Edwards Lifesciences Corp (EW) — Q4 2018 Earnings Call Transcript

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our fourth quarter 2018 financial results. During today’s call, we’ll discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A. Our presenters on today’s call are Mike Mussallem, Chairman and CEO and 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, expectations for product opportunities, commercial trends, clinical trials, litigation, new product approvals, reimbursement, competitive matters, 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 2017 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. Finally, please note that because the SAPIEN 3 low risk data will be presented just six weeks from now, we will not be making any further statements or answering questions about expected results of the trial. Accordingly, we are not updating, withdrawing, or supplementing any of our prior statements related to this topic. We would appreciate you respecting our request given the timing. And now I will turn the call over to Michael Mussallem. Mike?

Thank you, David. We are pleased to report strong fourth quarter total adjusted sales of $983 million or 10% sales growth on an underlying basis, consistent with our expectations, driven by our portfolio of innovative technologies. For the full year 2018, we also reported 10% growth on an underlying basis and over $3.8 billion in sales also in line with our guidance. Profitability was strong in 2018 with adjusted EPS growing over 20%, even as we continue to invest aggressively in our innovation initiatives and infrastructure. As you heard at our investor conference last month, we are as convinced as ever in the tremendous opportunity to improve patients' lives by addressing deadly conditions and bringing significant value to the healthcare system. In Transcatheter Heart Valve therapies, global sales for the fourth quarter were $592 million, up 11% on an underlying basis and over 12% for the full year. We estimate global TAVR procedures this quarter continue to grow in the mid-teens. Our worldwide sales grew at a lower rate due to a modest year-over-year share decline as we continue to exercise price discipline and hold global average selling prices stable. We estimate our global competitive position remains stable in the second half of the year. Also late in the quarter, we were pleased to receive approvals for our SAPIEN 3 Ultra system in Europe and the U.S. We believe this therapy will bring significant value to patients and providers. As highlighted at our investor conference, we believe there are a large number of patients suffering from aortic stenosis who are either undiagnosed or untreated. We're investing in programs to increase awareness, increase diagnosis, improve referral patterns, and help patients receive the care they need based on medical guidelines. In the U.S., total TAVR procedures for the fourth quarter grew in the mid-teens versus the prior year and our growth was comparable. Growth was highest in newer and smaller centers, which are providing access to a broader population of aortic stenosis patients. We continue to enroll the U.S. pivotal trial to study our self-expanding CENTERA valve in intermediate risk patients. We estimate enrollment of this trial will be completed next year. In the fourth quarter, we continued to enroll our continued access protocol for our U.S. PARTNER 3 trial. A late breaker presentation of the PARTNER 3 trial results is scheduled for the ACC scientific session in March, and our guidance continues to assume receipt of a low-risk indication late this year. CMS is currently in the process of formulating a draft provision to the National Coverage Determination or NCD, which we expect to be released at the end of March for public comment. We assume any changes to the current NCD are unlikely to significantly affect the global TAVR opportunity. We expect the new NCD to be finalized by the end of June 2019. Outside the U.S., in the fourth quarter, we estimate TAVR procedures continued to grow in the mid-teens, while Edwards' procedures grew in the low double digits year-over-year. We continue to see excellent long-term opportunities for growth as we believe international adoption of TAVR therapy is still quite low. In Europe, we estimate that TAVR procedures grew at an impressive mid-teens rate. Growth in countries of lower TAVR adoption rates continued to outpace countries where the therapy is more established. On a year-over-year basis, we experienced some expected share loss. However, our share continued to be stable on a sequential basis. We are continuing to control the commercial introduction of our SAPIEN 3 Ultra and CENTERA systems in Europe as we focus on achieving high procedural success rates. While early, we are receiving positive feedback from clinicians on the unique features offered by both products and the potential of streamlining the procedure and have a meaningful impact on patient outcomes. Our plans are to replace SAPIEN 3 with SAPIEN 3 Ultra as the market-leading therapy in Europe. In Japan, we continued to see strong TAVR adoption, driven by SAPIEN 3 and new centers are being qualified. This is our fastest growing region in the fourth quarter where we believe aortic stenosis remains an immensely undertreated disease among the large elderly population. Earlier this month, we reached an agreement with Boston Scientific to settle all outstanding patent litigation. We are pleased with this conclusion that allows us to move forward, dedicating our time and resources to advancing our innovations and helping patients. In summary, we are encouraged by the continuing strength of our TAVR adoption globally and continue to expect our underlying sales growth for 2019 to be 11% to 15%. We expect our sales growth rate to ramp up following Q1 as we introduce new products and continue to develop strong clinical evidence supporting this therapy. We are committed to maintaining our leadership in TAVR, which remains a large global opportunity that we estimate will double in size and reach approximately $7 billion by 2024. Turning to our Transcatheter Mitral and Tricuspid therapies, or TMTT. We remain enthusiastic about the opportunities to treat the many patients suffering from these deadly heart valve diseases. As we previously outlined, we continued to invest aggressively in our portfolio and plan to achieve significant milestones in 2019. You can expect to hear incremental updates at medical meetings this year and today, I will provide some select updates. Beginning with transcatheter mitral repair, we've made some progress toward obtaining a CE mark for the Pascal transcatheter valve repair system. In the U.S., clinicians are treating patients in the CLASP IID pivotal trial to study PASCAL in degenerative mitral disease, and we are activating new sites. We continue to expect the initiation of our CLASP IIF pivotal trial for patients with functional mitral disease in late 2019. We were disappointed to learn earlier this week that Abbott is pursuing patent litigation regarding our PASCAL system in the U.S., UK and Germany. PASCAL represents the culmination of 20 years of innovation by Edwards to develop a novel differentiated and more advanced platform for patients in need. The IP landscape for transcatheter mitral therapies is complex and crowded. In fact, Edwards owns an impressive portfolio of intellectual property in this space. We plan to vigorously defend ourselves and are currently evaluating a range of responses. Patients continue to be treated commercially in Europe with Cardioband. As expected, fourth quarter sales were limited to $1 million due to the ongoing supply constraints. We are continuing to transfer the production of this platform to other Edwards manufacturing facilities in order to fortify our near-term supply and scale for long-term volume expectations. This process remains on track and we continue to expect supply to progressively improve throughout 2019. As this therapy advances, we believe that the annular reduction provided by Cardioband can be an important first-line treatment for many mitral patients. In mitral replacement, we continue to see significant progress in both of our novel platforms and remain strong believers in our transseptal strategy. We have initiated our U.S. early feasibility study for EVOQUE and are encouraged by the early clinical results. We are also continuing to enroll patients in a U.S. early feasibility study for SAPIEN M3 and plan to initiate a U.S. pivotal trial in late 2019. In transcatheter tricuspid repair, again, constrained by supply, clinicians continue to treat a limited number of patients in Europe with our Cardioband tricuspid system and we've received positive feedback on this therapy. In the U.S. clinicians are treating patients in our early feasibility study. In summary, our guidance for total TMTT revenue assumes approximately $40 million for 2019. We continue to estimate the global TMTT opportunity to reach approximately $3 billion by 2024 and are passionate about bringing these solutions to these deadly diseases and improving patients' lives around the world. In surgical structural heart, adjusted sales for the fourth quarter of $212 million were up approximately 5.5% on an underlying basis, excluding the impact of the consignment inventory conversion, which is now complete. For the full year, underlying growth in this product line was 3%. Fourth quarter growth was driven by solid aortic unit volume and continued adoption of our newer premium aortic valves. We are continuing to launch our INSPIRIS RESILIA aortic valve in all major regions, and are encouraged by the strong adoption of this new class of resilient tissue valves. This valve is designed to be an attractive option for active patients, and we've observed a trend of physicians treating younger patients with INSPIRIS versus traditional heart valves. We have begun enrolling our RESILIENT trial, a prospective study to evaluate durability of RESILIA surgical tissue valves in patients under 65. And we remain on track to begin treating patients with our Harpoon system in Europe by midyear 2019. In summary, in surgical structural heart, we continue to expect full-year 2019 underlying sales growth to be 1% to 3%. And even as TAVR adoption expands, we are excited about our ability to provide innovative surgical treatment options for more patients and expand our global leadership in surgical structural heart technologies. In critical care, sales for the quarter were $178 million and grew 10% on an underlying basis. For the full year, underlying sales grew 11%. This quarter's performance was strong across all of our critical care product categories, led by the healthy demand for HemoSphere and the continued growth of enhanced recovery. Sales in the U.S. continue to be robust this quarter. HemoSphere, our next generation all-in-one monitoring platform that is replacing our existing monitoring system continues to receive excellent feedback from clinicians. This platform is designed to provide greater clarity on a patient's hemodynamic status and enables our artificial intelligence capabilities. This new monitor should continue to be an important growth driver for our critical care product line, although year-over-year comparisons will become more difficult in 2019. In the fourth quarter, we are pleased to announce FDA clearance of our Acumen Hypotension Prediction Index software, or HPI, for use on HemoSphere. This platform is expected to be an important growth driver for 2019 and the commercial launch is underway. We continue to collect clinical evidence on this technology, which introduces artificial intelligence to hemodynamic monitoring through a machine learning data-driven algorithm that indicates the likelihood of a hypotensive or low blood pressure event before it occurs. Additionally, we are on track with our assisted fluid management clinical trial in the U.S., which we have also described in our investor conference. In summary, we continue to expect 2019 underlying sales growth of 5% to 7% as comparisons become more difficult throughout the year. We remain excited about our pipeline to innovate critical care products and look forward to continuing our global rollout of HemoSphere. And now I'll turn the call over to Scott.

Thank you, Mike. I'm pleased to report that our strong finish to the year enables us to broadly meet or exceed our guidance for 2018. Today, I'll provide a wrap-up of 2018, including detailed results from the fourth quarter, as well as provide guidance for the full year and first quarter of 2019. For the full year 2018, adjusted sales increased 10% on an underlying basis to $3.8 billion. Adjusted earnings per share grew 24% to $4.70, and we generated $786 million of adjusted free cash flow. We are also pleased to invest in growth initiatives even more than originally planned in 2018 due to the benefit of U.S. tax reform that reduced our effective tax rate by approximately 400 basis points. We utilized the savings of over $40 million to hire new employees, accelerate research and development initiatives and contribute more to employee retirement accounts, while also growing earnings. And after recognizing the new tax on unrepatriated earnings, we were able to utilize cash formally trapped outside the U.S. to fund the growth investments, expansion of our facilities and share repurchases to offset dilution from stock option exercises. Unfortunately, the suspension of the medical device excise tax is scheduled to expire at the end of 2019. And if it is not repealed, it will largely consume the savings from tax reform. Consistent with prior quarters this year, adjusted sales excluded sales return reserve related to our conversion to a consignment inventory model for surgical valves in the U.S., which was $5 million in the fourth quarter. As planned, we completed the conversion process in 2018 with a full year negative impact to reported sales of $83 million. Adjusted sales in the fourth quarter grew 10% on an underlying basis, and adjusted earnings per share grew 24% to $1.17 versus the prior year. GAAP earnings per share was $0.03, which included several one-time adjustments, primarily a non-cash charge of $116 million, or $0.52 per share related to the impairment of Cardioband intangible assets that I discussed at last month's investor conference; and a $180 million charge, or $0.65 per share related to the previously announced settlement of the patent disputes. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. I'll now cover the details of our results and then discuss guidance for 2019. For the fourth quarter, our adjusted gross profit margin was 76.1% compared to 73.8% in the same period last year. This improvement was driven by favorable foreign exchange, the benefit of a more profitable product mix, and the absence of last year's expenses associated with the closure of our manufacturing plant in Switzerland. These benefits were partially offset by continued investments in manufacturing capacity. We continue to expect our 2019 adjusted gross profit margin to be between 76% and 78%. Our rate should be lifted primarily by foreign exchange along with an improved product mix, tempered by capacity investments. Selling, general and administrative expenses in the fourth quarter were $288 million or 29% of sales, compared to $273 million in the prior year. This increase was driven primarily by TAVR therapy adoption initiatives, partially offset by lower reported expenses outside the United States due to the stronger U.S. dollar. We continue to expect SG&A excluding special items to be between 28% and 29% of sales for the full year 2019, which includes the continued suspension of the medical device excise tax until the end of this year. Research and development expenses in the quarter grew 11% to $163 million or 16.7% of sales. This increase was primarily the result of continued investments in our transcatheter structural heart programs, including spending on clinical trials. For the full year 2019, we continue to expect R&D as a percentage of sales to be between 17% and 18% as we invest in clinical trials to expand indications and develop new technologies. Regarding taxes, we recorded a tax benefit to earnings this quarter due to deductions resulting from our litigation settlement and intangible asset impairment. Excluding the impact of these and other special items, our tax rate this quarter would have been 17.2%. This rate includes an approximate 200 basis point benefit from the accounting for employee stock-based compensation consistent with our guidance. Our full year tax rate in 2018, excluding special items, was 13.4% and we continue to expect our full year rate in 2019 to be between 12% and 14%. Foreign exchange rates decreased fourth quarter sales growth by 1.6% or $14 million compared to the prior year. At current rates, we now expect an approximate $60 million negative impact or about 1.5% to full year 2019 sales compared to 2018. FX rates positively impacted our fourth quarter gross profit margin by 110 basis points compared to the prior year. Relative to our October guidance, FX rates positively impacted earnings per share by about a penny, reflecting our effective currency hedging program. Free cash flow for the fourth quarter was $235 million. We define this as cash flow from operating activities of $293 million less capital spending of $58 million. For the full year 2018, adjusted free cash flow was $786 million. Turning to our balance sheet. At the end of the quarter, we had cash, cash equivalents, and short-term investments of $956 million. Total debt was $594 million. We repurchased 1.8 million shares during the quarter for $272 million, including the $250 million accelerated share repurchase we announced at the December Investor Conference, as well as additional shares repurchased through a 10B5 program. As a result of these repurchases, average shares outstanding during the quarter declined to $212 million. It is notable that in the past two years, we have reduced fully diluted shares outstanding by approximately 2.6% or 6 million shares. We continue to expect average diluted shares outstanding for 2019 to be between $211 million and $213 million. Before turning the call back over to Mike, I'll finish with guidance for 2019. Our full year sales guidance ranges communicated at the investor conference last month remain unchanged; for transcatheter aortic valve replacement, we continue to expect a range of $2.4 billion to $2.7 billion; for surgical structural heart, $810 million to $850 million; for critical care, $670 million to $710 million; and for TMTT, sales of approximately $40 million. For Total Edwards, we expect sales in 2019 of $3.9 billion to $4.3 billion. For the full year 2019, we continue to expect adjusted earnings per share of $5.05 to $5.30 and free cash flow, excluding special items of $800 million to $900 million. For the first quarter of 2019, we project total sales to be between $950 million and $1.01 billion and adjusted earnings per share of $1.15 to $1.25. And with that, I'll pass it back to Mike.

Thanks, Scott. Our strong 2018 performance reinforces our confidence in our focused innovation strategy and our longer-term outlook, and we anticipate an exciting 2019 as we pursue important therapies that will benefit many more patients. We look forward to launching a number of new technologies, as well as achieving meaningful milestones across our product lines. We are confident that our differentiated strategy and focus on leadership will continue to create value and benefit the patients we serve. With that, I'll turn it back over to David.

Thank you, Mike. Before we open up for questions, please note that Edwards is planning to host an analyst meeting at ACC on Sunday, March 17th. This meeting will be webcast for those who cannot attend in person. More information will be available in the coming weeks. We are ready to take questions now. In order to allow broad participation, we ask that you please limit the number of questions to one plus one follow-up. If you have additional questions, please reenter the queue and we'll answer as many as we can during the remainder of the call. Operator, please go ahead.

Just wanted to start out with a pipeline question related to mitral and then I had a follow-up on the first quarter guidance that you're providing. To start with the pipeline question, on mitral valve repair, I'm just curious on PASCAL. Will we see some European PASCAL data at ACC or PCR? Just give us a sense of when we will see some PASCAL data and what exactly we will see?

No, we are not expecting any data from PASCAL at ACC. We would expect to see PASCAL data later in the year at PCR. There is a German meeting called DGK, which might also share some PASCAL data, so that might be the first time that you see some of that CE Mark data.

And so expecting midyear approval?

That’s correct.

And then on the first quarter, either for Mike or for Scott, I'm sure the recent questions on the earnings side, given it is below where the consensus is. But I wanted to ask about on the top line. The numbers you gave us. Can you give us a sense what growth rate that assumes? And I know at the analyst day you said growth would be lower in the first quarter. But maybe if you could just walk us through the revenue guidance to start, especially in light of the fact that you're launching new TAVR launches. I would expect those you could start to see some, perhaps some acceleration in TAVR growth in the first quarter, because of those launches. So I just wanted to ask a little bit about the Q1 revenue growth guide.

So let me just take you through the full year underlying growth rate guidance, which for total Edwards is 9% to 12%; TAVR 11% to 15%; for TMTT, we're starting from a really small base, call it several million dollars in 2018. So the growth rate is not meaningful, but we're targeting around $40 million in revenues for 2019; surgical structural heart 1% to 3% underlying growth and critical care 5% to 7%. So to your question about TAVR in the first quarter, we're going to continue to grow, but a lot of the growth drivers in TAVR hit after the first quarter, such as the new products that Mike talked about and the clinical evidence that we are going to be continuing to develop during 2019. For TMTT similarly, we'll start to see new products being recorded at the sales line as we get later into 2019, and as we start seeing some of the supply constraints continue to alleviate that have been affecting Cardioband. In critical care, now we probably came out of the fourth quarter stronger than we expected. And that may accrue to our benefit in the first quarter. But overall, you should expect that first quarter sales and underlying growth year-over-year for Edwards will be lower than the rest of the year. In fact, it might be lower than the bottom end of that 9% to 12% range. This is something we highlighted at the Investor Conference last month. We mentioned it again at the JPMorgan Conference earlier this month. But overall, we're really positive on a very successful growth here in 2019.

And I'll just add, Bob, particularly on the TAVR numbers. Rather than us trying to score a touchdown in the first quarter, we're executing a playbook where we very carefully try and roll out these technologies, because the SAPIEN 3 safety has such a strong track record clinically that we really feel like we want to have an outstanding launch of the Ultra valve and CENTERA. They are different. They behave differently in the hands of clinicians. And we're being very thoughtful about that.

But no changes since the Analyst Day really, there is nothing changing in the guidance as it relates to Q1 or how the year is developing.

No changes in the guidance for the year since the Analyst Day last month, Bob.

First question is on the Commercial Org. Just hoping, Scott, if you could maybe help qualify the investments that you're making in the commercial organization ahead of the low risk indication that you guys expect later this year. And the reason I ask you is I'm just thinking about how any incremental spending will ramp over the course of the year assuming the date is good at ACC.

So we've been investing in the commercial organization, both in Europe and in the U.S. to support growth in TMTT and TAVR, in particular, and we're going to continue to do that. But you shouldn't expect that it's going to be a big stair step just because we've been doing this in an orderly fashion over time. In the fourth quarter, SG&A as a percentage of sales was 29.3%, which is a little bit higher than our full year guidance, but SG&A expense only grew about 6%. So expect that we're going to be continuing to grow at that rate that we talked about at the Investor Conference, 28% to 29%. The other thing that we're doing on the SG&A line is continuing to invest in therapy development initiatives, and making sure that we are making patients and physicians, clinicians aware of therapeutic alternatives. And so we're investing more aggressively going forward than we have in the past.

And then just to follow, on Europe. Appreciated your comments regarding the hand off that you expect from S3 over Ultra and CENTERA. I'm kind of curious how quickly you expect that to play out this year. And what that means for ASPs in TAVR into the region or maybe globally? Thank you.

Ultimately, we anticipate that the Ultra valve will replace the SAPIEN 3. We haven't set a strict timeline for this transition. Our priority is to achieve outstanding results, and we want to keep the process moving forward. I expect most of the volume to shift to Europe by the end of the year, though we don't have a specific number at this point. This transition largely depends on our ability to execute at a very high level. Regarding average selling prices, we expect to see some modest declines tied to volume discounts if we look at the big picture. However, we are very disciplined with our pricing, so we don't foresee significant changes in that regard.

I'll just start with Scott, and then I have a follow up after that. Scott, at Analyst Day, you suggested there were some allotments that were made for the Boston legal dynamics, and now I'm thinking about '19. Ultra can come to Germany. There is no UK injunction coming up in May. So what impact now does that have on guidance?

I think it probably doesn’t change our guidance specifically. It might reduce some of the risks associated with the guidance and sales we provided for TAVR. But it doesn’t fundamentally change our guidance at all, David.

Mike, just two questions for you, the first is just you talked about at Analyst Day modest share loss in the U.S. and stability ex-U.S. And given the learnings that you have from CENTERA and Ultra in the fourth quarter, I wonder if you can just comment on how you are feeling about those expectations here end of January based on the fourth quarter knowledge? And then just a follow up on Bob's question. Do you still intend to launch PASCAL mid-'19 if you don't have an injunction?

First of all on your first question, no our assumptions really have not changed since our investor conference. We continue to get positive reinforcement from our clinicians on what they have seen of Ultra and CENTERA. Although, we would admit that this is still early feedback and so we are proceeding there. So nothing's really changed in that. And then your second question was about what we expect for launch. We expect the European launch by mid-2019, and really haven't changed anything in that regard.

One strategic question for you, Mike. One guidance question for you, Scott. So Mike you recently hired a new Chief Scientific Officer who is very well-regarded in the cardiovascular space, but I believe his focus is outside of structural heart disease. So what's his mandate going to be at Edwards? And should we expect to see any change in the company's focus or will you remain hyper-focused in structural heart?

So we are very pleased that Dr. Todd Britten is running our organization as a Chief Scientific Officer. He has got a tremendous background as both an engineer and a physician. And we think he is going to bring a lot to our company. The short answer is no, absolutely nothing is changing in terms of our hyper-focus of our strategy. We are going to remain totally focused on structural heart disease and critical care technologies. Todd brings with him a lot of expertise and we expect him to just help us even be more successful in the future than we have been in the past.

And Larry on the EPS for 2019. If I were to look down at my risk band playbook, I'd say we're going to continue to invest aggressively in some of our growth initiatives that hit the R&D line and the SG&A line. And the sales growth as I mentioned before, doesn't kick in earnest until post the first quarter. So you're right. First quarter EPS estimates at the midpoint would lag Q1 of 2018 and that's the reason.

Could you provide some insights on TAVR specifically for the fourth quarter? Mike, it seems like the U.S. market remained stable from quarter to quarter, while the international market might have softened a bit. How much of this could be attributed to a slight softening in the market? I recall Medtronic mentioning a potential overall market softening. Additionally, I noticed that our share performance remained stable. Could you discuss the changes in our shares from one quarter to the next and the overall market growth?

I can give you an estimate of what's going on. So, we still think that the overall global market is growing in the mid-teens. And we think the U.S. and OUS actually are at very similar levels of growth there. Is it possible that the market grew a little bit less in the fourth quarter? It could have. It gets very difficult, especially the last two weeks of December to be very accurate in terms of estimating this just one implant can account for that dramatic impact on results. And so very difficult, I wouldn't take that as a big signal. In terms of the competitive positioning, we think that's been quite stable overall on a sequential basis, both inside and outside the U.S.

And then maybe one for Scott. Scott, it looks like the FX benefit gross margins in the Q. And it looks like the benefit for Q1 should be higher just given how the hedges impact the gross margin line. I'm having a hard time on the EPS one. Is there anything on the R&D line, which is you may have a big step up in Q1. So maybe just help us understand the Q1 dynamics?

Well, let me start with your first question on the fourth quarter and just take you through the impact of FX; if you look down the P&L; sales, we mentioned before 1.6% lighter due to a strengthening dollar; gross profit margin benefitted by over 100 basis points in Q4; R&D came down a little bit; and SG&A was a little bit lower again as a result of the stronger U.S. dollar. And earnings in Q4 benefitted to the tune of about $0.03. If you roll forward to fiscal 2019, we were expecting a $90 million headwind in sales last month at the investor conference. At current rates, that looks more like $60 million of a headwind. And you're right in terms of gross profit benefit from FX, it's probably closer to a couple of hundred basis points in the full year 2019. And that should help our EPS a little bit as well when you go down to the bottom line. Although again it's at current rates and those move around at a one factor EPS forecast as we get into the year.

And just anything on the R&D line? I think gross margin sequentially, I'm having a hard time I guess coming into the EPS for Q1.

So R&D will come down a little bit and SG&A will come down a little bit. Again, as a result of FX, most of those expenses in R&D hit us in the U.S. There is relatively little in R&D that we realized from outside of the United States.

Scott, I would like to start with you. And I apologize in advance for the question, because I wanted to set it up. As you look at your P&L over the last three years, including the guidance for 2018. You have spent about the same percentage on SG&A the last two years, and you plan to spend similarly this year. You are growing your R&D and you are also growing your top line and your gross margin line. And so that's been the primary contributor along with tax rate improvements and share buybacks to drive a faster earnings growth line. I just like you to maybe get a peak under the covers with respect to how conceptually you are thinking about your P&L as a company, and specifically the middle of the P&L leverage that you might or might not still have. As you look forward, understanding you have only given us one year forward guidance. But just conceptually, whether or not we as outsiders should expect or model as we model longer-term to see leverage in the middle of the P&L?

Scott, why don’t I answer the first part of this and then toss you the football. First of all, our focus is on top line growth. And given the value of the innovations from Edwards, we really feel like the investments that we make to drive that top line, we get a very good return on. And Scott, why don’t you comment on how you feel the rest of the P&L should be viewed?

We have been investing significantly in research and development as well as selling, general, and administrative expenses to support our primary goal of organic top line growth. Despite this, we have managed to achieve bottom line growth. In 2018, much of our bottom line improvement was aided by tax legislation, since our expenses have been rising at a greater rate than our revenues for some time now. However, in the long term, we anticipate that R&D as a share of sales will decrease. We expect the top line to grow at a faster rate than our expenses. It's important to note that this will not follow a straight path, as clinical trial costs can vary. As we increase trial activities, more R&D costs will be reflected in our income statement, but as those costs decrease, we will gain some benefits in our financials. Over time, we expect R&D expenses as a percentage of sales to decline from the 17% to 18% range we expect this year. Our SG&A expenses, which stand at 28% to 29% of sales, are at a sustainable level, although we aim to improve efficiency in our administrative costs. We believe we are making appropriate investments in our field operations, particularly with physician-facing resources as our business grows. Overall, we anticipate improvements in operating margins and earnings per share, which we expect will grow at a rate faster than our top line. In 2018, we saw a slight increase in operating margin, ending 2017 at about 30% and reaching approximately 30.3% in 2018, which aligns with our guidance. Our goal is to continue this trend. If we chose to significantly boost earnings, we could easily do so by reducing R&D and SG&A expenses. However, our strategy and priority are to keep investing for long-term top line growth.

And then Mike a much more brief question for you. Maybe you've been asked this several times I'm sure since TCT with COAPT. Have you seen any demonstrable changes in the pace of screening or the level of interest in any form that you might be willing to talk about as it relates to the repair or replacement trials that either you are conducting and you're conducting the most that I know of? Or in any of the other trials other companies do? And just generally speaking, pace of the screening enrollment interest level?

There is nothing there that's obvious, Jason. And just big picture, it does not change our strategy. It just reinforces our confidence as we have been before. We're very committed to developing this portfolio of these innovative therapies for people that need mitral and tricuspid treatment. We were big believers before that happened and we'll continue to be believers now. I think that's an inevitable that more patients are going to be treated as we have really safe and effective therapies.

Most of our focus remains on the U.S., Europe and Japan, but there is a world out there. Could you give us an update on plans into other geographies?

I mean, in particular I assume you're talking about TAVR?

Yes please?

So TAVR is dramatically undertreated in so many places around the world. And we're continuing to have a lot of impact in places that go beyond Europe, the U.S. and Japan. I mean, obviously, a clear important target would be China. And although, we're not near the end zone on that one, that is one that we are actively pursuing. It's been a complex process there and we don't expect to have anything really accomplished of substance in 2019, but it's a priority for us and we think another potential growth engine in the future.

My second question relates to the mitral data. It seems there will be some PASCAL data presented at PCR, but what other data are you anticipating this year, whether at ACC, PCR, or another event?

Well, that's a difficult one for me. Of course, we expect there to be PASCAL data, particularly the CE Mark data that will become available later on this year. But I would expect at medical meetings, you know that clinicians are engaged in this, they're very anxious to share what they have. And so they're going to be sharing even EFS data when they get a chance and that's collected. Maybe the most meaningful data that will be available later this year will be some of the pivotal data from CLASP IID, these are the degenerative patients. There will be study with PASCAL. So that would be one that you might look for later in the year that would have some substance.

So I appreciate the color Mike on the U.S. OUS trends, and I think that's something that folks have some difficulty to parsing given the worldwide TAVR numbers that you folks are reporting now. And just if you could provide any color as to what are some of the dynamics affecting Europe, and something in a bit more of detail maybe regionally. And then what are some of the things that are enabling you to stay with the market hold share, defend share, if you will, in the U.S.? And I have one follow-up.

A little different in Europe than it is in some other markets rather than the regulatory process being an important catalyst, the reimbursement process is quite important. And as I tried to indicate in our prepared remarks, what we are seeing are those countries that have been slower adopters traditionally and have a lower penetration rate in terms of TAVRs per million, population for example, are growing faster. We are watching that happen across the board. Whereas those that were early adopters aren’t growing quite as fast. So maybe that helps give you a sense for some of the color that’s going on. The thing that we feel really good about is overall here is the market that’s still growing in the mid-teens after all these years. I mean TAVR was introduced in 2007. Not many technologies are still growing at that rate and tells you about how much this therapy has continued to improve and how much opportunity there is for continued adoption. Many of these countries are just playing low in terms of their adoption rates today. Although, it's painful to watch how slow medicine changes sometimes, I guess the upside to that is there is still a lot of opportunity ahead.

And just if I could clarify something, when you talk about the faster growing later adopters, I mean we talked to doctors in centers in some of these countries. And there is a budgetary consideration when considering which one of the platforms they are going to use, or use more or use less. And is that I guess in those geographies present a bit more of a challenge in terms of capturing the same share that you might have in the earlier adopting like central European countries? And then I do have just one follow-up on the product launch, if I could.

No Matt, you are right, that’s very much the case. There are people that just have such economic constraints that they feel like it has to drive their clinical condition. We strive very much to make sure that we try and maintain price discipline, so that our good customers aren’t disadvantaged versus those that just don’t have the ability to pay. And it’s a consequence of where we are. But overall, I'm very pleased with our leadership position in this therapy. And we are hopeful that as things improve in these countries economically and as the cost of TAVR continues to come down that it's more and more accessible.

And then on the product launch, just Ultra in particular. I guess, there's been a couple of periods over the past couple of years where your commentary heading into the year would include something like, we expect to potentially lose some share to Medtronic product launch that you might be facing, say in the U.S. So this is maybe the first time in a couple years that you really got a significant upgrade to the safety and platform, not to push you too far out over your skies. But is there some potential here that this is something that could be a little bit of a tailwind for you compared to where you might have been playing defense say two three years ago?

Matt, are you talking about global, U.S. or OUS?

In the U.S., in particular…

Well, in the U.S., we tried to be clear here. Nothing has really changed in terms of our assumptions. There's only been two competitors and we expect to have a third midyear. And we expect that to have a modest impact on our share. And even though we're very excited about rolling out Ultra, we think that's inevitable. At the same time, there is more and more evidence that's going to be presented. So we think that the TAVR market is going to continue to grow, so there is every opportunity for us to grow nicely as well.

I'd like to go back to Cardioband. It sounds like much as you said at the Analyst Day and as said recently. The gradual process of improving supply transferring at the other Edwards facility is on track, I hear you. Maybe if you could just drill down a little more. Is this going to be readily resolved as the year unfolds? Or no, it's really going to take you the second half? Maybe just help us understand where you are in the process? And maybe just a part of that for Scott, when we think about the $40 million. Scott, is this half and half Cardioband, half PASCAL with the launch in Europe and the trials getting underway? How do we think about that breakdown?

It's a priority for us to improve Cardioband. But no, our plans are really unchanged, our expectations are unchanged. We think it's going to be a gradual improvement in the supply situation during the course of the year. We have some pretty good confidence by the end of the year that we're going to have this transferred and have this in pretty good shape, but it's going to take us some time. So I think you should anticipate a ramp.

And I'd just add to that. Our plan is and our expectation is that PASCAL will probably be a larger contributor to that $40 million than Cardioband in 2019. I'll also mention since you raised it. We're spending a lot of money in facilities and in our operations and getting our local supply chain positioned to support growth from all of our business units. And so our guidance for 2018 was that we'd have CapEx maybe $250 million, we'll probably come in a little bit less than that, but going in 2019 to about $350 million. So you've seen our announcements about continuing to build out our facility in Costa Rica, our new brownfield facility in Ireland. We're planning to break ground on our greenfield facility in Ireland, as well as we continue to add capacity in the U.S. and other locations around the world. And so these are all investments that support, not just the transfer of Cardioband supply chain capacity but other products that we're bringing to market as well.

And just as a follow-up, returning to the IP discussion, Edwards clearly has a significant portfolio of IP. The ongoing litigation seems reminiscent of other periods of innovation in the medical device field that I've witnessed over the years. Mike, this may sound like a naive question, but I’m curious about your thoughts. Is there a potential upside as these matters get resolved? It’s certainly good that the situation with Boston is settled and behind you. Does this strengthen the market for the key players who are truly dedicated to research and development, innovation, and IP? I’m not sure, but perhaps you have a more insightful answer, which is why I’m asking. Thank you.

I'm not positive exactly where you're going with that question, Rick. Bigger picture, for sure, these patients need innovation. They have some pretty terrible outcomes right now and they really don't have great solutions with a catheter-based approach. If we could deliver things to them that are really safe and effective that’s great. And actually a competitive environment with a number of options, probably not a bad thing from a patient perspective. We're disappointed that Abbott chose to initiate patent litigation and we are obviously thinking deeply about that. But we think the best solution is not really to be in a fight even though we are going to aggressively defend ourselves. We think our competitive environment is the best situation for everybody.

What if maybe I could follow a bit on the commentary around Europe and the pricing pressure you might be seeing there? I know it's relatively constrained that it's been for several quarters now. But anything more you can offer in terms of where that is and what's driving it? Is it still just a few very isolated centers, are you seeing more broadly just really anything would be helpful?

I don’t know that I have great details to add to that Raj. I would say in general, we see it broadly rather than in a focused way. We see a pretty consistent premium. We feel like we pretty consistently have a substantial premium versus our competitors. Of course, people go to the large-volume centers and would do some of the most aggressive bidding. But generally, I would say it's broad. And we just have chosen with SAPIEN 3 not to go down that road. We have a lot of confidence in our product. We think it's highly differentiated in terms of its performance, and we've been disciplined in our pricing.

Well, it’s a little difficult to parse out from the results you are giving us now. But in terms of the share loss, I mean how much share do you think you may have lost in Europe at this point?

Well, again, what we tried to indicate here is sequentially, probably the second half of the year has been at least by our customer estimates that it's been pretty flat. If you go from a full year perspective, it's probably 1 to 2 point something in that range.

So it doesn’t seem like it's getting any worse relatively?

No, I mean, as a matter of fact, the opposite. We think it's been pretty stable here for the last couple of quarters.

People have asked this a couple of different ways. I mean, I'll try a different one. If I think back to the conversion of XT and then SAPIEN 3 it went very rapidly. So maybe you could just help us understand a little bit better why the hesitation to rollout the new products in Europe on a more aggressive basis?

It's actually not as complicated as you might think. SAPIEN was a great product. When SAPIEN XT came along, it was significantly better. It was a giant step we went fast. When SAPIEN 3 came along, it was a giant improvement; it went very quickly. SAPIEN 3 has such stellar performance. And the SAPIEN Ultra valve, for example, is just different. It's got a different sheet. It's got different ways that the valve is delivered. And we just want to be very careful about that. When the performance is as good as SAPIEN 3 is, we can't tolerate one mistake out of a 100 cases. We really need this to be virtually flawless. And that's what's driving our caution and our care to make sure that we get this just right.

And just last year on the surgical structural heart. As we're looking at a big ramp in catheter growth over the course of 2019. How should we think about the cadence here? And maybe if you could help us understand what percentage of that business is exposed to aortic surgical valves?

At this point, the bulk of our business is aortic still in the surgical heart valve business. And so there is more than half of it that's exposed, if you will. Now, as we've been introducing our new premium products, those are probably consuming maybe not quite a quarter, but a significant portion of the volume as well. And so we expect the growth of those, particularly INSPIRIS, which is enjoying a lot of success, to be able to offset some of what we think is going to be natural cannibalization that comes from TAVR.

And any way to help us to understand maybe on a volume basis the more you move into low risk. What the assumptions are around cannibalization, and how we think about that through the balance of the year?

Well, I mean we think about that when we provide our guidance. And so we thought about that in advance. So we give the guidance of 1% to 3%. You noticed it's lower than the growth rate this year. Part of that is anticipating continued progress and particular progress on the low-risk patients that's going to begin probably during 2019. So no really it's anticipated in our guidance and we really haven't seen anything that changes our view at this early date.

I wanted to start by asking how you view the asymptomatic patient population and the opportunities there. Following the low-risk data, do you think physicians will be more proactive in assessing symptoms in these patients, or will we need to wait for early TAVR data before this population is addressed? I also have a follow-up question.

As you know, we're very excited about early TAVR but it's going to take us a while till we see that. It's continuing to enroll nicely. I'd like to think the TAVR continues to stay popular with the spotlight provided by additional evidence we'll maybe stimulate that enrollment some. But it's early to tell. But we're making steady progress. And we're really looking forward to getting results with that trial because we believe that's an underserved population.

And then just my follow-up was just on manufacturing planned build out in Costa Rica and Ireland. Are there plans to transfer the PASCAL manufacturing into one of those facilities?

Those build outs are going really well. We just don’t comment on where we manufacture products. But thanks for that question. And so with that, thanks for all the continued interest in Edwards. And Scott, 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, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and use conference number 136-86-196. Additionally, an audio replay will be available on the investor relations section of our website. Thank you very much.