愛德華生命科學 (EW) 2013 Q3 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences Corporation third-quarter 2013 earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, David Erickson, Vice President, Investor Relations. Thank you, Mr. Erickson, you may begin.

Welcome, and thank you for joining us today.

Earlier this morning, we issued a press release with our third-quarter 2013 financial results. On today's call, we will discuss those results and follow our prepared remarks -- following our prepared remarks, we will open up for questions. Our presenters today are Mike Mussallem, Chairman and CEO, and Tom Abate, CFO.

Before I turn the call over to Mike, I would like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include but aren't limited to, our expectations regarding sales and sales growth, gross profit margin, earnings per share, SG&A, R&D, taxes, free cash flow, diluted shares outstanding, interest expense and foreign currency impacts.

These statements also include our current expectations for the timing, status, and expected outcomes of our clinical milestones and trials, regulatory approvals, regulatory compliance and reimbursement, as well as expectations regarding market growth and opportunities in the US and Japan, launches of safety and products and associated economics, new product introductions, impact of competition, and the timing and impact of the patent litigation. These statements speak as only as of the date on which they are made, and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements.

Information concerning factors that could cause the differences may be found on our press release, our annual report on Form 10-K for the year ended December 31, 2012, and our other SEC filings which are available on our website at edwards.com. Also as a quick reminder that when we use the terms underlying, excluding the impact of foreign exchange and excluding special items, 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.

Now I will turn the call over to Mike Mussallem. Mike?

Thank you, David.

This quarter we are pleased to report strong sales growth driven by transcatheter and surgical heart valves, as well as well as solid bottom-line results. A number of important transcatheter valve developments were among this quarter's highlights, including the approval to begin the US clinical study of our most advanced valve, SAPIEN 3, expanded approval to include alternate delivery approaches for SAPIEN in the US, a favorable patent infringement ruling in Germany, and the receipt of reimbursement in Japan. This approval means Edwards is the first to offer this novel technology to patients in Japan, which brings our life-saving therapy to over 60 countries.

Now turning to the quarterly results, reported sales grew 11% to $496 million. Sales growth, excluding the impact of foreign exchange was 13%, driven by transcatheter and surgical heart valves with a strong contribution from Europe. In transcatheter heart valves, third-quarter sales grew 39% to $172 million, driven by the ongoing US SAPIEN launch and strong growth in Europe. In the US, THV sales for the quarter grew 56% to $86 million, which included $12 million of clinical sales, but was reduced by $2 million of net stocking.

As we previously projected, activities slowed sequentially due to seasonality, and the impact of consignment conversions exceeded stocking sales. Clinical sales were driven by enrollment in our PARTNER 2a trial and the ongoing nested registries. We estimate commercial procedures grew 80% over last year. As a reminder, in third-quarter last year, net stocking had a favorable $8 million impact to sales.

At the end of September, 265 sites in the US offered SAPIEN to their patients. Overall, we continue to believe that TAVR economics and hospital capacity are not yet optimized at most sites, and there remains significant opportunity for improvement. Our US team is strengthening its capability to educate sites on TAVR economics, and share best-demonstrated practices from some of the leading US programs. Importantly, nearly 15,000 patients in the US have been treated with our transcatheter heart valves over the past two years, and clinicians continue to maintain very high procedural success rates. In September, the FDA approved the revised labeling for our SAPIEN valve to include alternate access points, in addition to the transfemoral and transapical approaches. This change enables US reimbursement for patients, regardless of which implantation approach a physician uses.

Outside the US, THV sales grew 25% over last year, or 20% excluding the impact of foreign exchange. Growth was driven primarily by transfemoral units. We estimate the favorable patent infringement ruling in Germany had negligible impact on sales in the quarter, as affected customers continued to work down inventory of the competitor's product. While more recent competitors had a small impact on this quarter's results, we expect it to be greater in the fourth quarter due to new product approvals.

Now updating our clinical and product development milestones. We are actively working with FDA, and continue to expect a mid-2014 US approval for SAPIEN XT with the NovaFlex delivery system, and anticipate a rapid introduction will follow. We are proud to announce that we have completed enrollment in cohort A, the surgical arm of the PARTNER II trial. This is the first randomized study -- the first randomized trial to study transcatheter heart valves in moderate risk patients, which has the potential to significantly expand patient access to transcatheter valve technology.

In August, we received FDA approval to expand our PARTNER II clinical trial to include a 500 patient cohort to study one-year outcomes of our SAPIEN 3 system in high risk and inoperable patients. Recently we started enrollment, and are excited to bring our most advanced valve delivered through a 14 French inch eSheath, and designed to reduce paravalvular leak to patients in US.

In Europe, we remain on track to receive a CE Mark to launch our SAPIEN 3 valve by year-end. We completed an initial clinical experience with our CENTERA valve, and expect to begin another clinical series with an enhanced delivery system in the next several months. During the quarter, we received reimbursement for SAPIEN XT in Japan, which became effective October 1. We have completed our first commercial cases, and since sites are required to undergo a rigorous certification process, we anticipate sales will ramp slowly. We believe transcatheter valve technology will be particularly attractive to Japanese patients, and the introduction of our SAPIEN XT valve in that market should contribute meaningfully to sales beginning next year.

And finally, we received approval in the quarter for SAPIEN in Australia and SAPIEN XT in Canada. Treating mitral disease with transcatheter technology continues to be one of our primary development efforts, and we still believe a first-in human experience with a transcatheter mitral valve is likely in 2013. We expect to provide an update at our December investor conference. We are continuing to invest broadly in structural heart disease solutions, and have dedicated teams working on multiple therapies.

In our patent litigation with Medtronic, we had two significant recent developments. First in Germany, the Court found that Medtronic infringes our Spenser patent. The validity of this patent is still being contested. We posted the necessary bond, putting into effect the Court's injunction and recall. Contrary to our interpretation of the Court's decision, Medtronic has not instructed hospitals to return product. We have requested further enforcement action by the Court, and we anticipate more clarity in the next few weeks. Second, in our US case involving the Andersen patent, the US Supreme Court has denied Medtronic's request for a further review of the case. Edward's request for a permanent injunction and additional damages are pending before the Delaware trial court, and no timing for these decisions has been established.

In summary, we continue to expect global transcatheter heart valve underlying sales growth of 25% to 30%, and are tightening our 2013 sales guidance range to $700 million to $730 million. Included in our assumptions are US sales at the low end of our previous guidance range of $350 million to $400 million, and stronger OUS performance. In the fourth quarter, we expect minimal impact from the German injunction and the Japan launch.

Now turning to surgical heart valve therapy group, reported sales increased 3% over last year to $192 million. Excluding the impact of foreign exchange, sales grew 6% compared to the prior year driven by unit growth. This quarter's growth was led primarily by strong performance in the US and Europe, and tempered somewhat by a competitor's launch in Japan. INTUITY contributed approximately 2% to total sales growth.

Globally, our pricing remains steady. ASPs were stable in the US and higher in Europe due to INTUITY, but offset by geographic mix. In the US, sales grew 6.7%. We estimate that we regained share in the quarter, and that the market grew in low single digits. We also believe we are beginning to benefit from our recently published long-term durability data.

In Europe, we are making good progress on our key INTUITY milestones. We continue to expect a CE Mark in the near future for INTUITY Elite, our next-generation platform which has been well-received by clinicians for its lower profile. In the US, enrollment in our TRANSFORM trial remains on track, and we now have upgraded all sites to INTUITY Elite. Also in the US, we continue to enroll patients in our COMMENCE IDE trial studying the GLX tissue on our aortic and mitral Magna Ease platforms. Based on current trends, we are raising the bottom end of our sales growth range in surgical heart valve therapy, and now project 3% to 5% underlying growth in 2013.

Turning to the Critical Care product group, total sales of $132 million for the quarter declined 5% over last year. The primary driver of the decline was the foreign exchange impact in Japan. Excluding the impact of foreign exchange, sales increased 1% as double-digit growth of FloTrac was nearly offset by the continued reduction of distributor inventories in China, and the ongoing exit of our ACCESS product line. The incorporation of our noninvasive monitoring technology into our EV1000 platform is continuing, and the integrated product remains on track to be introduced in 2014. This quarter, noninvasive products once again contributed modestly to sales.

We remain enthusiastic about the significant opportunity represented by our GlucoClear system, and are encouraged by the progress on our 2013 goals. We completed enrollment in our ICU accuracy study in Europe, and expect it to demonstrate compelling results in the hospital setting. We expect to receive further insight on the pathway toward US approval in the fourth quarter. Based on our year-to-date results, we now expect full-year 2013 underlying sales growth for Critical Care product group to be at the bottom of our previously stated 2% to 4% range.

And now, I will turn the call over to Tom.

Thanks, Mike.

Turning to the financials, this quarter our strong sales performance in valves allowed us to achieve diluted EPS of $0.68, representing growth of 17% over the prior year. At the same time, we increased our R&D investments by 14%. During the quarter, we repurchased 3.1 million shares for $250 million, and now project fully diluted shares outstanding to be between 111 million and 112 million at year-end. Just after the end of the quarter, we issued $600 million of five-year notes at 2 7/8%, and fully paid down the $532 million balance on our revolving credit facility.

For the quarter, our gross profit margin was 73.8%, compared to 75.1% in the same period last year. The reduction was driven by higher manufacturing costs, as we prepare for the SAPIEN XT launch in the US and SAPIEN 3 launch in Europe, as well as the reduced benefit from foreign exchange of 40 basis points. These items were partially offset by a more profitable product mix of 180 basis points.

Excluding special items for the fourth quarter of 2013, we expect our gross profit margin to remain at approximately 74%. Third-quarter SG&A expenses were 36.4% of sales, or $180 million, an increase of 8% over the prior year. This increase was driven primarily by US and Japan transcatheter valve launch-related expenses and US Medical Device tax, partially offset by lower incentive compensation and FX. As a percentage of sales, SG&A should decrease in the fourth quarter, and we continue to expect SG&A to be between 36% and 37% of sales for the full year.

We continue to aggressively invest in R&D, and spending in the quarter grew 14% to $84 million or 17% of sales. This increase was primarily the result of additional investments in multiple heart valve clinical studies. For the full year, we continue to expect R&D to be approximately 16% of sales.

Net interest expense for the quarter was $1 million. In the fourth quarter, we expect net interest expense will increase to approximately $4 million to $5 million as a result of the $600 million debt issue issuance earlier this month. We estimate our recent share repurchases will largely offset the EPS impact of the higher interest expense, and therefore, have a neutral effect on our fourth-quarter EPS. Our reported tax rate for the quarter was 23%, down from 25.9% in the prior year, due primarily to the absence of the federal R&D tax credit last year, and favorable reserve adjustments this year. We continue to expect our full-year tax rate excluding special items to be at the low end of our 23% to 24% range.

FX rates negatively impacted third-quarter sales by $9 million compared to the prior year, driven by the weakening of the yen. Compared to our recent guidance, FX rates negatively impacted EPS by $0.01. At current FX rates, we now expect a $45 million negative impact to full-year 2013 sales. Free cash flow generated during the quarter was $110 million. We define this as cash flow from operating activities of $147 million, less capital spending of $37 million. For 2013, excluding special items, we continue to expect free cash flow to be between $270 million and $310 million.

Turning to our balance sheet, at the end of the quarter we had cash, cash equivalents and short-term investments of $758 million. Total debt increased to $532 million, as a result of our share repurchases during the quarter. Our DSO at the end of the quarter was 58 days, and our inventory turns were 1.7, both consistent with the prior quarter.

Turning to our sales and earnings guidance, at current exchange rates for the surgical heart valve therapy product group, we are raising the bottom end of our range and now expect sales of $780 million to $810 million. In transcatheter heart valves, we have tightened the range to $700 million to $730 million, which reflects US sales at the low end of our $350 million to $400 million range, and stronger OUS performance. In the Critical Care product group, we now expect sales at the low end of our previous $530 million to $570 million range.

In summary, we are reiterating our full-year guidance with sales of $2 billion to $2.1 billion, and earnings per diluted share excluding special items of $3 to $3.10. For the quarter -- for the fourth quarter of 2013, we project total sales of $520 million to $550 million, and diluted EPS, excluding special items, to be between $0.81 and $0.85.

And with that, I will hand it back to Mike.

Thanks, Tom.

We continue to project double-digit underlying sales growth in 2013, and believe that our many clinical and commercial accomplishments this year have strengthened our leadership. This positions us well for continued success, and we remain committed to developing innovative technologies in structural heart disease and critical care that provide clinicians with transformational therapies to treat their patients.

Before we open up for the questions, I would like to remind you about our 2013 investor conference on Monday, December 9, in New York where we will provide an update on our new technologies, as well as outlook for 2014.

And with that, I will turn it back over to David.

Thank you, Mike.

If you haven't yet RSVP'd for our December investor conference, you can do so on our website. And as a reminder, to those of you who are here in San Francisco for the TCT conference this week, Edwards is hosting an informal breakfast meeting on Thursday morning at the Intercontinental Hotel. Please RSVP for the breakfast by contacting a member of our Investor Relations team.

As we move into Q&A, I would ask that you please limit the number of questions you ask, so that we can allow broad participation. If you have additional questions, please reenter the queue, and we will try to get to as many people as we can during the rest of our time.

Operator, we are ready for questions, please.

Thank you.

(Operator Instructions)

Larry Biegelsen, Wells Fargo.

Good morning. Thanks for taking the question. Mike, maybe if we could spend a minute on the Q4 guidance, and how you are thinking about that. If I am doing the math correctly, I think this quarter, TAVI sales were up 39%. The midpoint of the guidance for Q4 implies about 19%, 20%. The US in particular, implies a pretty significant deceleration in growth from what you reported this quarter. So maybe you can talk a little bit about that? And I know there was a lot of stocking in Q4 2012. So maybe if you could talk about just the commercial growth that is implied in kind of the US guidance? Thanks.

Yes. Thanks, Larry. Yes, the -- we actually expect a good quarter in the fourth quarter, and I think there is enough guidance out there, with three quarters under our belt, and you now have our full-year expectation you have a pretty good feel of what we think is going to happen. But, yes, if you are just looking at growth rates on a reported basis, you have to take into account what you mentioned, which is the fact that we had positive net stocking in the fourth quarter of last year that was pretty substantial.

Remember, that was the quarter when the Cohort A was approved and transapical came into being. And so, that was a boost to the quarter's -- much in stocking. As you see this quarter actually, we had negative net stocking. And we wouldn't be surprised if it would stay -- it is certainly not going to be the positive driver that it was in the fourth quarter of last year.

Thanks. And then just one on mitrol. Obviously, encouraging commentary from you earlier, that you still think the first-in-man is likely this year, only two months left in the year. Is there any additional color you can give us, Mike, on what gives you the confidence that you will be able to do a first-in-man in 2013? And I will drop. Thanks.

Yes, thanks, Larry. As you can imagine, it is quite a process for us to move forward with a first-in-man experience. And I think the good news that you should take away from our continued statement that it is likely this year, is that we continue to make progress, and to achieve milestones along that way. And we really don't have much more to share. Just wanted to let you know that we are going to provide an update at the investor conference in December. And so, I would say, really stay tuned for that.

Thank you very much.

Amit Bhalla, Citi.

Thanks. Mike, just on fourth quarter and Germany, can you talk just a little bit about the impact there? You said you are not expecting much from Germany, and you expect Medtronic to remove its products. How does that balance against the compassionate use that is still allowed, and why is there not just greater contribution into the fourth quarter guidance from Germany?

Yes. It is a good point. So just to keep in mind, what is going on there, recall that in anticipation of the injunction, that Medtronic provided some excess sales it appears to their accounts. And I think that they acknowledge that. And so there is some inventory that still remains, and we believe that that was being worked off to some extent in the third-quarter. There is a difference of opinion on the Court's interpretation. We feel that the Court expected customers to return product.

Medtronic has not asked their customers to do that. And so, we have gone back to the Court to provide clarity in that regard. And further, as you know we proactively provided for compassionate cases, and have a specific set of valves that we thought were appropriate -- that wouldn't be appropriately treated with an Edwards system. I think Medtronic may have a different interpretation, a broader interpretation of that. We are also asking the court for clarity on that point.

And Mike, just a second question, just on US demand. Yesterday at the conference, there was a discussion of a TVT registry, in which the speaker said, that US market plateauing at about 250 sites and 800 US procedures per month. Do you have a comment on the US market saturating or plateauing?

No. We don't believe that the US market is plateauing. I think the TVT registry has a substantial look back there, and I am not sure that you are able to really draw conclusions from the collection of that data. No, our experience is that there is still a growing market in the US. And I think that -- the results this quarter that we believe that procedures versus third-quarter a year ago grew approximately 80%, is a pretty good indication that this is not a flat market.

Thanks, Mike.

Jason Mills, Canaccord Genuity.

Hi Mike, thanks for taking the question. Can you hear me okay?

Hear you great, Jason.

Great. With so much scrutiny on just one aspect of one division in your business, US TAVI, wondered if you could comment about the US business commercial, and also including clinical. But if -- and correct me if I am wrong, but last year I think you had somewhere in the mid-single digits from a clinical perspective in terms of contribution to US TAVI. And this year, it was significantly bigger than that. In our research, some of your bigger clinical centers, in some cases preferred to enroll patients than to implant with the -- in commercial setting, given the different innovations, the different products that they have access to.

So how would you have us look at your US business? I know you gave commercial sales growth, but should we include clinical in that, given the phenomenon of clinical centers perhaps in some cases preferring to enroll than to implant in commercial?

Yes, thanks, Jason. As you pointed out, there were significant clinical sales this quarter, larger than they have been in the past, particularly because there was pretty stout enrollment of the PARTNER II trial with SAPIEN XT. And if you just step back, I think a reasonable way to think about this is, those cases that are being done clinically could very well have been done commercially. And I like to look at the total number of procedures that are happening, and think that clinical volume should be sort of added to the commercial volume, when you consider what is the demand that is in the marketplace. So I think that is a correct observation.

We expect the clinical demand to stay pretty robust here in the future. And you have to remember, that there is also competitive critical demand as well. So I think that is worth taking into account, when you think about just how big the market is or how fast it is growing.

That is helpful. And so for my follow-up, let's stay with US TAVI. I know you are not ready at this point to give your 2014 expectations. But perhaps you could give us a sense for how you are building that up, and what variables you see as the biggest drivers to growth in your US business next year, in terms of how you are building up the number of synergy think will contribute to that number? And then utilization rates, just juxtaposed to your experience in Europe in year three there, versus what you may expect here in terms of utilization, and how that might trend next year? Thanks, Mike.

Sure. Well, I think one of the things that we indicated is over time the impact of stocking and consignment will diminish. And so, we think that will be a less pronounced effect in 2014 than it is in 2013. You are right, we are not going to give specific guidance about 2014. But the high procedural success rate gives us confidence that we have got a very robust and growing procedure base, and that will continue. And there -- one of the biggest headwinds I think to growth so far, has been some of the economic concerns, and those just continue to improve over time. We still have a young procedure and that is we believe getting considerably better on a consistent basis. And so, we think that is really what will provide the underlying lift for continued growth next year.

And as you point out, in Europe, here we are, this is the sixth year after introduction, and Europe just had a growth quarter of about 20%. So pretty remarkable. I know it is -- maybe the comparison last year was at the depth of some problems in Europe, but nonetheless, it is pretty encouraging to see how that is going.

Thanks.

Mike Weinstein, JPMorgan.

Thanks for taking the questions. Just two quick clarifications first. One, I wasn't sure what the fourth quarter full-year US TAVI guidance is now, if that had changed? And second, Mike, will we not hear anything on the mitral side until the Analyst meeting? If you could clarify that? Thanks.

Yes. So yes, on the mitrol question, I don't think you should anticipate that you are going to hear things from us until the investor conference. We don't have any plans to report anything at this point. And then in particular, you are asking about what the guidance is for the remainder of the year? (Multiple Speakers).

I know you had the $350 million to $400 million range, but did you change that today?

We, what we have said is that you should expect it to be at the low end of that range.

Correct.

Okay. And then --

We kept the overall global range the same, because of the stronger OUS performance.

Got you. And then just one question -- I don't know if you caught the [Tweak's] comments yesterday on the TVT registry. I felt like you let a little something slip out of bag, ahead of the publication. But he said that 25% of the implants to date -- and this is in the first 50 to 700 cases -- had [FTS] scores below 5. Is that possible? I -- it just didn't seem right to me, but I was hoping you would know the data better than we would.

Yes. I don't know about that, Mike. We understand that they are struggling to enroll that trial. And I think it is probably a result that there is a -- (Multiple Speakers).

No, no, I am not talking about [Sertavi], Mike, I am not talking about sertavi, I am talking TVT -- (Multiple Speakers)

Oh, the registry, oh the TVT?

Yes.

Are you talking about the US or European data?

No. No, the US TVT registry.

Yes. that is doesn't sound likely to us. We are not sure that SDS captures all the factors. Sometimes what confounds that is the frailty or porcelain aorta. So maybe that is confounding the statistics, but broadly we think people are pretty disciplined about the way that they utilize the valves.

That is what I was wondering. Okay. Perfect. Thank you.

David Roman, Goldman Sachs.

Thank you, and good morning. I wanted to come back to the surgical valve business which you kind of glossed over a little bit in your prepared remarks, though you did see somewhat of a turn in that business. So I am hoping you could walk us through in a little bit more detail, what is happening with that franchise? To what extent if any are the centers seeing a pull-through effect from having TAVI programs in the US? And then how should we think about the surgical valve business going forward from a cannibalization standpoint?

Yes, thanks very much. The -- we are -- we still believe that there will be a halo, although we just haven't seen substantial impact in our results so far. The growth this quarter was unit growth. And so, we believe that the market was probably growing in low single-digits, and that we also had share increase I think, as we are regaining share in the US is part of that. We saw growth both in THV accounts and non-THV accounts this quarter. So both sort of lifted. So we are pretty optimistic about our surgical heart valves franchise in terms of where it is right now. Does that answer your question?

Yes. (Inaudible) And then I guess the corollary question to that would be, if you are not seeing much of a halo effect or pull-through effect, why wouldn't this business see increased pressure over time as this PARTNER A group starts to pick up as a percentage of total units?

Yes. It is a good question, and we will get deeper into that at the investor conference. But big picture is, yes, there will be some pressure, and some cannibalization, of course. But we think that the awareness of aortic stenosis is going to increase. It is a largely untreated population, and that there are likely to be more people that flow into system, and so we will get a boost from that. And so, we are not sure that it is just purely a subtractive effect.

Okay. Got it. And maybe just for Tom on the P&L. Just a clarification around the moving parts in the gross margin line, can you maybe first give us some perspective, what was the underlying or sort of real gross margin this quarter? And then how long do we see this headwind from inventory build?

Yes, that is a good question. I think we are going to see the inventory effects throughout the launch, is going to continue into 2014. When exactly? I don't have a date, but it is a number of things that are involved with the training and inventory and so forth. So I think that is likely to continue into the future. I would say this -- the benefit, we are still seeing some benefit in this quarter from FX, if you just isolate the current quarter. But that is pretty much gone by next quarter.

So we had a strong first half. Remember, we were getting helped 150 to 100 basis points. We also had a real strong benefit last year, second half. So but that is tapering down. Now, of course, as you wrap around rates whenever you have a big movement, that is pretty normal until the next movement. So predicting FX, we will take another shot at it in December, but it is always a variable.

Okay. Thank you.

You bet.

Brooks West, Piper Jaffray.

Yes, hi. This is actually Misha Dinerman in for Brooke. I was just wondering, Mike, if you could give us an update on TA training, and how the rollout there is going? How many of the sites have been now set up with training? And -- (Multiple Speakers) -- go ahead.

Yes. Thanks. I think at this point, a great, great majority -- I don't know the exact number, but my estimate would be it would be 95% or more of sites in the US are trained on transapical approach.

Okay. Great. Thank you.

Bruce Nudell, Credit Suisse.

Good morning, thank you. Mike, one of the consternations about the stock is the view that the US market, given the constraints of the NCD can't really grow that fast, until there is indication expansion. And that given the emergence of competitors and just trialing efforts that are going on in clinicals, that it is going to be difficult for Edwards to grow the US TAVI business reliably in 2014 and 2015? And just kind of schematically, how do you respond to that? And is there any -- anything we should be thinking about that we are maybe missing?

Yes. We continue to be optimistic about the US market. I think the improving economics will be gradual, but I think they will be deliberate, and we will see that. And we think as economics improve, that it will stimulate hospitals to increase their capacity, and to further develop their referral networks. So that is just a -- it would be an underlying boost.

Remember, we expect a SAPIEN XT approval next year, which we think is also very helpful. And that comes along with additional sizes, so we think that is also helps increase the number of patients that you might touch in the United States, compared to just the SAPIEN technology that is there today.

And Mike, my follow-up is about the kind of hospital profitability situation. And just to put a clarifying point on it, if a patient is mapped to the correct MS-DRG, and you can reduce length of stay with kind of discharge to home, that in your mind really will allow the hospital to kind of pocket more of the profit, and there won't be some recoupment on the part of CMS?

Yes. I think that is right. Overall, we believe that profitability is not only improving, we think that most hospitals today are profitable on a per procedure basis. And as they improve their economics, for example, improve their length of stay and have proper discharge planning, yes, the benefit comes to the hospitals.

Thanks so much.

Danielle Antalffy, Leerink Swann.

Hello?

Hi, Danielle.

Hi, sorry about that. Thanks so much for taking the question. Mike, I was hoping I could follow-up on the mitrol program. Sorry to harp on this, but can you give us any color on sort of what are the milestones that still need to be hit, before we can go first-in-man? And then secondly to follow-up on that, how quickly can this go from first-in-man into a pivotal CE Mark trial? Thanks.

Yes, we really haven't gone to the point where we lay out the specific milestones. I think as we have mentioned, we go through quite a process -- all of our in vitro tests, as well as the early preclinical tests that we would do, both on acute animals and chronic animals. So it is quite a process, and I don't know that it is appropriate to get into that in a deliberate way.

We think there is a lot to learn in a first-in-man. There are no great models for really doing this in the mitrol position. And so, I think getting in front of ourselves would be inappropriate. We are going to try and bring this more to life, when we are with you at the investor conference. And so we will try and get much deeper, but I think at this point, it -- we will hesitate to make any projections beyond that. We think it is likely that we are going to get into the first-in-man, and we look forward to that experience.

Okay. Great. Thanks. And I was hoping you could comment on your Q4 guidance and for OUS THV sales, and how you are factoring in -- just this earlier this morning, a competitor got a next-gen valve CE Mark approval. So how you are thinking about the competitive ramping up in Q4, particularly since you don't expect to benefit from Medtronic in Germany quite yet? Thanks.

Yes, thanks. We have been really pleased with both what the market has been doing in Europe, and also our performance compared to competitors. And that has gone very well, and we felt like we leave the third-quarter with a lot of momentum. I think what was just approved this morning is no surprise to us. This is fully what we expected, and that is fully anticipated, and in our guidance.

Okay. Thank you so much.

Sure.

David Lewis, Morgan Stanley.

Good morning. Just a couple quick questions here. Mike, just on XT, I mean, a couple questions. First, the timing you are giving for mid-next year seems a little longer than maybe some more optimistic expectations, considering that it is not a novel valve. Maybe just give us a sense of -- could that estimate actually prove conservative, and what your thoughts are there? A

nd then secondarily, I would love to know kind of how you think about XT in the US, in terms of being able -- as a key growth driver next year can it really drive increased growth, or do you see XT as a valve that likely cannibalizes a lot of TA procedures? So to those two points, both the FDA process, and how you see XT playing out next year as a growth catalyst?

Well, thanks, David. I think we need to bring you with us to the next FDA meeting, so that you can explain to them that XT is not a novel valve, and that they should rapidly move to approve this. (Laughter). We try and make similar arguments, but they are pretty convinced that it is a unique and novel valve. And we are pretty pleased.

We think that profile changes change is going to be substantial. I am not sure everybody really thinks about the difference of moving from a 24 French system to a 18 French eSheath. That is a big change that customers are going to go through, and I think it is going to have a big impact on patients. In addition, I also mentioned that we have -- we will have a range of sizes that are significant, and that will make a difference as well. There is -- there are patients that are being excluded today, because we can't serve them with a 23 and 26 millimeters size.

Okay. And then Tom, just give me a quick follow-up on gross margins. Obviously, this year there is significant series of launches in multiple markets which are pressuring GMs. Next year you start to an anniversary some of those launches, but we kind of gear up for the US push of XT. I mean, is XT in the US going to have the same type of inventory pressure that we are seeing here in '13, or can we sort expect the broader mix of your business with the multiple countries driving [perf] valve to maybe take those GM's higher? So I am just trying to get a sense of whether the pressures we are seeing in the back half of '13, are we going to see them again in '14 because of XT, or the net benefit should be GMs heading higher? Thank you.

Yes, it is difficult to predict. We need to get the actual approval dates behind us, and see how these launches are actually going to work, how aggressively we will look at inventory in both cases. But our goal is to get everything that we can outside the US to XT, including the US. So it will give us some efficiencies. Obviously S3 will be the leader, but next year it is probably mainly Europe that we are looking at.

So being able to drop SAPIEN should help. I don't know how quickly we would see that benefit. Probably a little bit of time before we get that worked through the system, because we do still have some -- we still will have some SAPIEN in some indications in the US.

Yes. I think I will just add to Tom's answer, that although we do pick up efficiency when we leave SAPIEN and go to XT, we will be producing a more expensive SAPIEN 3 valve as we move forward so.

That is true.

Thank you very much.

Kristen Stewart, Deutsche Bank.

Hi, thanks for taking the question. This is a follow-up to that last one. Just in terms of the SAPIEN XT label, have you changed your view on our expectation that it will be not only approved for the inoperable patient population but also for high-risk, because I am just confused as to how you would then be able to transition everything over to SAPIEN XT without that label also specifying high risk?

Yes. No, we haven't changed our view. Of course, we would love to have the label be not only inoperable but high risk. But at this point, we don't have any reason to be able to really provide any guidance on that, Kristen. If -- the trial provide -- well, you are familiar with what the trial tested.

Right. And so, I guess if it doesn't change, then I guess we could continue to see some of this inventory pressuring gross margins, because you will have to have both product lines continue in the US, until presumably PARTNER IIa results and approval?

I think that your broad assumption is correct. If that were to persist, then we would have to keep SAPIEN going as well as XT, as well as SAPIEN 3, that would sort of hurt our efficiencies, and we would feel that in the margin.

Okay. And then I was wondering if you could spend expand a little bit more on just the Japanese market? I know you had mentioned that you expect the ramp to be a little bit slower. Can you maybe help us get a little bit more perspective, just on the number of centers you are looking at there, what in particular is causing this slow ramp? What centers need to be credentialed for, or anything in that regard?

Sure. So the -- we have already begun training centers. But there, in addition to what Edwards typically does, there is an additional criteria that was established by the Ministry of Health and Welfare in Japan, and medical societies for there actually to be a certification that will be done by local physicians, local societies. And that is an additional gating item, and would need to be done along the way.

So what we are concerned is, it will make the launch actually even more deliberate. So it will be -- might be a slower ramp than if we had we didn't have that requirement in there. Now having said that, we think this is going to be a very popular procedure in Japan and ultimately it is going to grow very nicely. But I think this additional requirement is going to mean that it is going to go slower. So even though we have trained some centers, for example, I doubt that we will have an additional 10 centers trained in the fourth quarter.

Okay. And I missed in the beginning, but how many centers are in the US right now?

265 at the end of the third-quarter.

And do you still feel good about the targets that you had set? It seems like it is tracking a little bit lighter.

I am sorry, Kristen, what was that?

But do you still feel positive about the number of centers that you expect to add? That number seems to be tracking a little bit lower.

Yes. Given where we are right now, it is probably less likely that we reach 300 by the end of the year. But we think typically the third-quarter is slow, so it is not surprising that it is a little less this quarter than we have experienced in the past. I think we need to let some others ask questions now, Kristen.

Glenn Novarro, RBC Capital Markets.

Thanks, good morning. Just a follow-up on Germany and a follow-up on Japan. In Germany, I believe Medtronics CoreValve was doing similar, about $15 million to $20 million per quarter. And I guess, what I am hearing you is you are saying is, in 4Q there is enough product in the channel that you are not going to be able to really benefit, but how should we think about the benefit in 2014? Can we capture at least 50% to 75% of CoreValve? And then I have a follow-up on Japan.

Yes. I think it is a really good question, Glenn. When we said there was minimal impact this quarter, actually our local team actually thinks there might have been slightly negative impact, as they are still working off quite a bit of this competitive inventory. But before we can make a call on how things might go in the future, I think we are going to need these decisions from the court, because the courts will tell us a couple of things.

One is, whether there is going to be a recall of the products that are still on the shelf. And two, just how rigorous this definition of compassionate is. We think it is quite rigorous. And again, we have tried to be generous with the idea that we are really going to do the very best for patients and physicians. But that is not clear. So we would expect over the next several weeks to have some decisions there that help clarify that. But it is not perfectly clear right now, Glenn.

And I would assume we will get the update and at the analyst day, correct?

Certainly.

And then just in Japan, can you remind me -- I believe in the past you have said, no stocking Japan, just consignment. Is that correct?

That is correct. We are going to go directly to consignment model in Japan.

Okay. Great. Thanks for taking my questions.

Certainly.

Bob Hopkins, Bank of America Merrill Lynch.

Thanks, and good morning.

Good morning, Bob.

So just a couple quick follow-ups. First of all, on the US side, can you give us a sense as to what you expect in terms of Q4 revenue from clinical trials for US TAVI?

And then to follow-up on the question on number of centers in the US, I was wondering if you could comment on, are you still comfortable longer-term that you can have really 400 centers up and running ultimately? Or is that number now lower, because that is certainly was what some of the commentary was yesterday in a few of the sessions.

Yes. So the -- and so the -- and I am trying to --

The Q4 clinicals --

So the Q4 clinicals, we hesitate to make predictions about what clinical cases will be in the quarter. We think that there will continue to be some pretty good clinical volume with SAPIEN 3 beginning in the PARTNER II trial. We think that will be pretty popular, so that could drive some pretty rapid uptake. But it is difficult for us to predict exactly where that comes out.

In terms of the number of sites, yes, you are right, given that we are at 265, it does call into question on whether we would get to 400 by the end of next year. We are going to that analysis now. We will try and give maybe a sharper picture of that, when we get to the investor conference, but your observation is a good one.

So and then just as a follow-up, on the clinical trial revenue -- I know you don't want to give an exact number for Q4, but should we assume it is roughly the same as what it is right now? And then my last follow-up is simply, do you have any update for us in terms of your expectations for a decision from the European patent office on validity?

Yes. Thanks. I admire your persistence on trying to get a clinical number out of us in the fourth quarter, but I think we are going to hesitate to offer that up. I think I have pretty much offered the best insight that I can.

In terms of the Spenser patent, we would expect the European patent office to make a decision in the first half of 2014 on the validity.

Okay. Thanks very much.

Sure.

Matt Taylor, Barclays.

Can you hear me okay?

Yes, Matt.

Great, thanks. So just wanted to ask a question about SAPIEN 3. You have got your launch expected here early next year, and you are also doing some additional clinical work in the US. So first question is, you mentioned the clinical trial drain on commercial volumes in the US. And I am curious as to how you see that evolving sequentially, meaning you have got a lot of clinical stuff going on.

But you mentioned before there is more competitive clinical trials going on at the same time. Do you think that you will actually see more clinical sales for Edwards or less because of that dynamic?

Yes. No, I guess I would say, that we are really excited about SAPIEN 3. We think it is a terrific valve. We think clinicians are super excited about it, and the opportunity for them to implant in the US, especially in these leading centers that are in the PARTNER II trial is going to be exciting for them, and we expect them to move along at a pretty rapid pace. I don't know how fast that is going to go. Naturally, they need to go back through their IRBs, which they do for any of these changes.

I don't expect that to be onerous, but it is still a requirement. So it is tough to make the call exactly how fast that is, but we would expect it to enroll pretty fast. And that would drive the clinical sales number up.

Having said that, whether it is clinical sales or commercial sales, we are relatively indifferent. This is -- as long as we are making progress here in terms of moving the best system forward, and that the therapy is continuing to grow and be popular and help patients, we are very pleased with that.

Great. And just to follow-up on the centers. There has been some speculation about the total number ultimately. Can you comment on the centers that you have trained so far, have you retained all those centers? Is your value average pretty high there, and have any centers dropped off because of one reason or another?

Yes. I don't know any exact numbers, in terms of exactly what is going on. We don't tend to have centers that so-called drop off that I am aware of any serious numbers. I'm sure there are exceptions here and there, but for the most part I think people try and meet their minimum requirements to stay within the NCB.

Great. Thanks a lot for the comments.

Sure.

Suraj Kalia, Northland Securities.

Good morning, everyone.

Hi, Suraj.

So Mike, if I may piggyback on the question about Germany and inventory for CoreValve, I think that is widely expected that you are going to follow the same pattern in some of the other countries, whether it is Italy, UK, so on and so forth. Can you give us some perspective of, if you all would try to preempt any of the inventory issues with CoreValve, assuming in some of the other countries you will go for litigation of the Spenser patents? And would German Court set a precedent in some of the other countries also in the interpretation?

Yes, I think the other countries do pay attention to what the German courts do, but I am -- I hesitate to do any projections. We just don't comment on future litigation, Saroj. And so, we really have nothing to share at this point.

Fair enough. One more question, Mike. And forgive me, if this is a too forward-looking question. Obviously a lot of the centers in the US complain about profitability about TAVI. I think a lot of the centers that we talk to, have consistently started giving feedback that the peri operative and immediate post-op outcomes have improved substantially, but it is the cost of effectiveness which is killing them. Do you think given all the competitive clinical trials coming on board, do you -- what does your internal analysis suggests on the price elasticity of demand on the commercial side for your products? Do you think it is a viable strategy at this time, in terms of causing a step change in the demand curve?

Yes. Just broadly, we think although everybody is not there at this point, we think more than half the centers are profitable just on a per procedure basis today, and that that is improving. And we have seen that results in the early data that we have had a chance to look back, the MedPar data, and we are feeling that in our own experiences.

In terms of our pricing and the role in that, we think our pricing is fair, and we think it does a good job of reflecting the value of the procedures. Even if you go back to the PARTNER trial and cohort B, and remember that cost effectiveness versus other cardiovascular procedures, it was pretty comparable. And when you consider that it is a young procedure, and that there is a large opportunity for improvement, we think we are pretty well-positioned for that to continue to get better over time, especially as we are able to bring better systems that are going to be easier for patients and their physicians.

Thank you for taking my questions.

Sure.

Rick Wise, Stifel.

Thanks for taking the question. Mike, two things. First briefly, I hate to ask or even think about Mike's departure -- or Tom's departure, but any update on timing of the CFO search?

Yes. The CFO search has gone really well, Rick. We are going to be sorry to say goodbye to Tom as well. He has been a fantastic partner. He has continued to be highly engaged, and so we are expect a very smooth transition. I think that we will have something to announce certainly before year-end, hopefully even sooner than that. So just stay tuned, but that is all going well.

Good. CENTERA, a couple questions to finish for me, you said you are starting a second trial. Maybe a couple things around CENTERA, Mike, and you could just take it at whatever order you want. What does this all imply for a new trial, a second trial imply for EU approval? Do you think you can still come to market in 2014? You talked about a new delivery system. I think you said -- it went by sort of quickly. And any larger reflections as the repositionable era grows closer? Thanks.

Sure, Rick. So, yes, we are really excited about the CENTERA valve. We think it has the potential to be by far the best-in-class self-expanding system. We decided to make a pretty significant change to the delivery system. And so, we are going to start the trial with the new delivery system here in the next several months, and that will pick up the clinical cases. We don't have any timing to project. Maybe we will have some things that we can talk about at the investor conference. But we are pleased with the direction that this is going in, and we are really looking forward to starting this next series of patients.

Thank you.

Sure. Okay. Well, thanks for your continued interest in Edwards. Tom and David and I will 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 growth rates, sales results excluding currency impacts, 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.

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