indication with the trial enrollment completion slated for the end of this year, are you expecting to have a Continued Access Program ongoing in 2018?

We expect to be able to get the Ultra valve into the U.S. as it should be a PMA supplement, and we hope to achieve that by the end of 2018. I’m not sure if we’ve made a decision regarding continued access, so it might be premature to rely on that. We will definitely engage in discussions with the FDA about it, but at this moment, I don’t have a definitive or clear answer for you.

Understood. Thanks for the answers.

Sure.

Hi. Thanks for taking the question. I was wondering Scott, if you could go to the gross margin for this current quarter. And can you quantify what the impact of Puerto Rico was or just cost from the hurricanes? And maybe just compare quarter-to-quarter what some of the puts and takes are? And that have a follow-up after that.

Sure, Kristen. So, Hurricane Maria, about 40 basis points. But let me take you through the whole gross margin profile. But it was pretty much as we expected it would turn out like, excluding special events. So, we ended at about 120 basis points higher than the third quarter 2016. 220 basis points higher, driven by mix and about 140 basis points FX of about 0.5 point in supply chain and manufacturing benefits year-over-year of about 30 basis points. It was offset by Maria which you talked about before the closure of our Swiss facility and accelerating some depreciation on those assets is about 20 basis points. And then other items, about 40 basis points. So overall, it's pretty much like we expected. It turned into earnings per share of $0.88, excluding the actual excess tax benefit versus what we had expected. So, we expected a higher ETB than we thought would achieve, which is why our EPS looks like $0.84, but the way we're thinking about it modeling it, it's more like $0.88.

Okay. Perfect. And then Mike, just regarding CENTERA, I know that you said you're going to use the experience early on what to guide your use, but what exactly are you looking for? You guys know the transcatheter valve market very well at this stage, so what are going to be some of the milestones that you be looking at and considering in order to determine what exactly will be definitive, I guess, to inform whether or not you'll pursue I guess, an expanded launch of CENTERA in Europe or a launch in the United States?

Yeah. We're also – it's going to be interesting, Kristen, for us to observe the particular behavior of physicians when they have CENTERA in their hands. CENTERA has a lot of advantages associated with it. Some of those physicians that are probably using self-expanding systems are probably spending much less at this point. So, we're going to have a chance to see just how they feel about an improved system that maybe has a higher price than the systems that they're using today and we look forward to that feedback and that's going to teach us a lot about what we need to think about for the future.

So, it's just mainly a cost, I guess, differential in your mind?

They're probably used of cost differential, but that's not really driving us what we're really interested here in is seeing whether – the value framework for CENTERA is the way that we believe it will be. We think physicians are going to be pleased with it and are going to prefer CENTERA, but we would really like to see that improving clinical practice.

Okay. All right. Thanks for taking my questions. I appreciate it.

Hey thanks guys. Just one from me tonight big picture one on the mitral segment. So, given that we're in the early stages of developing treatments for mitral disease and you've got what's shaping up to be a pretty robust portfolio of mitral products. Can you help us understand the extent to which there's cross-pollination of ideas between these teams and how that's shaping Edwards' overall approach to mitral disease, product development and, you know, maybe if that portfolio view had any impact on the decision to make some of the changes to the CardiAQ valve? Thanks.

Yeah. Thanks. Inside Edwards, we've decided to organize our transcatheter mitral and tricuspid programs into a team that works together, so even though there are dedicated teams for each of these technologies, they share a lot of learning. Certainly, there's a lot of commonality and sharing across the clinical team across the regulatory team across the operations and supply chain team that actually goes throughout the organization. The management team sit together and they talk about their progress and their setbacks. It is very much does inform our strategy. So, yeah, it's a key opportunity that we have by having this portfolio of products that we're able to learn from each other. So, we think it's going to pay off. Actually, we think it will be a key success factor for Edwards in the long run and we're using that insight to actually shape our strategy today. Again, you'll get a chance to hear more of that. We feel like it's a little tough to do on a quarterly conference call, but we'll be able to get into it a little deeper at our Investor Conference in December.

Perfect. Thanks, guys.

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

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying sales and growth rates and amounts adjusted for special items, are included in today's press release and can also be found in the Investor Relations section of our website at edwards.com. If you missed any portion of today's call, the telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and use conference number 13670702. I’ll repeat all those numbers for you, 877-660-6853 or 201-612-7415 and the conference number is 13670702. In addition, an audio replay will be available on the Investor Relations section of our website. Thank you very much.