Edwards Lifesciences Corp (EW) — Q2 2019 Earnings Call Transcript

Thank you, Raya. Good afternoon and thank you for joining us today. Just after the close of regular trading, Edwards Lifesciences released its second quarter 2019 financial results. During today's call, management will discuss the results included in the press release and accompanied financial schedules and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, Chief Financial Officer. Before we begin, I'd like to remind you that during today's call, management 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 expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they are made and Edwards does 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 differences and important product safety information may be found in the press release, our 2018 Annual Report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. Finally, a quick reminder that when using terms underlying and adjusted, management is referring to non-GAAP financial measures, otherwise they are referring to GAAP results. Additional information about the use of non-GAAP measures is included in today's press release and available at edwards.com. With that, I'd like to turn the call over to Mike for his comments.

Thank you, Mark, and welcome to the team. We are pleased to report strong second quarter total adjusted sales of $1.1 billion, which represents 14% underlying sales growth with balanced strength across all four product lines. Sales were boosted by high teens global growth in TAVR, reinforcing our belief in a $7 billion opportunity by 2024. We are aggressively pursuing breakthrough technologies that could help a broader group of patients and drive significant future value. Given our performance in the first half of the year, we are more confident that we will achieve double-digit sales growth in 2019. In transcatheter aortic valve replacement, second quarter global sales reached $678 million, up 18% on an underlying basis. We estimate that global TAVR procedure growth was in line with our sales growth. We expected an acceleration in growth following the first quarter, and our results this quarter exceeded our expectations. Globally, our average selling price remained stable as we maintained price discipline. For the first half of 2019, we estimate that global TAVR procedures increased in the mid-teens, consistent with our guidance from the December investor conference. In the US, our TAVR sales grew in the high teens, and we believe our share of procedures remained stable. Growth was likely stimulated by increased confidence in the therapy following the positive results of the PARTNER 3 clinical trial presented and published in late Q1. It was encouraging to see broad-based growth across both high and low volume centers. However, based on our ongoing research, we believe there are many patients who would benefit from TAVR who are currently undiagnosed, not referred, or not treated. We remain focused on increasing awareness and diagnosis, improving referral patterns, and helping patients receive the necessary care as guided by medical guidelines. Patients continue to be treated with the PARTNER 3 low risk continued access protocol at over 30 high volume clinical trial sites. We now estimate that the FDA will approve SAPIEN 3 and SAPIEN 3 Ultra for patients at low surgical risk in the third quarter. Late in Q2, the US Centers for Medicare & Medicaid Services released a final updated NCD, which we believe aligns better with current practices and patient needs. We commend CMS for its thoughtful updates to the TAVR policy. While the NCD did not achieve balance between surgery and TAVR, we believe the modernized requirements and streamlined patient evaluation process will enhance access for more patients suffering from severe aortic stenosis. Outside the US, we estimate that TAVR procedures grew in the mid-teens year-over-year, with Edwards’ growth comparable. We see excellent opportunities for growth internationally, as TAVR therapy remains underutilized. In Europe, we estimate TAVR procedures also increased in the mid-teens year-over-year, with Edwards’ growth being similar. We are continuing to launch the SAPIEN 3 Ultra system in Europe, which we expect will account for a significant portion of our TAVR sales in the region by year-end. CENTERA was limited to a few centers and did not significantly contribute to this growth. In Japan, TAVR adoption continues to be strong, driven by SAPIEN 3, and new centers are being qualified. We are committed to expanding TAVR therapy availability in the country, believing that aortic stenosis remains greatly undertreated in this large elderly population. As we discussed earlier, the PARTNER 3 trial demonstrated SAPIEN 3’s superiority over surgery in the low-risk patient population, with a low 1% risk of death or stroke at one year. Combined with prior clinical evidence, we believe the majority of patients with aortic stenosis are ideally treated with Edwards’ best-in-class SAPIEN 3 platform. Given the expected approval for low-risk patients and our platform's excellence and versatility, we have made the difficult decision to discontinue the CENTERA program. While CENTERA has shown excellent clinical outcomes, the time and resources needed to enhance its deliverability and expand indications to match SAPIEN 3 are considerable. Moving forward, we believe we can best meet patient needs by reallocating resources toward our promising pipeline of next-generation balloon-expandable technologies and indication expansion trials. We are pleased with the performance of the SAPIEN 3 Ultra valve, and positive clinician feedback has reinforced our confidence during the launch. Many clinicians have expressed preferences regarding aspects of the SAPIEN 3 delivery system, and we are working to incorporate these changes to optimize the SAPIEN 3 Ultra system. We anticipate that physicians will continue to transition from the SAPIEN 3 to the SAPIEN 3 Ultra system globally. In summary, our year-to-date underlying sales growth in TAVR stands at 14%, prompting us to raise our full-year guidance to around the top of our previous 11% to 15% range. Despite the special charge resulting from strategic decisions we made this quarter, these decisions will enhance our long-term execution strategy. We are encouraged by the robust TAVR opportunity and continue to be confident that our innovations will sustain our strong global leadership position. Regarding Transcatheter Mitral and Tricuspid Therapies, second quarter global revenue reached $7 million, supported by the ongoing rollout of PASCAL in Europe. In our early commercial phase, we focus on physician training, procedural success, and positive patient outcomes. We are pleased with our progress and the positive feedback we have received from physicians regarding PASCAL as a distinct therapy. We have also commercially treated patients with our Cardioband therapies for mitral and tricuspid annular reduction, and we are improving supply as we shift production to other Edwards’ manufacturing sites. As we develop our comprehensive portfolio, we are prioritizing clinical evidence. We have recently presented positive data on our experience with PASCAL and Cardioband at EuroPCR and TVT medical meetings. We are encouraged by the results from the CLASP study of the PASCAL system, which showed substantial MR reduction and significant improvements in functional status, exercise capacity, and quality of life at six months. Looking forward in mitral repair, we have received approval for our CLASP IIF pivotal trial for patients with secondary or functional mitral valve disease and plan to start enrollment in late 2019. We are also continuing to enroll in our CLASP IID pivotal trial studying PASCAL in primary or degenerative mitral valve disease. In mitral valve replacement, we are satisfied with the early feasibility studies of both EVOQUE and SAPIEN M3 transseptal therapies and are on track to begin a US pivotal trial of SAPIEN M3 in late 2019. In tricuspid repair, we have gained valuable clinical experience through three simultaneous US early feasibility studies for PASCAL, Cardioband, and FORMA. We believe PASCAL and Cardioband can address a significant number of patients with tricuspid regurgitation, which supports optimizing our portfolio. We plan to initiate a pivotal trial using PASCAL in the tricuspid position later this year and will also start a second tricuspid pivotal trial with Cardioband in the future. Additionally, despite the positive clinical outcomes for patients treated with FORMA, we have decided to discontinue the FORMA project to speed up our other tricuspid programs. Overall, we are excited about the potential to treat patients with tricuspid and mitral diseases using our transcatheter therapies. We are on track to meet our 2019 milestones, including ongoing enrollment in our CLASP IID pivotal trial and planning to start three additional pivotal trials by late 2019. You can expect more updates regarding our one-year CLASP study data at the upcoming TCT medical meeting. In summary, we are confident in achieving approximately $40 million of total TMTT revenue for 2019. We continue to forecast the global TMTT opportunity to reach about $3 billion by 2024 and are committed to providing a range of solutions for patients in need.

Mike. Our top line performance this quarter was outstanding with underlying sales growth of 13.6%, reflecting strength in all four of our product lines across all regions. Particularly strong this quarter was our TAVR sales, which likely benefited from the recent clinical evidence supporting SAPIEN 3 therapy. Our adjusted earnings per share in the second quarter was $1.38, an increase of 11% compared to the prior year, driven by our strong sales performance, although it was partially offset by higher research and development spending, primarily in our transcatheter structural heart programs. As Mike mentioned earlier, this quarter we made strategic decisions regarding our transcatheter aortic valve portfolio, resulting in a $46 million special charge primarily related to finished goods inventory. This charge, along with other adjustments, brought our GAAP earnings per share down to $1.14. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. I will now cover the details of our second quarter results and then discuss guidance for 2019. For the quarter, our adjusted gross profit margin was 76.4%, compared to 74.4% in the same period last year. This improvement was driven primarily by favorable impacts from foreign exchange and product mix, with some offset from investments in our global supply chain expansion. We still expect our full year 2019 adjusted gross profit margin to range between 76% and 78%, although we anticipate lower benefits from foreign exchange than we had originally expected at our investor conference. Selling, general and administrative expenses in the second quarter were $308 million, or 28.4% of sales. This represents a 12% increase over the previous year, driven by expenses related to transcatheter structural heart field personnel, including the expansion of the TMTT field organization in Europe, which was partially offset by the strengthening dollar. We continue to estimate that SG&A, excluding special items, will be between 28% and 29% of sales for the full year 2019. Research and development expenses for the quarter grew 25% year-over-year to $192 million, or 17.7% of sales. This increase was largely due to significant investments in our transcatheter structural heart programs, including higher clinical research costs for the PASCAL system. For the full year 2019, we expect research and development, excluding special items, to be between 17% and 18% of sales. Regarding taxes, our reported tax rate for the quarter was 10.7%, or 12.0% when excluding the impact of special items. This rate included a benefit of 530 basis points, or $0.08, from accounting for employee stock-based compensation. We continue to expect our full year 2019 tax rate, excluding special items, to be between 12% and 14%, reflecting the ongoing benefits of accounting for employee stock-based compensation. Foreign exchange rates reduced our second quarter sales growth by about 2%, or $20 million, compared to last year. At current rates, we estimate a negative impact of approximately $60 million, or about 1.5%, on full year 2019 sales. Foreign exchange rates positively impacted our second quarter gross profit margin by 260 basis points compared to the previous year. Compared to our April guidance, FX rates had less than a $0.01 impact on earnings per share, thanks to our effective currency hedging program. Free cash flow for the second quarter was $277 million, derived from operating activities of $341 million, less capital expenditures of $64 million. We now expect full year 2019 adjusted free cash flow to be at the upper end of our $800 million to $900 million guidance. We are on track with our capital expansion projects as we aim to increase global capacity and enhance our global supply chain's resilience. Looking at our balance sheet, at the end of the quarter, we had cash, cash equivalents, and short-term investments totaling $934 million, with total debt at $594 million. In line with the company's plans to counteract dilution from equity-based compensation, Edwards repurchased 1.4 million shares in the second quarter for $250 million. The average shares outstanding during the quarter remained steady at 212 million. We continue to expect average diluted shares outstanding for 2019 to be between 211 million and 213 million. Regarding our 2019 guidance, based on our strong first half performance, we have increased our confidence in meeting our financial targets for this year. We are raising the lower end of our sales guidance for Edwards and TAVR. We now project total Edwards sales to be between $4.0 billion and $4.3 billion, with underlying sales growth at the top end of our previous 9% to 12% range. For TAVR, we expect sales to reach between $2.5 billion and $2.7 billion. We also anticipate TMTT sales of approximately $40 million and Surgical Structural Heart sales between $810 million and $850 million. We are revising our estimate for Critical Care sales, including CASMED, to the higher end of our previous $700 million to $750 million range. We are raising our full year adjusted earnings per share guidance to a range of $5.20 to $5.40, up from our prior range of $5.10 to $5.35. For the third quarter of 2019, our typically lowest quarter, at current foreign exchange rates, we expect total sales to be between $1.02 billion and $1.06 billion, with adjusted earnings per share ranging from $1.13 to $1.23. I will now turn it back over to Mike.

Thanks, Scott. We're very pleased with our strong performance in the first half of 2019. As patients and clinicians increasingly understand the significant benefits of transcatheter-based technologies supported by the substantial body of compelling evidence, we remain as optimistic as ever about the long-term growth opportunity. Our foundation of leadership, combined with a robust product pipeline, positions us well for continued success. And with that, I'll turn it back over to Mark.

Thanks, Mike. We're ready to take questions now. In order to allow for broad participation, we ask that you please limit the number of questions to one plus one follow-up. If you have additional questions, please re-enter the queue and management will answer as many questions as possible during the remainder of the call.

Congrats on a phenomenal second quarter. I guess the first and obvious question is really on the TAVR growth acceleration in the quarter, both for yourselves and for the market. Can you just comment on what drove that acceleration? How much do you think that was actually low risk versus some other driver?

There were multiple factors that probably contributed to the growth in Q2 and it's pretty hard for us to isolate each one. I'll remind you, there has been high variability in the past quarter to quarter. It just has not been uncommon in TAVR. Recall the Q1 growth rate was lower than the recent past and the second quarter here was certainly higher. You look at the first half in total and it was around 14% back in the mid-teens, but it was quite a difference between quarters and there could have been some seasonality associated with it. But to add to that, I mean, to be fair, we believe that the growth might have been stimulated globally just by the increased confidence in the therapy, following the strong PARTNER 3 clinical trial results. It could have had several influences. There was a lot of awareness and publicity that could have encouraged treatment. It's possible that there's some borderline patients that received TAVR. There was a minor increase and more cap. But what we are encouraged by particular, Bob, was that was broad based growth across the globe and that even in the US, it was in both large and lower volume centers.

I just wanted to follow up regarding mitral. You're still guiding to approximately 40 million, but you'll need to nearly triple your revenue in the second half. Could you discuss what gives you the confidence that PASCAL can accelerate as much as you're anticipating in the latter half of the year?

Yeah. So we weren't really focused on the numbers this quarter. Our early commercial experience, we just stayed focused on physician training, procedural success and just trying to get great outcomes for patients. The procedures did actually increase quite a bit over Q2 and it's possible that some of the Q1 sales actually was consumed in Q2. But we're pleased with the kind of feedback that we've gotten on PASCAL and we remain confident in achieving the $40 million guidance.

Just two from me. Mike, just thinking about TAVR guidance for the back half of the year, it's pretty stable, frankly, that's what we saw from a growth perspective in the second quarter. So is that how we should think about the business? Why should we not expect sort of further inflection or do you expect that after the approval and NCD? And then a quick follow-up.

I'm not sure I followed it exactly. You're saying, why shouldn't it be more. Is that the question David?

Growth rates, your back half top end of the range means back half of the year is consistent with the second quarter. So the question is, why do you not see further inflection or do not expect that until we see the approval or NCD?

Yeah, we think it's premature. As you're well aware here, we've decided to discontinue the CENTERA program, so that won't be a driver of growth. We know that Boston Scientific is in the process of launching and we expect that to have some impact. So those are going to be some headwinds. And so we feel pretty good about where we guided things, David.

And then Mike just new competition was a big debate this year. So competition in the US from a third entrant, you suggested stable share this quarter. Was there any impact in the second quarter from new entrants? And how should we think about the second half of the year relative to new entrants? Thanks so much.

It's always challenging for us to estimate market growth, but we believe that the overall growth in procedures and our growth were quite similar. Concerning Boston, they seem to be implementing a careful launch and are concentrating on training, and we anticipate they will become more active in the upcoming months. However, we remain confident in our guidance.

Congrats on a really nice quarter here. Mike, just back on TAVR guidance for the back half. I just want to understand that, sequentially, we had 800 basis points of acceleration versus 1Q. Your comps did not seem like it was easier. And based on your comments, this was broad based, right? This was not just a US phenomenon. You saw this across the geographies. Your comments on Europe accelerating, I think that's the first time we've seen Europe, you guys being holding back to mid-teens in a while. And this is all happening before the formal approval, right? So back to, I guess, the question, 2Q was so strong, why shouldn't it accelerate post the approval in the back half?

Thank you, Vijay, I appreciate your analysis. When comparing Q1 to Q2, we anticipated Q2 would show stronger growth than Q1. However, Q1 was surprisingly low, likely due to factors we don't fully understand, including seasonal variations from the calendar. Interestingly, Q2 exceeded our expectations. I advise against assuming this level of sequential growth will occur regularly. Looking ahead to the second half of the year, we anticipate receiving approval in Q3, which is typically our slowest quarter due to seasonality for both us and our customers. Additionally, considering the context of CENTERA and Boston Scientific's launch, I believe our guidance is appropriately set.

And maybe one on the mitral side, Cardioband, I'm not sure I heard Cardioband being mentioned on what its contribution was for in TMTT? Is it being used in mitral because I certainly heard about tricuspid and the trial starts, but I'm just curious on Cardioband in the mitral area?

The supply situation for Cardioband has improved. It was utilized in both the mitral and tricuspid positions, with a larger focus on tricuspid this past quarter. We are pleased to see this improvement, as it allows some of our operators to progress down the learning curve and use it more consistently.

And congrats on the really, really impressive quarter. One on the EPS guidance, one on Ultra. So if I'm doing the math right, Scott, EPS beat by the midpoint of the Q2 guidance by about $0.06, but you raised the fiscal 2019 EPS guidance by only about $0.07 at the midpoint. Why is that? And I had one follow-up.

So you're generally right about the math, Larry. This is, by the way, about $0.12 over our investor conference guidance. But effectively expenses and sales in the second quarter came in higher than we expected. And so as we look at the second half of the year, we're also expecting expenses to come in higher than we originally expected. Remember, we've got new pivotal trials coming online and some additional other R&D and SG&A expenses that go along with those.

And then Mike on SAPIEN 3 Ultra, do you think the balloon issues have been resolved with the update to the IFU? And are you now planning to rollout Ultra more aggressively? And could you provide a little more color on the SAPIEN 3 delivery system comments you mentioned in your prepared remarks?

Yeah. What we expressed is, we're getting a lot of favorable feedback on the SAPIEN 3 Ultra valve itself and the way that that valve is performing. But we are seeing many clinicians also express a preference for aspects of the SAPIEN 3 delivery system. So we're working to incorporate those into the Ultra system. Ultimately, we think that that will have an impact on the balloon issue. The balloon issue, we identified some factors that were associated with that and actually there has been less of that that have occurred with this SAPIEN 3 delivery systems. So we expect that to be a real enhancement in that regard.

Two quick questions, I want to spend a moment on the international market, the pricing dynamics. And last quarter, we talked about stable market share in a slower market. This quarter, we're talking about stable market share in a faster market. And I'm just trying to make sure I understand what's going on here?

Yeah, so we do think that OUS procedure growth did pick up in the second quarter. And, you did hear correctly that we feel like our growth was comparable with the market. So we didn't really see a share shift in our minds either last quarter or this quarter. And this is true year-over-year and quarter-over-quarter. Now exactly why it picked up is a little difficult to say. Our team would say that there was probably some positive influence that came from the PARTNER 3 news that came in the end of Q1.

And then I just want to also understand the impact of the continued access program in low risk and what you may think it helped in the second quarter. And how are you thinking about that for the second half contribution?

Yeah, thanks. So that stays in place until there is an approval. The cap program in the second quarter generated a little more than the first quarter, but it was pretty small. It was minor. I want to say something maybe in the 10% improvement. So I think maybe a couple of million dollars.

Great and congrats on a nice quarter. I heard you mentioned comments that the M3 is moving into pivotal trials late in this year. I didn't hear an update on timing for EVOQUE. Can you just give us an update on, if you're doing implants in patients in both of those right now and the status for EVOQUE?

Yes, we are doing patients with both systems. We've been really pleased with the feedback on both systems. We have, at this point, decided that we are going to initiate the SAPIEN M3 clinical trial before the end of the year. One of the reasons that we feel comfortable going first with that is because we have literally thousands of patients in which the SAPIEN valve has been used in the mitral position. So it gives us an opportunity to start there, but we don't mean to send a signal that we're not excited about the EVOQUE platform. We also feel great SAPIEN M3 is going to go first.

And you gave some good color on what you thought about second quarter and maybe some of the drivers of growth there. But maybe just diving into the international markets a little bit and if you could break out Europe and outside of Europe. This is a market that's been doing low risk for a while, it's been growing mid-teens for an impressive number of years. What is it there that you're seeing in trends that drove the growth this quarter, well above the expectations? Was it less competitive pricing? Was it some change in competitive dynamics? Was it some markets doing better than others? Any kind of color you could give would be great.

Sure. So I mean, this was a really remarkably level quarter for us in that we experienced double-digit growth really around the globe, and that was driven by TAVR. In Europe, in particular, what we have seen is that the less penetrated countries continue to grow faster than the more penetrated countries, but there is still ways to go. Europe is influenced to some extent by its reimbursement programs and so that's the key element of this. But I think, you said that there was already low risk in Europe. Actually, there is no low risk approval at the EU level that will probably come in 2020. But we do think that there were some influence from the PARTNER 3 data that appeared at the end of Q1 and that probably had some impact on the treatment of patients in the quarter.

This is actually Cecilia on for Jason and thank you for taking the questions. I just wanted to ask about Japan and the strong TAVR adoption trends you've seen recently, juxtaposed with the current number of qualified centers in the region. And as you look forward, can you talk about the TAVR outside EU here and the leg work necessary to really open up the opportunity, what still needs to be done to increase the total number of qualified centers as well as establish and improve current referral patterns?

Yeah, the growth rate in Japan has been nice and we've been pleased with that. But we are not pleased at all with the treatment rates in Japan. Given the large elderly population there, we would expect TAVR penetration to be much higher at this stage of the game and we believe that one of the reasons it's not higher is because it's really been limited in terms of the way their system has allowed centers to start up and that there should be more centers and the centers that are doing it should probably be doing more procedures. So we still have our work to do to make sure that proper policies are put in place and we are applying energy to do that. So although, Japan is nice, it's still a big opportunity for patients to be treated at a much higher rate.

And then just turning to Europe, I realize it's still very early in the process, but could you talk more about your ongoing PASCAL launch in the region and specifically the training programs that you're implementing, the learning curve associated with the platform and adoption trends within centers following initial utilization. And just what types of patients are you seeing the platform be used in initially as centers trial the device? And where does this expand in your view longer term?

So early on here, we've really put a premium on making sure that the training was very well done that we have great procedural success that patients had great outcomes and that's been job one for us. It really hasn't been so much about the numbers. We've gotten a lot of great feedback. We saw the number of procedures really accelerate in Q2 and we are indeed adding centers in Europe during Q3 and Q4. So, you can tell from our projection that we expect to do around $40 million in 2019. And that's going to be primarily from PASCAL. So I think it kind of speaks for itself in terms of what we think the adoption rate will be.

So the first question I wanted to ask was, you mentioned it's a difficult decision to discontinue CENTERA. I was wondering if you could talk a little bit more about that as it certainly implies a lot of confidence in SAPIEN 3, which you should have. But you're not going to have a self-expanding option going forward. And what does that do to you in terms of the additional flexibility or horsepower that you get from discontinuing that you could put behind PASCAL or some of these other programs?

You're correct that much of this centers around the substantial evidence supporting the SAPIEN platform, especially SAPIEN 3, which has boosted our confidence due to its performance in the PARTNER 3 trials. This has set a high standard for system performance. While we are enthusiastic about CENTERA and acknowledge that the valve performed admirably, it didn't meet our expectations across all anatomical variations. This situation would necessitate improvements to the delivery system. Additionally, the CENTERA trial we are involved in will only provide an intermediate risk indication, which means we would need to conduct further trials. Considering all of this and evaluating where to allocate our team's resources, alongside our strong confidence in the current platform and our excitement about forthcoming options, we made the challenging decision to focus on next-generation platforms and our existing offerings.

Could you elaborate on how you've adjusted your investments in mitral and tricuspid, particularly in relation to the PASCAL trial starting in tricuspid later this year? Where are you looking to accelerate these efforts?

Yeah. So a few things, one is PASCAL is really kind of going first on the repair side. So we are pleased, now we already had a program that was focused on these primary or degenerative patients and to be able to launch a pivotal trial for the functional or secondary patients we're excited about, because that's a significant group of patients that we're looking forward to treat. On the tricuspid side, after a lot of deliberation, we decided that our first tricuspid trial should be done with PASCAL. So we made that call. You also heard that we decided and made the tough decision to discontinue the work that we have on FORMA. And so that one, we're in discussions with FDA in terms of what that trial design would look like. And so hopefully that gives you a sense, and at the same time, I think we just explained where we are on the mitral replacement with M3 going into a clinical trial late this year.

I'll echo everyone's congratulations on the quarter. One thing people seem to be trying to understand is the strengths that drove our performance, which doesn't appear to be simply about continued access. Mike, could you clarify? It doesn’t seem like it was primarily low risk patients, but you've mentioned a few times how awareness of the PARTNER data has made an impact. Is there something specific, like stroke risk, that stood out or changed the conversation for intermediate risk indications? Any insights on how awareness translates into volumes would be appreciated. I also have a follow-up.

I understand the confusion and wish I could point to a single factor that influenced this. While this call might feel celebratory, there are significant issues at hand. We believe there was just inherent variability between the first and second quarters. The data shared at the end of Q1 generated considerable excitement, and we saw people starting to engage with the system. However, we recognize that individuals typically don't transition through the system quickly. It often takes 90 to 120 days or even longer for them to move through. Therefore, the extent of activity in Q2 remains uncertain. We don't attribute this to capacity or a significant influx of low-risk patients during the quarter; rather, we view it as a result of a general increase in TAVR procedures.

I understand it's difficult to pin down, but regarding Q3, let's just say that cap is not a factor. Perhaps we could discuss seasonality; last year, there was a decrease of about 30 million sequentially from Q2 to Q3. What might cause that number to decline as it would need to in order to meet the guidance you've set for Q3?

Yeah, it's a good question. So you know that Q3 is a seasonably slow quarter for our customers. And so that kind of goes without saying, it wasn't so long ago, I'll remind you, back in 2016, after we got the approval that Q3 was lower growth than Q2 and I'm not sure we fully explained exactly why that was the case, but it happened. And so it causes us to just stay thoughtful and moderate about what our expectations are. We expect to have approval. But again, if the approval does come, it’s probably likely to come during one of the slowest times of the year.

I have two questions about the low-risk approval. First, what gives you the confidence to narrow the guidance range for approval timelines to the third quarter? Should we expect the approval to happen soon, within the next week, or later in September? I also have a follow-up question.

Yeah, thanks for the question. I understand where you're coming from, Josh. So what happens usually as we go through questions back and forth with FDA and you can usually tell when the questions are winding down or when they're coming down to the final questions. And so it makes us feel we're pretty close. One of the things that's not clear is whether our approval would come at the same time or whether the FDA might choose to move two competitors at the same time could be a factor. So we're saying based on everything we know probably Q3, but we just can't be any more specific than that.

And just in terms of low risk approval in the label. I think you've been clear you don't expect any kind of exclusion of bicuspid, I just wanted to sanity check that, is that still your view. But to follow up on top of that is, I mean, could you have a labeling advantage in the early days of low risk approval? It's our understanding that the Medtronic bicuspid arm is still enrolling or just gotten started enrolling couple of months ago. Could you have an advantage in the bicuspid segment for a period until Medtronic gets that data together?

Yeah, I'll just remind the audience that bicuspid is not contraindicated today and we do not expect it to be contraindicated in the label or in the future. You saw Raj Makkar's data, which was quite encouraging. So I'm not sure it's going to be much of a competitive dynamic going forward. We feel comfortable that it will be treated in the future much like it is today.

Congrats on the quarter guys. So Mike just to start off with how close is CLASP IID to completing enrollment? Just trying to get a better sense for the regulatory timeline there?

So we've been enrolling for a while. It's proceeding largely as planned. We're continuing to activate more centers. I don't think we have anything more to share on that. We really haven't laid out what we think it's going to take us. This is the first time that we've been engaged in a mitral transcatheter trial just like this. But it is going largely as we planned.

Okay. Can you talk a little bit more about the tricuspid opportunity? We haven't seen a ton of data yet on these devices in that position, but you guys are moving ahead into two trials that suggest you're encouraged by what you're seeing. What types of patients you're looking to treat new studies? Is there going to be any difference in terms of how you set up the one for Cardioband versus PASCAL? Anything you can share there would be helpful.

So this is really going to be new for these patients. Today, they don't have very much options. One of the reasons that we're enthused as clinicians are enthused and they say, we really could use a transcatheter option to be able to help these patients. As we mentioned earlier on the call, we actually have done three early feasibility studies in the tricuspid position and even though each of those systems behave differently, we've consistently heard back that patients really get an improvement in their quality of life following that. Now, of course, that's anecdotal, we need to do that in a high-quality fashion. We really have not defined the clinical trial at this point. We're working with FDA at this point, but it's going to be some kind of a trial that actually compares it to medical management probably. And so it will be back fundamental.

I wonder if I could maybe get your thoughts on the NCD, the expanded NCD or the updated NCD that came out a few weeks ago. Any thoughts on what impact that will have on the market and are you seeing new centers already starting to gear up to start offering TAVR?

So, we often think that the primary risk that have faced severe aortic stenosis patients is not the treatment complications, but the risk of not receiving treatment at all and we really commend CMS for a thoughtful approach that I think really is going to modernize the requirements and it will be more streamlined for patients. We know that there are a number of centers that are anxious to open TAVR programs and when we look ahead, we say it's reasonable to estimate that approximately 200 new sites could achieve eligibility to initiate a TAVR program by the end of 2020.

And in that context, what's your sense on how expansive that will be to procedure volumes versus sort of cannibalizing patients that would have been referred previously?

Yeah. We don't know this for sure, but based on our past experience, we think new centers often mean new patients. We think that often patients are trapped in the referral pathways and don't necessarily get referred out to other larger centers. So we think it is going to be additive. But overall, remember that we have an estimate that the overall opportunity is going to grow to $7 billion by 2024, which infers a pretty significant growth rate between now and then. And we think that's all part of it. The NCD kind of turned out the way we had hoped it would turn out and had planned for it to turn out. So not really outside of our existing guidance.

Congratulations on an excellent quarter. Mike, I wish it were a birthday party. I have a quick question regarding the patients you mentioned. You noted that some of them might be borderline patients. Do you have an estimate of how many would fall into that category? Additionally, would it be more informative to consider age? Do you have any insight into whether the average age is still around 80, or has there been a change this quarter?

I appreciate the favorable comments. You know what, we just don't have anything quantifiable. What we hear back is pretty anecdotal. So I really can't track it for you. The borderline patients we don't think was the majority, we think it was a factor. But we just think that for whatever reason, there was an acceleration. So we track what's going on in age, but that generally lags by a quarter or two. So we don't have a really clear handle on that at this time.

And then just a quick follow-up on Europe and following up on Joanne's question around cost and just wondering what's happening as you have conversations with some of the healthcare systems over in Europe because some of the feedback I got at PCR was, we love SAPIEN 3, but it's too expensive and we actually can't grow volumes, because we're limited by the cost of the valves, they need to get cheaper. What are you hearing, I understand you guys have been very disciplined about price, but not even as it relates to competition, but just from a volume perspective and patient access in Europe and how might you address that longer term?

Yeah. We think some of the healthcare systems in Europe aren't fully prepared to pay for the quality and value that goes along with therapies like TAVR. Actually, I think when you compare with the value that it adds to the system, what it would cost to add a quality year of life and so forth, TAVR compares wonderfully with so many other therapies. We need to do a better job of influencing the policy makers about the importance of this therapy and that's really what's key for us. We can understand why physicians are in a tough place, they have to live within the existing reimbursement system, but we think in some cases, they don't fully reflect the value of the technology. That's our job to do.

Couple of questions. The first one, can you refresh us on the number of centers in the US that are using Ultra? What is the order rate for these centers on Ultra versus SAPIEN 3? And how quickly are you converting into 100% of Ultra?

So, I don't know the number of Ultra in the US. It's a small number. We were further along in Europe. We didn't give a projection of how far we were going to be overall, we did say that we thought it would account for the majority of procedures in Europe, before the end of the year and that ultimately we think that the Ultra system will replace SAPIEN 3 in all geographies.

Okay. And then two housekeeping questions. What impact discontinuing CENTERA have in your gross margins? Now as you shift more valves into Ultra in Europe, how should we think about how that impacts your gross margins as they need to ramp up two production lines to full capacity?

So you're saying, how is our gross margin impacted by the switch to Ultra from SAPIEN 3?

Yes.

Yeah. We think that's pretty, it's pretty negligible. CENTERA would have been a more expensive system to make, but Ultra is comparable to the SAPIEN 3. Sure. All right. Well thank you everybody for your continued interest in Edwards. Scott, Mark and I welcome any additional questions by telephone. And with that, now back to you, Mark.

Thanks, Scott and thank you all for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the call, which include underlying sales and growth rates as well as amounts adjusted for special items are included in today's press release and can be found in the Investor Relations section of the website at edwards.com. If you missed any portion of today's call, replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and use the conference ID number 13691682. Additionally, an audio replay will be available on the Investor Relations section of the Edwards Lifesciences website. Thank you.