愛德華生命科學 (EW) 2013 Q4 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences Corporation fourth 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. Erikson, you may begin.

Welcome, and thank you very for joining us today. Just after the close of regular trading, we released our fourth quarter 2013 financial results. During today's call, we'll discuss the results included in the press release and the accompanying financial schedules, and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO, and Scott Ullem, CFO.

Before we get started, I'd like to remind you that during today's call we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to, our expectations regarding sales, gross profit margin, earnings per share, SG&A, R&D, interest expense, taxes, free cash flow, diluted shares outstanding, and foreign currency impacts. These statements also include our current expectations for the timing, status, and expected outcomes of our clinical trials, regulatory submissions and approvals, as well as expectations regarding adoption rates and potential for new products, litigation strategies and outcomes, and Company growth. These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them after today. 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 these differences may be found in 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, a quick reminder that when we use the terms, underlying, excluding the impact of foreign exchange, excluding special items, and adjusted for 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 and on our website. And now I'll turn the call over to Mike Mussallem. Mike?

Thank you, David. I'm proud to say that our strong fourth quarter results helped us finish a year that places Edwards Lifesciences in a stronger position today than any time in our history. Although our initial sales expectations for 2013 were more optimistic, we ended the year with an underlying full-year sales growth of 11%, and non-GAAP diluted EPS growth of 16%.

Additionally, during 2013 we launched important new products, reported strong clinical data, and made significant progress on several key development milestones that position us very well for a sustainable future growth. Most importantly, even more patients are benefiting from our life-saving technologies than ever before.

Now, turning to our quarterly results; total underlying sales grew 10% to $550 million. This growth rate excludes the impacts of foreign exchange and the THV sales return reserve, which Scott will explain in more detail later. We are pleased with our THV results across all geographies this quarter, and are exiting 2013 with strong momentum.

Underlying global THV sales were above our expectations, and grew 22% to $198 million, driven by especially strong growth in Europe, and the contributions we expected from SAPIEN in the US. Outside the US, underlying THV sales grew 28%, driven once again by strong SAPIEN XT transfemoral unit growth in Europe. TF growth continues to be aided by the competitive strength of our 29-millimeter system.

Double-digit industry growth of transcatheter valve procedures in Europe, even after six years of commercial availability, validates our belief in the existence of a large group of untreated patients just now seeking treatment. We estimate the patent infringement rulings in Germany had a negligible impact on sales this quarter, and we continue to see only a small impact from more recent competitors.

In our first quarter of launch, THV sales in Japan were $4 million. We're very pleased with how our rollout is progressing so far and continue to believe the opportunity there is attractive. While the hospital certification process is governing the speed of the launch, the favorable reimbursement, physician enthusiasm, and very high procedural success rates support our optimism for the broad adoption of our SAPIEN XT technology. We continue to believe the TAVR opportunity in Japan will grow to between $300 million and $400 million in 2019.

In the US, underlying THV sales were $93 million for the quarter, which included net stocking sales of $2 million and clinical sales of $13 million. Clinical sales were strong once again this quarter, driven primarily by the rapid enrollment of the SAPIEN 3 high-risk arm of the PARTNER II trial.

New commercial site training picked up in the fourth quarter, and by the end of the year 290 sites in the US were offering SAPIEN to their patients. Estimated procedural growth exceeded 40% this quarter over last year. Recall that the fourth quarter last year included $16 million of net stocking sales that coincided with the FDA approval of SAPIEN for high-risk patients in transapical procedures.

We are gratified that heart teams have maintained their high procedural success rate since the launch in the US two years ago. We continue to believe there are a great many more patients on the sidelines that will pursue transcatheter technology, and are continuing to build awareness for this important therapy. Likewise, we are focusing on ways to help hospitals optimize their TAVR programs by sharing best practices, which can reduce lengths of stay and improve their economics.

I'm sure you saw the announcement of a competitor that was approved to treat inoperable patients in the US. The timing of this was consistent with the assumptions we discussed in December, and we are well prepared to respond. We plan to rapidly upgrade customers to our SAPIEN XT valve once it's approved at prices comparable to what they're currently paying for SAPIEN.

Overall, we are committed to aggressively defend our leadership position, and are confident that clinicians in the US will prefer SAPIEN XT as they do in Europe, where we are the market leader and have been gaining share since 2010. In summary, we're pleased with our THV results across all geographies this quarter.

For 2014, given the near-term uncertainty associated with the competitive dynamics, we are reiterating our 0% to 14% underlying sales growth guidance. We expect to refine this range as we gain further clarity. Overall, we exited 2013 very strong, and believe we are well-positioned for durable leadership in the growing TAVR space.

Turning to Surgical Heart Valve Therapy product group, sales were up 8% on an underlying basis, driven by -- primarily by unit growth. This quarter's growth was strongest in the US and Europe. Pricing remains steady globally with a modest increase in average selling price lifted by INTUITY, our rapid deployment valve. In the US, surgical valves grew 11% this quarter. We believe there was increased growth in procedures overall, and that we have regained share as customers returned after trying competitor products.

In Europe, underlying sales grew 7%, driven primarily by sales of our premium-priced INTUITY valve system. To summarize our surgical valve business in 2013, we are exiting with strong momentum and expect underlying sales growth in 2014 to be in the 4% to 7% range, driven by additional traction in Europe of the INTUITY Elite and launches of new minimally invasive cardiac surgery products.

Now, turning to the Critical Care product group. Total sales for the quarter grew 2% on an underlying basis. Growth was solid across most regions and product lines this quarter, but was reduced by the impact of the China distributor inventory reductions and the ongoing exit of our Access product line. During the fourth quarter, we were excited to obtain a CE Mark for ClearSight ahead of schedule. ClearSight is our integrated platform combining our noninvasive monitoring technology with our best-in-class EV 1000 system.

We think ClearSight will be a very attractive product for hospitals that are looking for a noninvasive technology to monitor their less critical patients. In 2014, we expect to build on our strong leadership position and deliver underlying sales growth of 3% to 6%, aided by the launch of our new ClearSight product.

Before we get into the financials, I'd like to recap a few of the developments in our ongoing IP litigation. In the US, we announced last month a federal jury found that Medtronic willfully infringes one of our Cribier patents and awarded us $394 million in damages. We intend to ask the Court to grant a permanent injunction. This patent is valid until the end of 2017.

Also in the US, we are still awaiting the Court's decision related to the Andersen patent, which also found Medtronic willfully infringes. We are seeking additional damages and a permanent injunction. Separately, we expect a decision by the US Patent Office to be made in mid-2014 regarding the final patent term extension of this patent.

Edwards has invested significant resources developing products to help patients, and we will continue to vigorously defend our intellectual property. Although the enforcement of our IP represents potential upside for our Company, we have not included any benefit from patent litigation or royalties in our guidance.

Now, I'm pleased to introduce to you Scott Ullem, our new Chief Financial Officer, who joined us last month. Scott replaces Tom Abate, who is retiring from Edwards after many years of service and dedication to our Company, for which we are truly grateful. Scott?

Thank you, Mike. I'll start by saying that I am pleased to have joined Edwards. I've had a chance to meet some of our investors already, and I look forward to getting to know many of you at upcoming conferences. I also want to thank Tom Abate for helping me make a smooth transition.

Now I'll turn to our financial results. This quarter, our sales performance in valves allowed us to achieve diluted earnings per share of $0.68 and non-GAAP diluted EPS of $0.91, comparable to the fourth quarter of 2012, which benefited from large US THV stocking orders. Before I get into the details of the quarter, I wanted to elaborate on the sales return reserve that Mike referenced earlier.

As we discussed during our Investor Conference on December 9, as we launch SAPIEN 3 in Europe and SAPIEN XT in the US, we will exchange previously sold Transcatheter Heart Valves for the more advanced technologies. These planned product upgrades required us to record two reserves in the fourth quarter.

First, a $14 million sales return reserve that reflects the value of the valves we already sold and will take back from customers. This reserve will reserve reverse during 2014 as we ship the upgraded valves.

Second reserve is a small inventory reserve for returned product not expected to be resold. In order to compare our sales results on a consistent basis between periods, we are excluding the impact of the sales reserve, both in this quarter and future quarters when the sales reserve reverses.

Now turning to the financials. For the quarter, our gross profit margin was 72.9% compared to 75.4% in the same period last year. The reduction was driven primarily by a reduced benefit from foreign exchange of approximately 130 basis points, the impact from the sales return reserve, and higher manufacturing costs as we prepare for the SAPIEN XT launch in the US and the SAPIEN 3 launch in Europe. These items were partially offset by a more profitable product mix. For 2014, we continue to expect our gross profit margin, excluding special items, to be approximately 73%.

Fourth quarter selling, general, and administrative expenses increased to $191 million, up 7% over the prior year, driven primarily by the US medical device tax and Japan transcatheter valve launch-related expenses. This was partially offset by favorable foreign exchange translation, principally because the yen depreciated more than 20% year over year. We expect SG&A, excluding special items, to be between 37% and 38% of sales for the full year 2014.

Research and development expenses in the quarter grew 5% to $79 million, or 15% of sales. This increase was primarily the result of continued investments in heart valve clinical studies. For the full year 2014, we continue to expect R&D as a percentage of sales to be approximately 16%.

During the quarter, we recorded a $16 million pretax special charge comprised of two items: a global realignment charge of $10 million, primarily related to severance expenses to improve Critical Care's operational efficiency; and second, a $6 million intangible asset write-off related to a prior acquisition. Net interest expense for the quarter was $4 million.

In the fourth quarter, Edwards issued $600 million of 2.875% coupon five-year notes. We swapped $300 million of those notes to floating. For the full year 2014, we continue to expect net interest expense to be between $12 million and $15 million.

Our reported tax rate for the quarter was 25.3%, or 23.7% on a non-GAAP basis. Assuming renewal of the federal research and development tax credit in the fourth quarter, and excluding special items, we continue to expect our 2014 tax rate to be between 20% and 22%.

Foreign exchange rates negatively impacted fourth quarter sales by $13 million compared to the prior year, driven by the weakening of the yen. Compared to our recent guidance, FX rates negatively impacted earnings per share by $0.01. Looking forward, at current rates we continue to estimate $20 million negative impact to full year 2014 sales when compared to 2013 rates.

Free cash flow generated during the fourth quarter was $91 million. We define this as cash flow from operating activities of $111 million less capital spending of $20 million. Excluding the $57 million impact from the Medtronic receipt for initial IP damages, full-year free cash flow was $306 million, which was our strongest performance ever.

Turning to our balance sheet. At the end of the quarter, we had cash, cash equivalents, and short-term investments of $937 million. Total debt was $593 million.

Now turning to our 2014 guidance; our financial guidance remains unchanged from our December Investor Conference. For Surgical Heart Valve Therapy, we expect sales to be between $810 million and $850 million. In Transcatheter Heart Valves we expect sales to be between $700 million and $820 million, excluding the impact of the sales return reserve. And in Critical Care, we expect sales of $535 million to $575 million.

We expect full-year total sales of $2.05 billion to $2.25 billion, and free cash flow, excluding special items, between $325 million and $425 million. Excluding special items, we expect diluted earnings per share to be a wide range around $3. Given our planned share repurchases during the first quarter of 2014, we expect full-year diluted shares outstanding to be between 107 million and 109 million.

For the first quarter 2014, we project total sales of $500 million to $550 million, excluding the impact of the THV reserve. And diluted earnings per share, excluding special items, to be between $0.61 and $0.71. With that I'll hand it back to Mike.

Thanks, Scott. Now I'd like to provide an update on some of our product development programs. In transcatheter valves, we are continuing to actively work with the FDA to obtain approval of the SAPIEN XT valve in the US.

Consistent with our prior assumptions, we are anticipating approval over the next few months. Our SAPIEN XT, which is currently the leading transcatheter valve in Europe, will be a welcome upgrade for our US physicians and patients, and we anticipate a rapid adoption once it becomes available.

A few weeks ago, you'll recall our announcement about the completion of the enrollment of the SAPIEN 3 trial for high-risk and inoperable patients, and the approval to begin the study of 1000 intermediate-risk patients. The 500 patients in the high-risk arm were enrolled rapidly, which demonstrates the enthusiasm clinicians have for our most advanced SAPIEN 3 valve and its smaller profile and a feature to address paravalvular leak.

Assuming a one-year follow-up and an uncomplicated FDA approval, we could expect US approval by mid-2016. Enrollment of our 1000 intermediate-risk patients has already begun, and we expect this study arm to enroll by the end of the year.

In Europe, we've just received CE Mark for SAPIEN 3 and have commenced an aggressive launch, with a number of successful implants already this year. Upgrading customers to this new platform should be fast, as there is no need for extensive training, and clinicians are very eager to get their hands on this exciting new technology. For these reasons, we believe SAPIEN 3 will quickly become the leading transcatheter valve in Europe.

We will soon be initiating enrollment in Europe of the next series of patients for our self-expanding CENTERA valve. CENTERA features a short discrete frame, a novel motorized delivery system that allows for stable, precise deployment, and is delivered through a 14 French e- sheath. We continue to expect receipt of European approval in the mid-2015 time frame.

Now I'd like to provide an update on our Mitral program. We continue to be excited about this significant opportunity that will be meaningful for patients, and believe that Edwards is well-positioned, even as the path to commercialization may be long. We are disappointed that our first in-human experience has not yet begun, as we are just now receiving the necessary regulatory approval to proceed. This has been the sole cause for the delay and we expect to begin shortly.

In our surgical valve product line, we're working closely with our notified body to gain CE Mark for our INTUITY Elite system and expect the approval soon. You will recall the increased reimbursement for INTUITY valve is already in place in Germany.

During the Society of Thoracic Surgery meeting, data from the Cadence trial demonstrated that INTUITY with an MIS approach significantly reduced cross-clamp time and improved mean gradients when compared to a conventional open procedure. We continue to believe in INTUITY's potential for simpler procedures, fewer complications, and faster recovery, which supports our expectation for increased adoption of INTUITY in Europe in 2014.

In the US, enrollment in both our Transform trial for INTUITY and our Commence trial studying the GLX tissue on aortic and Mitral Magna Ease valves, remain on track to be completed by the end of the year. GLX is our advanced tissue platform designed to enhance valve durability and enable pre-mounting of valves and delivery systems.

During the STS meeting, clinicians from the Cleveland Clinic presented a 30-year study of more than 12,000 patients who received our PERIMOUNT aortic valves, representing over 81,000 patient years of follow-up. Of particular note were the durability outcomes showing a 98% freedom from explant for structural valve failure at 10 years and an 85% freedom of explant for structural failure at the end of 20 years. Together with the two 25-year PERIMOUNT studies presented in 2013, these data strengthen the differentiated body of scientific evidence, demonstrating unmatched durability of the PERIMOUNT platform.

And lastly, we continue to expect the introduction in 2014 of several minimally invasive enabling tools in our CSS product portfolio. And finally, in our Critical Care product line, interest in noninvasive advanced monitoring remains high as clinicians apply this novel technology to surgical patients. We're just beginning our launch of ClearSight in Europe, and continue to expect the US launch in the third quarter of this year.

We're encouraged by the progress we're making with GlucoClear and the significant need for glycemic monitoring in the hospital setting. We're just now expanding our evaluations in Europe. Ultimately, key to driving customer adoption will be the publication of outcomes and accuracy studies. These data will also help inform the pathway toward a US approval.

So in conclusion, we have a number of exciting products positioned to contribute to growth in 2014, and as we look beyond 2014 we like how we're positioned. Edwards is fortunate to have strong leadership and attractive markets with sustainable growth potential and a robust product pipeline, which should enable us to strengthen our position even further and impact the care of more patients around the world. Combined with upside opportunities, such as successful mitral therapies, glucose monitoring, and patent enforcement, we believe that Edwards' future is very bright. And with that, I will turn the call back over to David.

Thank you, Mike. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions, please reenter the queue and we'll answer as many of these as we can during the remainder of the hour. Operator, we're ready for questions please.

Thank you.

(Operator Instructions)

Raj Denhoy, Jefferies.

Wonder if I could ask, several things to ask. Maybe I could just start with the number of centers in the United States in the quarter. I think you noted it was 290, which was a nice take-out, but I'm curious if you have any thoughts around what's behind that. Whether it's the availability of SAPIEN 3 in clinical trialing, or perhaps hospitals getting more comfortable with profitability? Any thoughts there would be helpful.

Yes. Thanks, Raj. Good question. I think it's just more of the same. There's continued interest on the part of these trial -- on the part of hospitals. They've been wanting to get involved. They've all been looking very hard at how they can comply with the NCD, and I think a number of them have found a way to clear the hurdles. That's the primary driver.

Okay. Maybe just for my follow-up, I know it's very early days, but Medtronic is now approved and coming here in the US. Any initial views on what they're doing in the marketplace? Have you seen anything yet? [Ruining] appetites there for you?

There's not much to report at this point, Raj. I can't say that we've really felt the presence very much at this point. So we're fortunate that we have this first-mover advantage, and we like the clinical preference that we think is going to be there. And so we're feeling pretty good at this point. We're certainly ready for them.

Good. I'll leave it there. Thank you.

David Roman, Goldman Sachs.

I want to come back to the return reversal question, and make sure I fully understand what numbers you intend to report over the course of this year. So as I look at the first quarter, the $500 million to $550 million number. Can you give us some sense as to what the return reversal impact is going to be in Q1, and what number you actually expect to show up in street models?

Sure. Eventually all of the return reserve will be reversed. And I can't predict how much of that will happen in the first quarter versus in quarters beyond, but all of it will be reversed as products are exchanged.

Yes. Isn't it fair to say, Scott, that in that estimate we really have taken the reserves out of it? That's our estimate of what's going to actually happen on it. So you'll see that in our non-GAAP results. And that's what our guidance was about.

I'm sorry if -- I can take this off-line later, but are you going to be reporting any non-GAAP revenue numbers for the fourth quarter? If I look at the gross profit, for example, the 72.9%, that's calculated off of $550 million number? Or $536 million number?

Well, the 72.9% is calculated off of $536 million. We're going to be reporting GAAP and non-GAAP sales as we do for any special items in the first quarter and beyond.

Okay. I got it. And then maybe a strategic question for you, Mike. As you thought about the list of upside drivers that are not factored into your guidance, I think you said litigation, mitral, and glucose monitoring, all three of which seem very far out. Can you talk about how you see 2014 unfolding, and what factors we can watch for to give clarity on a better outer-year growth profile than what your presenting for this year?

Sure. We probably have some upsides that could show up in 2014, could have to do with product approvals. There could be just continued date that continues to be presented from Edwards that's stronger than our competitors, but you're right in your observation that many of the upsides that I shared will occur possibly outside of 2014.

In 2014, I think one of the things that will be most interesting is, and there's a little list here, one within transcatheter heart valves, just how do we stack up competitively in Europe and in the US? How does Edwards do with SAPIEN 3 versus the new competitors that are going to show up in the US?

How does Edwards do with SAPIEN, especially SAPIEN XT, versus our first competitor after a couple of years? And then, that very nice momentum in surgical heart valves. How well does that continue? We feel like some of the factors were dragging the growth rate of Critical Care should be behind us that'll lift that growth rate. So I think there's a number of indicators to watch.

Okay. I'll get back in queue. Thank you.

Rick Wise, Stifel Nicholas.

Mike, maybe you could talk a little bit more about the European launch of SAPIEN 3. You obviously expressed considerable optimism. Maybe a little more color detail on the ramp, how quickly can it be -- is it going to be available in the major centers? Is this a share gainer? Does it open new accounts? And maybe put that in perspective relative to the other product trials that are underway. Does it blunt the impact there? Just again, some of those details.

Yes. We've got a pretty good supply out there, and we're converting people right now. There's strong excitement, and so people would like to go quickly. The features of this valve are something that they find very attractive. In terms of, will it be a share gainer? In many accounts, we are on the shelf with a competitor.

So this is a chance for us actually, for people to reach for SAPIEN 3 more often. So I think it does have an opportunity to have a share impact, probably pretty early on here. We think it really is a best-in-class, and we think once people try it that they're going to be excited about it. It's still early on, Rick. So it's tough to give you much more than that, but right now they're anxious to get their hands on it.

And it sounds like you're ready to supply. And the SAPIEN XT, I know it's always a difficult question. But you said quote, we expect approval in the next few months. And I'm sorry to look for meaning where there may be some or none, but are you feeling more optimistic today versus your comments in December? Approval in the next few months feels more optimistic to me, but maybe I'm looking for something that isn't there.

I think it's similar, Rick. We're just two months out from where we were before. So obviously here we are two months closer saying pretty much the same thing from a timing perspective. So I guess that does express some level of confidence, but we're still feeling pretty good about that. But it is a regulatory process. So we're never positive just when that will come.

Okay. Sounds like hopeful in the second quarter.

Yes, certainly.

Thanks.

Bruce Nudell, Credit Suisse.

Mike, when we think about the XT approval, should we be thinking about broad partner one approval inclusive of inoperable and operable?

Yes. We are hopeful that indeed when that approval comes, we're working with FDA. We ask for both, and we're hopeful that that's the way that it comes out. We think certainly that the data supports that, but we can't be sure.

And then one of the upstart competitors today announced the first in-man, successful first in-man in mitral. Could you briefly explain the circumstances around your timing, and you also alluded to the fact that it's a long-term opportunity with where commercial sales won't arise in the near-term? Around what time frame might we see successful commercialization of product?

Well, as I said earlier, we expect to begin shortly. Our compliments to them if they really do have some early success here. We chose to do our first in-human in places that have rigorous regulatory processes. And we've got some questions related to the pre-clinical data, but we believe we've answered all the questions and we really do believe that we're going to begin shortly.

So we feel good about this. This is a big opportunity, and we're anxious to get started to find out just exactly where we stand. I think the competitive landscape there is one that will unfold probably pretty deliberately over time. I think it's pretty tough to make a call of where anybody is competitively at this stage of the game.

Thanks so much.

Jason Mills, Canaccord Genuity.

First question is on your EPS guidance, Mike. What are the top two or three variables that you need more clarity on to narrow that range? And when do you expect that that clarity might come? Will it be on the first quarter call? Do you think it will take half a year? Maybe a little more color there.

Yes. Thanks, Jason. Probably the single biggest thing is going to be the approval of XT. Once we have clarity on the approval of XT in the US, that's probably the single outstanding variable. Second biggest to that is probably just how, as we get more clarity on how our competitors are behaving and their launches in Europe and the US, and maybe we'll get a little bit more clarity than we have today, but the single biggest one will be that. And I hope that we have it under our belt by the time we get to the second quarter call. That will put us in a position to have a shot here at tightening things up.

Okay, great. My follow-up, again on transcatheter valves. Sorry if I missed it, Mike, but did you give an ongoing procedural growth rate for you and for market in Europe? Just trying to get a sense for what that market's doing with the next-generation technology, and what you're expecting it to do with SAPIEN 3, whether or not you expect to see an acceleration there. And then the US follow-up on the first question, what's in your guidance, or your THV guidance, with respect to pricing, if any changes change is in there? Thanks, I'll get back in queue.

Jason, I'm going to make sure that I answer your questions accurately here as we go through it. So first of all, in Europe, what we specifically reported on was our OUS results. So OUS sales grew 28%, and that was driven by very strong transfemoral growth. If you peel it back, I would say Europe grew in the low teens for us in 2013, and so we're pretty pleased with that.

I think when we talked about it going into the year, we were expecting a market growth of around 10%, and our own growth to be less than that because of competitive reasons, and we certainly came out much stronger. Some of this driven by the real momentum that we have in the fourth quarter. So that's broadly where that stands. I don't know if that answers your question. I expect there to be pretty good growth in 2014 as well. I don't know, I would hope that it might be in the 10% range.

As it relates to pricing, we think our pricing has been pretty solid. We've noted in the past that we had an ASP decline that was probably in the 3% range, probably driven mostly by the volume discounting we do. With the advent of SAPIEN 3, we expect to be able to introduce those products at the same price as SAPIEN XT. So I think you should think that pricing is going to stay pretty stable in 2014.

Thanks, Mike.

Danielle Antalffy, Leerink Swann.

Just a quick question on valve sizing. I understand with SAPIEN XT you'll get, I believe, it's the 29-millimeter valves, so that helps fill out the sizing, makes you more competitive with CoreValve. How much does that increase the addressable market from a patient perspective, in your view? And then how much of the market will you still not be able to address versus your competitor, CoreValve?

The 29-millimeter valve, in our view, is very meaningful. I think if you think back to the days when we first introduced it in Europe, we saw a real uptick. We got it first in the transapical position, then transfemoral, and that picked up. And then it feels like a lot of the share that we're gaining Europe right now is in the 29-millimeter size. It seems to stack up pretty well competitively. So I don't know exactly what that percentage is. It probably is in the, I don't know, it's plus-20%, probably in the 29. But I would say the majority of patients get covered, between 23 to 29. We'd estimate that close to 95% of the patients are addressed.

Okay. Got it. Mike, not to harp on Mitral, but you've given a little bit of color in the past when we've come to visit you on how you guys are thinking about the Mitral timeline as far as getting from first demand to commercialization. Are you still thinking that, despite the delay, it's possible to tighten up that timeline versus what we saw with first-generation SAPIEN here in the US? Or is the 7- to 10-year timeline what we should be thinking about?

Danielle, I don't know how to explain this more clearly. We're really excited about Mitrals. It's a really big opportunity. We're beautifully positioned, but it is really hard to put timelines on it at this stage of the game. We really don't have our first in-human experience underneath our belt. And until we see what that looks like, we're just not going to know what kind of timeline. You could think optimistically that if everything is perfect then you just keep going right to CE Mark, but you very easily could be in a redesign as well. And we just don't know the answer to those questions yet. So I think it's premature, Danielle, to dial-in too many specific sales here in the near future.

Okay. Got it. Thanks, Mike.

Brooks West, Piper Jaffray.

Mike, can you remind us what your ASPs are for SAPIEN 3 in the clinical setting in the US? Said another way, if you're going to do 1,000 patients this year, what should we look at for US clinical revenues?

Yes. I think in most of our contracts, we price our clinical units around $25,000, Brooks. So if that helps.

Perfect. And then one on Japan. You did $4 million you said in Q4, maybe being slowed down by the certification process. I think Larry said at the analyst meeting that you would do $40 million to $50 million next year in Japan. Does that still seem achievable? And then does that become pretty backend loaded?

You know what? It feels to us that Japan is right on track, exactly what we expected. As I noted, there is this certification requirement. So we're thinking right now that we're going to get limited to adding four accounts per month. So from that perspective, yes it's backend loaded. But we feel good about the $40 million to $50 million range. That range is tracking, at least with the experience we have so far, which is I guess four months under our belt, it looks like that's stacking up just the way we thought it would.

Great. Thanks, Mike. And welcome onboard, Scott.

Larry Biegelsen, Wells Fargo.

Let me start, Mike, with comments you made earlier about clinical data that may help differentiate you from the competition in 2014. Can you talk about that a little bit, and specifically, we were intrigued to see this head-to-head study called the Choice study from Germany being presented as a late-breaker at ACC. Was that what you were referring to? Do you think that study's big enough to impact share? And I had one follow-up. Thanks.

We continue to be surprised with the data that's being collected out there. There are country registries that are going on. This study that you referenced coming out of Germany that's going to be presented at the ACC is one that's going to be interesting, and we don't know the results of that.

Then there's also quite a bit of data that's being presented now in the surgical space. Some good stuff for us, and some things that aren't necessarily complementary for some other valves of our competitors. And so broadly, we think we're on pretty solid ground here and like to think that the more that our products are studied, the more that the best of Edwards is going to show. But I wasn't trying to refer just to that study in Germany at the ACC, because we really don't know the outcome, but we're optimistic about it.

Mike, I just wanted to ask my follow-up question on the US TAVI market. If we look at your sales, excluding stocking the last three quarters, it's been in the $88 million to $91 million range. It's been flattish, if I'm doing the math right. And so if we take stocking out, you did about $345 million in the US this year. Why do you think it's been flattish sequentially the last three quarters? And what are you looking for in 2014 at this point for the US market, ex-stocking? You can put clinical in, because I think that is probably valid. But help us think about the market growth for the US in 2014, including CoreValve? And I'll drop, thanks.

A couple of things. One is, this was pretty -- the fourth quarter was pretty consistent with what we thought it was going to come out to be. I think when we provided our guidance we said it was going to be at the low end of the range that bottomed at $350 million, and pretty much came out that way. Some of it probably has to do with the limitations of SAPIEN. This is a pretty big valve, Larry. It's a 24 French system, and we think as you have systems that are easier to handle, it's going to be better for patients and better for clinicians, and we think that will certainly help. There was more to your question. I'm sorry?

Yes, expectations for market growth in 2015. On an apples-to-apples basis, if you want to just include clinicals, strip out stocking, whatever you feel is most helpful to give us some direction on market growth.

It's tough to know. At the Investor Conference we estimated that global growth in 2014 for THV would be in the 20% to 30% range. We didn't give an estimate for the US, and I think that reflects some of the uncertainty associated with these approvals. But I do think that as systems that can go through an 18 French introducer come out there that it's going to help the growth rate in the US market.

Thanks for taking the questions.

Ben Andrew, William Blair.

A quick question about the efforts to go back and work with clinics to improve their economics. Have you seen any traction in a subgroup of clinics yet, and how do you expect that to play out through the course of the year? And what impact does that have on your range of guidance?

Thanks, Ben. Yes, we're optimistic about this one. We have seen improvements. We think there are sites right now, and the biggest improvement that we note are in their length of stay. They've gotten, in many cases, motivated about this. They're talking about it, they're sharing best practices, and they're moving the needle.

I wouldn't be surprised to see more and more presentations in the future about how people are reacting. We hear about things anecdotally that are pretty impressive. And so we like the way things are moving right now, Ben. It's substantial movement from a year ago today.

Okay. And then changing gears quickly, on the request for an injunction in the US, given the domestic focus on patient access or patient harm potentially, and the design differences, I know you're not going to characterize a percentage odds of this, but is it actually likely that you can get an injunction from the courts in the United States, unlike in Germany?

Yes, it's a good question, Ben. One of the things that I think any judge would worry about is whether somehow patients were going to be denied therapy because of implementing an injunction. And one of the things that we would do is to certainly consider having appropriate carve-outs that protect patients so that no patient is ever in a position where they have to worry about getting therapy because an Edwards product doesn't suit their needs. And we think if we take that kind of a stance it only makes it a little easier for the judge here to draw a conclusion that an injunction is appropriate.

Thank you.

But I also say that if something like that were to happen, it's certainly an upside. It's not in our plans today.

Right. Thank you.

Kristen Stewart, Deutsche Bank.

I wanted to go back to the reserve adjustments, understanding how you guys are presenting it through the non-GAAP figures. Mike, I think you had mentioned for transcatheter valves, $93 million in the US. Is that excluding the reserve? Maybe you can give us what the reserve breaks out in terms of US and OUS. I'm assuming you guys are adding that back to the sales line and then adding it back to cost of goods? I'm just a little confused on the accounting there.

Sure. It's a $14 million reserve, roughly split between the US and Europe.

Okay. So Mike, all of the US sales of $93 million were adding back roughly, I guess, $7 million to the reported GAAP results from a sales basis?

So $93 million I think excludes the reserve, Kristin, so it doesn't count that.

Okay. And then what specifically was written off? You had mentioned there was in-process R&D charge that was excluded out as well. So, I guess, what does that relate to?

There was that investment actually, some of you may recall, it goes back to umbrella. We took a slight impairment associated with that purchase that we did, I don't know, that must be two years ago now.

Okay. Is that written off because you guys are not pursuing that technology, or it's not going to come at the maybe sales contribution that you thought before?

I think our belief is that it's a smaller opportunity than was in our original business model, and that caused us to modify its value.

Okay. And then last question. Any change in thoughts about cash usage? I know you guys have the share purchase program outstanding, but any thoughts on the share, considering a dividend or acquisitions to maybe diversify the sales profile?

Kristen, really no change in priorities for cash at this point.

Okay. Thank you.

Glenn Novarro, RBC Capital Markets.

Just one follow-up on Mitral. Just wanted to confirm the first in-man is still going to be a transapical. And if so, can you give us any update on a transfemoral approach?

You're right, Glenn. There's no change in what we said at our Investor Conference. It's the device we talked about then. Yes, it's a transapical delivery system. It's still large bore. Our longer-term plans are certainly to want to move this to a transfemoral, which would mean transseptal delivery, but there's some work to do and we really want to have our first in-man experience before we can really give you more specifics on that one.

But that would really help unlock the long-term potential, but it's kind of premature right now. We want to right now have a successful experience and be able to look back after 30 days and say that we've got a valve that's functioning the way it needs to.

And then a follow-up, you didn't give us the timeline for PARTNER 2a. I think the last patient came in last summer, two years of follow-up. So do we see those results toward the end of 2015?

Yes. I'm trying to recreate it here. I think P2a, remember that has a two-year endpoint. So let's see. David, do you recall when we -- it was September, October that we did it? So then you've got two years following that, Glenn. Is that -- does that answer your question?

Yes. I'm assuming there we get that data TCT or AHA of 2015, toward the end of 2015. Is that reasonable?

Yes. I didn't do the math on that one, but I can get back to you on that. But yes, it usually takes us, once we actually hit that two-year endpoint, it usually takes us a good quarter, maybe a little more, before we could put the data together and have it ready for publishing and have it out there.

Okay. All right. Thank you.

Mike Weinstein, JPMorgan.

Mike, I think the last patient follow was early October. So I would assume ACC at 2016. Let me make sure I'm clear on the reversal for the reserve. Having covered stent companies for years, we've seen reversals before. But I don't think we've seen a company reverse the bottom-line impact. So I want to make sure I understand how you're going to be treating that going forward. So we see a negative impact from these reversals on EPS where your GAAP to non-GAAP adjustments over the course of this year being negative relative to the positive adjustment that occurred in the fourth quarter?

Sure. Mike, it's Scott. Most of the impact of the reversal comes at the gross profit line and the operating profit line, and it all flows right down to that $0.10 a share in diluted EPS.

Yes, I understand that. So you credited the 2013 P&L with $0.10 for product that you sold but didn't implant. And so as you go back with new product that you're going to sell again, and then you're going to do what on the EPS line? What's the bridge going to be from GAAP to non-GAAP in 2014 since you just added back that $0.10 in 2013?

We're going to pull it out in both years. Our intention is to reflect the impact of what the business would look like if we didn't have the swap and what the impact to the business looks like with the swap.

This is Mike. It's always risky when I get in here and answer financial questions, but what was sold in the fourth quarter is really what was sold, and it's typical sales. What the accounting convention we understand is, if you believe that there's going to be this sort of exchange in the future, you pull it out of today's sales, and then when it actually goes back and you put it back in, that would just confuse our presentation of results. And so that's why we're going to end up showing this both ways here. We're going to pull this exchange out and show you what it is discreetly, both this year when we're taking the downer and next year when it comes back and it's the upper, we'll also take it out.

Okay. So you'll take the EPS contribution from 2013 out of 2014, if we're all supposed to be using non-GAAP numbers here?

Yes. Top to bottom, Mike, it all comes out.

Okay. And then one question. The first quarter guidance, how do you get to the lower half of that range? It would seem, if the roughly $3 is the guidance for 2014, obviously recognizing that's a very much a ballpark figure, it would seem that guiding from down 2% to down 16% in EPS, the down 16% type number would seem to be extreme, given that the first quarter the competitor launching. How do you -- how would you get to the lower half of that range in the first quarter?

I don't know. Mike, there's a wide range. What we've tried to do is to represent what we think a full range of possibilities are. And this is, I suppose, the bottom of the range is if a lot of things go wrong and top of the range is if a lot of things go right. I'm not going to lay out detailed specifics on that. But at this stage when there was the uncertainty associated when Edwards was going to be approved, then the uncertainty of exactly how the rest of the questions about the rollout of competitor products exists, we thought it was best to give you what our feeling was as a realistic wide range.

Okay. Thanks for taking the questions.

David Lewis, Morgan Stanley.

It's Steve Beuchaw here for David. First of all, Scott, welcome to the call.

Thanks, Steve.

Two quick ones. One is on SAPIEN 3, the full CE Mark study data, could you give us a sense of when we might expect to see that data, and is it safe to say that expectations for best-in-class leak data/low stroke appropriate there?

Well, in terms of when it's going to be available, we'd say most likely at PCR. That would be our estimate, although again these clinicians tend to operate pretty independently. We can't speculate exactly what it's going to say, but the enthusiasm's been high. And we're thinking that the results are going to look pretty positive, based on what we've seen in the very early data.

Got it. And then one on the US market. Mike, in your comments, thinking back to TCT and the Analyst Day, you sounded very comfortable with a view that pricing in the US would be, let's call it, disciplined. Is there any higher or lower level of comfort that you're feeling, now that you've seen the competition on the market in the US as it relates to where pricing trends?

Yes. Thanks, Steve. It's going to be interesting to us. We just take what we've heard externally, the same maybe that you've heard is that we don't expect there to be a dramatic change in the pricing of our competitors, but we really don't know. We're not anticipating that there's going to be a big change in pricing. There's -- remember there was a very large investment on the part of anybody to get to the US market. This will only be the second competitor in the US market, and there's nobody on the near horizon for coming -- that would be coming to the market. So I don't know if there's a lot of incentive to change pricing dramatically.

Thanks. Very helpful. Have a great afternoon.

Ladies and gentlemen, due to time constraints we will be only able to take one final question. Bob Hopkins, Bank of America.

So two quick ones. First of all, Mike, in the prepared comments you talked a lot about how ready the organization is for the CoreValve launch. I was wondering if you could add any color to that in terms of how do you defend against CoreValve? What is the strategy? Any details you'd be willing to provide there would be helpful.

Yes. Thanks very much, Bob. I'm not sure that I want to go into a detailed tactical approach, but other than say that we think the body of evidence that's around SAPIEN, and especially SAPIEN XT, provides a tremendous foundation for which we can compete. And when you combine that with our willingness to upgrade people from SAPIEN to SAPIEN XT in a pretty painless and rapid fashion, we think it puts us in a position to be very strong defensively.

As you know from our P&L, we have -- we are continuing our spending rate in terms of our sales and marketing resources in the US. We haven't pulled back on that at all. And simply the fact that we have a first-mover advantage in that we've been in the marketplace for a couple of years. We like to think we've treated our customers with a lot of respect and a lot of care. We think that is only helpful at a time like this when they're going to have a choice.

Okay. Thanks. I understand the rationale for not disclosing too much there, but curious if you wanted to add anything. And then the second question was on the European market for TAVR, and if you could provide a little bit more color on why you think it did better than you originally anticipated? And are there any read-throughs there for the US market long-term? Just trying to understand why the better growth in Europe.

Yes. It was very encouraging from our point of view. I'm not sure that we really saw it. There were a couple of things that I thought were noteworthy. One is that we saw not only -- we've typically seen Germany grow nicely, and that continues to be a nice part of our growth. But we watched France and Italy and the UK all put up improved growth numbers, and so that was meaningful to us.

From a share perspective, we performed very well in transfemoral units. This was very strong growth. And again, it seems that the 29-millimeter XT is continuing to be a very popular product with customers. So I guess that's all I'd really add. Southern Europe has gone from being a drag to growing again. Maybe that's part of it as well, Bob.

Great. That's helpful color. Thanks so much.

Sure. Okay. Well, thank you all for your continued interest in Edwards. Scott and David and I welcome any additional questions by telephone. So 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.

If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and use conference number 13574369. Let me repeat those numbers. Dial 877-660-6853 or 201-612-7415, and the conference number is 13574369. In addition, an audio replay will be archived on the Investor Relations section of our website. Thank you very much.

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