愛德華生命科學 (EW) 2014 Q1 法說會逐字稿

Greetings and welcome to the Edwards Lifesciences First-Quarter 2014 Earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce Mr. David Erickson, Vice President of Investor Relations. Thank you.

Mr. Erickson, you may now begin.

Welcome and thank you for joining us today.

Just after the close of regular trading, we released our First-Quarter 2014 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 industry growth expectations, competitive impacts, new products, litigation 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, 2013, and our other SEC filings which are available on our website at Edwards.com.

Also, a quick reminder that when we use 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.

Now I'll turn the call over to Mike Mussallem.

Mike?

Thank you, David.

We're pleased to report a robust start to 2014, with first-quarter results reflecting better-than-expected THV results and solid bottom-line performance. This quarter THV growth in Europe was very strong, even better than expected. This performance was driven by strong procedural growth and share gains with SAPIEN XT and the launch of SAPIEN 3, which is off to a great start.

In the US, we're still waiting approval of SAPIEN XT, which is important as it will provide greater options for US patients who can benefit from the substantial enhancements in this proven platform. And even though we continue to expect competitive headwinds to temper growth in 2014, we remain confident that our innovative pipeline of products will enable us to lift growth in 2015 and beyond.

Now turning to quarterly specifics, total underlying sales grew 8% to $529 million. These results exclude the impacts of foreign exchange and the THV sales return reserve, which Scott will elaborate on later.

In transcatheter valves, underlying global sales grew 14%, driven by higher-than-planned O-US sales, which accounted for approximately 60% of the total sales. THV sales in the US were roughly in line with our expectations. Overall, pricing was stable.

Outside the US, THV sales grew 33% on an underlying basis, driven by exceptionally strong growth in Europe and the ongoing rollout of SAPIEN XT in Japan. The positive procedural growth trends in Europe that we saw in the second half of last year further strengthened so far this year. And we estimate this drove well over half of our O-US growth in the quarter.

In the first quarter in Europe, where all our latest competitive products are available, we feel it was noteworthy that SAPIEN XT continued to gain market share in accounts not yet converted to SAPIEN 3. More recent competitors still are having limited impact in the region.

Our SAPIEN 3 valve is receiving a very favorable response from clinicians. Noted for its lower profile and the ability to address paravalvular leak, SAPIEN 3 represents our best technology to date. And we believe it is helping to stimulate further market growth. With just two months of the launch underway, SAPIEN 3 accounted for almost one-third of our O-US sales this quarter.

In Japan, we're pleased with how our launch of SAPIEN XT is progressing. In our second quarter of launch, THV sales in that country were $7 million. And we continue to expect $40 million to $50 million of SAPIEN XT sales this year.

In the US, underlying THV commercial and clinical sales were $78 million for the quarter, which also included a negative net stocking amount that reduced this figure by approximately 10%. While there were limited stocking sales this quarter, they were more than offset by our rapid conversion of customers to consignment. Excluding the impact of net stocking in both periods, usage grew in the mid-teens year over year.

During the quarter we continued to add new commercial sites and remain on track with our previously-stated goal to add 45 to 65 new sites during 2014. Clinical sales were comparable to last quarter.

As evidenced in Europe where TAVR has been available since 2007, we believe the US opportunity is large. And we continue to demonstrate, and will continue to demonstrate, strong growth. This confidence is supported by the growing body of impressive clinical evidence, advancements in procedural technique and patient selection, as well as new devices that can expand access to more patients.

Turning to our pipeline, we are confident that we will receive FDA approval of our SAPIEN XT system this quarter. And we are prepared to launch immediately. Receiving this approval is important, and it will provide greater options for patients who can benefit from the substantial enhancements of this proven platform.

Enrollment in our US SAPIEN 3 trial of 1,000 intermediate-risk patients is on track to be completed by the end of the year. As a reminder, enrollment in the high-risk and inoperable patient arm is complete; and we continue to estimate FDA approval for these patients in 2016.

At EuroPCR meeting next month, clinicians will present data on the early experience with SAPIEN 3. We expect these data will demonstrate a notable reduction in TV leak, an important complication. In the earliest clinical experience, a higher-than-expected pacemaker rate was observed, which has subsequently been addressed by the valve placement technique. In our sizable commercial experience, pacemaker rates have returned to best-in-class levels.

In summary, we're pleased with our transcatheter sales results in Europe, Japan and the US this quarter. And continue to believe global TAVR procedures will grow 15% to 20% annually over the longer term. We will provide updated guidance at our next earnings update once SAPIEN XT is approved.

Turning to the Surgical Heart Valve Therapy product group, sales were $203 million, up 4% on an underlying basis, driven by healthy unit growth, partially offset by a small ASP decline. The decline was a result of a change in regional selling mix as pricing within each region remains stable.

In the US, surgical valve sales grew 6% this quarter, led by units. We believe the favorable surgical valve market trends continued this quarter with an increase in overall procedures in low single digits. In addition, we believe many physicians continue to return to the PERIMOUNT valve family after trying competitor products.

Earlier this month, we were pleased to receive CE mark for our advanced INTUITY Elite Valve System. We have initiated the launch in Europe. At the upcoming April AATS meeting in Toronto, three-year data from the European CE mark TRITON Trial will be presented. We expect O-US sales of INTUITY Elite to gain momentum as 2014 progresses.

In the US, we are continuing to enroll patients in our TRANSFORM trial for INTUITY Elite, and our COMMENCE trial studying GLX, our advanced tissue platform on aortic and mitral Magna Ease valves. Both remain on track to be completed by the end of the year.

We're also pleased that 25-year follow-up data with our valve in the mitral position has now been published in the Journal of Thoracic and Cardiovascular Surgery. This series of data demonstrated best-in-class valve durability in these 450 patients. Given the solid start to the year and favorable market conditions, we continue to expect underlying sales growth of this product group to be in the 4% to 7% range in 2014, driven by additional traction of INTUITY Elite in Europe.

Turning to the Critical Care product group, total sales for the quarter was $131 million, which grew 5% on an underlying basis. Growth was driven by core hemodynamic products outside the US and enhanced surgical recovery products in the US. As a reminder, ESR includes our minimally and non-invasive products such as FloTrac and ClearSight.

During the quarter, we initiated the European launch of ClearSight, our integrated non-invasive monitoring technology. We continue to believe ClearSight is an attractive product for hospitals that are looking for a non-invasive technology to monitor a greater number of patients. We continue to expect a US launch of ClearSight in the third quarter of this year. Given the strong start to the year, we expect to build on our strong leadership position and deliver underlying sales growth of 3% to 6%, aided by the growing adoption of ESR, which includes our new ClearSight product.

During the quarter we reported that we successfully completed the first three human implants of our FORTIS mitral transcatheter heart valve, which were performed in February and March by the heart team at St. Thomas' Hospital in London. Clinicians are treating additional patients, and we expect them to report clinical results at future medical meetings, including a late-breaker presentation at EuroPCR next month. Although durable success will not be known without significantly more experience and longer-term follow-up, we believe mitral valve disease is under-treated worldwide. And there's a particular need among patients who are too high risk to benefit from traditional surgical options.

Before we get into financials, I'd like to recap how we view the protection of intellectual property. We expect to compete primarily on the merits of our technology. For over a decade, Edwards has invested more than $1 billion in TAVR technologies. An important element to support the long-term investments needed to bring innovation to patients is the knowledge that our inventions will be honored under the law. This has prompted us to vigorously defend these inventions.

As you know, there's been a lot of recent activity on the foundational THV patents in the US. We've received another interim patent term extension for the Andersen patent to May of 2015. And our request for a permanent extension to March 2016 remains under consideration at the FDA.

As has been well reported, a federal district court, in response to Medtronic's continued willful infringement, ordered a preliminary injunction. The appeals court proposed postponed the effectiveness of this injunction pending further notice. A decision on whether the injunction was properly granted is expected in Q3. Regardless of the outcome, we remain committed to ensuring that patients continue to have access to appropriate transcatheter therapy.

Earlier in the quarter, another federal jury found Medtronic to willfully infringe a second Edwards THV patent, and awarded past damages of $394 million to Edwards. This Cribier patent is valid until the end of 2017. Although the enforcement of our IP represents potential financial upside for our Company, we have not included any benefit from patent litigation in our guidance.

And now I'll turn the call over to Scott.

Thanks, Mike.

And hello, everyone.

This quarter our non-GAAP diluted earnings per share grew to $0.76. Excluding the change in the treatment of intellectual property litigation, earnings per share would have been $0.04 lower. I'll take a minute to explain the accounting change.

Previously, litigation costs related to protecting Edwards' intellectual property were capitalized and amortized over the life of the related IP. Beginning in 2014, to improve comparability, increase visibility, and better align with industry peers, we began expensing these costs as incurred. All IP litigation expenses are reflected on a new line in our statement of operations called intellectual property litigation expense or income.

Amounts in this new line also include IP-related awards, such as the initial payment we received from Medtronic for patent infringement in the first quarter of 2013. The timing and magnitude of these fees and awards are difficult to predict and may vary significantly from period to period. Therefore, starting this quarter, non-GAAP earnings exclude all IP litigation expenses and awards.

Regarding the full-year 2014 impact of this new treatment, our original guidance assumed we would incur about $0.10 per share in litigation expenses that we will now exclude when we report adjusted earnings per share. As a result, our guidance for the year is a range around $3.10 per share under the new accounting. We've posted to our website a schedule detailing the financial impact for the past five years.

Separately, today we also posted on our website supplemental information detailing the quarterly impact of the sales return reserve for our transcatheter valve products. We announced last quarter that as Edwards launches SAPIEN 3 in Europe and SAPIEN XT in the US, we will exchange previously-sold transcatheter valves for these more advanced technologies.

Accounting rules require that we record a reserve against sales of valves that we forecast will be exchanged for next-generation products in the future. And require that we reverse this reserve when we ship the replacement product. In order to be transparent and to improve comparability of our quarterly transcatheter heart valve sales, we are providing the impact of this reserve, which in this first quarter reduced our THV sales by a net $6 million, from $195 million to $189 million.

In addition, we record a separate reserve for the cost of prior-generation THV products that will not be sold. This reserve will not reverse in the future. And since it's a write-off related to the product exchange, we excluded this special expense from non-GAAP profits.

The impact of this write-off reduced our gross profit margin by approximately 200 basis points in the first quarter. And the combined impact of these two THV reserves reduced our GAAP EPS by $0.10 in the first quarter. Again, further details are available in a supplemental schedule on our website.

For the quarter, our GAAP gross profit margin was 72.1%, compared to 75.6% in the same period last year. This reduction was driven by the approximate 200-basis-point impact from the THV product exchanges, higher manufacturing costs, and weaker currencies. For the full year 2014, we continue to expect our gross profit margin, excluding special items, to be approximately 73%, reflecting headwinds from our currency contracts in the second half of the year.

First quarter Selling, General and Administrative expenses were $197 million, or 37.7% of sales, an increase of 8% over the prior year. This increase was driven primarily by Japan and US transcatheter valve-related expenses, and a larger accrual for incentive compensation. We continue to expect SG&A, excluding special items, to be between 37% and 38% of sales for the full year. We are actively working to leverage our scale so that over time revenues grow faster than expenses.

We continue to aggressively invest in Research and Development. And spending in the quarter grew 8% to $86 million, or 16.4% of sales. This increase was primarily the result of continued investments in heart valve clinical studies and transcatheter research and development products. We expect our R&D investments to remain at approximately 16% of sales for the full year.

During the first quarter, we recorded a $7.5 million expense to settle all past and future obligations related to one of our intellectual property agreements. This special charge decreased diluted GAAP earnings per share by $0.06. And this one-time expense was excluded from the calculation of non-GAAP EPS, which totaled $0.76.

Net interest expense for the quarter increased to $3.5 million, primarily as a result of our $600 million issuance of five-year notes last October. 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 22%. Excluding the impact from special items, our adjusted tax rate was 22.5%. We continue to expect our full-year tax rate, excluding special items, to be between 20% to 22%, which anticipates renewal of the federal Research and Development tax credit in the fourth quarter.

Foreign exchange rates decreased first quarter sales by $6 million compared to the prior year. Compared to our recent guidance, FX rates had less than a $0.01 impact on earnings per share. Looking forward, with the slight improvement in the yen and euro foreign exchange rates, at current rates we now expect only a $10 million negative impact to full-year sales compared to last year.

Free cash flow generated during the quarter was $125 million. We define this as cash flow from operating activities of $139 million less capital spending of $14 million. For 2014, excluding special items, we continue to expect free cash flow to be between $325 million and $425 million.

Turning to our 2014 guidance, for sales, we are reiterating our previous guidance for all of our product lines. Driven by our strong performance in transcatheter valves, we continue to expect full-year total sales of $2.05 billion to $2.25 billion.

For the Surgical Heart Valve Therapy group, we continue to expect sales of $810 million to $850 million. In Transcatheter Heart Valves, we expect sales of $700 million to $820 million. And in the Critical Care product group, we continue to expect sales of $535 million to $575 million.

As I mentioned earlier, our guidance for non-GAAP earnings per share is a range around $3.10. The increase over our previous guidance is a result of the assumed impact of the change in treatment of intellectual property litigation.

As we've said previously, we planned to return capital to shareholders by utilizing most of our budgeted 2014 free cash flow to repurchase shares early in 2014. We actually repurchased 4.4 million shares for $300 million in the first quarter. And we expect full-year diluted shares outstanding to be approximately 108 million shares.

For the second quarter 2014, we project total sales to be between $525 million and $565 million, and diluted earnings per share, excluding special items, to be between $0.71 and $0.81.

And with that, I'll hand it back to Mike.

Thanks, Scott.

As the transcatheter valve procedures continue to expand and we further strengthen our competitive position with innovative new technologies, we remain as optimistic as ever about the long-term growth opportunity represented by transcatheter valves. Edwards remains dedicated to investing in transformational structural heart disease therapies and critical care technologies for clinicians and their patients around the world.

And with that, I'll turn it 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 as we can during the remainder of the hour.

Operator, we're ready for questions please.

(Operator Instructions)

Larry Biegelsen, Wells Fargo.

Mike, just one clarification. The mid teens usage year over year for TAVI in the United States, was that for you guys or for the market?

That was for us, Larry.

So, I'm having trouble, maybe it's something we can take off-line if you don't have the numbers handy, but the $78 million for clinical and commercial, how are you getting to the mid teens usage growth year over year?

I think we mentioned, Larry, the clinical sales were comparable to last quarter. I think last quarter they were around $13 million. And the net stocking was a decrease to that of approximately 10%.

So, if you put those together, you'd back into commercial sales that were pretty close to the same numbers as the reported sales. Commercial sales being in that $77 million, $78 million range.

I got it. So, the net stocking is not the $7 million O-US reversal. That's separate.

Completely. Exactly, Larry. That's completely separate. The net stocking was about a 10% decrease that was separate from the reversal.

Got it. And then just for my second question then, on SAPIEN XT, do you still feel good about getting both high risk and inoperable as well as the 29-millimeter valve when XT is first approved? Thanks.

I think we've been vocal about that in the past. We have requested the 29-millimeter and the high risk indication. But obviously it's subject to the FDA's decision.

Thanks for taking the question.

Rick Wise, Stifel.

A couple things. When you look at Europe and the rollout of SAPIEN 3, I think I heard you say that roughly a third of your sales are SAPIEN 3. How do we think about the mix in Europe going forward? Do you expect 100% conversion to SAPIEN 3? And maybe how long does that take?

Thanks, Rick. I think as I noted, we're about two months into the SAPIEN 3 launch. And what we said is about a third of our O-US sales was SAPIEN 3. So, that would be actually a little higher than that in Europe.

We think that's going to go pretty fast. It might take all year for it to happen, but we largely think when people have an option to go to SAPIEN 3, they will go there. And so, that will happen. But we're just at the early stage of that. Does that answer your question?

Yes. And, Mike, I think logic would have suggested that XT would get approval mid year. You've said that. But you're sounding so much more concretely confident in a second quarter approval. Can you share with us why that confidence and why you're saying it so strongly now?

We would have hoped that we would have had it approved by now, Rick. But we are confident that we're going to receive it this quarter. I don't have anything specific to add about the process, but as you can imagine we're pretty far along in that process at this time.

Okay. Thank you very much.

Bruce Nudell, Credit Suisse.

Mike, one of the things that we picked up clinically from clinical sources at ACC was speculation that, given the strength of TAVI, the results as a class, that it is conceivable to have PARTNER IIA conceivably looked at on a one-year follow-up as opposed to two years. Is that even remotely possible?

I think I've commented on this in the past. We really don't know, is the short answer. We have a two-year endpoint on that and I would still continue, from the purpose of how you do your estimations, to continue to anticipate that. Obviously, we think there is some opportunity. We would consider that as an alternative but I don't have anything that can provide clarification at this point, Bruce.

Fair enough. And there was a lot of back and forth legally. My read of what the original judge said was that he was considering the uses of with regards to the extension, he was viewing it pretty broadly. Could you comment on that aspect of this argument as to whether or not the patent Andersen applies broadly to the general use of SAPIEN, irrespective of transfemoral, irrespective of size, et cetera?

Yes, there are a couple of things. Judge Sleet, the federal judge at the district level, has already ruled that he believes that this is worthy of an injunction. So, he's already ruled on that. That is being appealed.

Separate from that, there is this process that goes on that says how long will that extension go on? And what I reported now is that we're extended until May of 2015, and we have petitioned to go to March of 2016. So does that answer --?

No. I guess the counterargument was that it should be parsed just to the FDA approved indication at that instant, when the patent expired. Any comment on that?

We don't think Medtronic's arguments have much merit in that regard. And we think that Judge Sleet has already agreed with our position. This is not something that is being litigated.

Thanks so much, Mike.

David Roman, Goldman Sachs.

I wanted maybe to start with a follow-up just on the underlying growth of the US market. I know you talked about mid teens and obviously there's some estimates out there for whatever Medtronic is going to do. But I'm wondering, can you give us some perspective on where we are in tapping out market potential with the current sized valve on the market, meaning SAPIEN? And any sense as to how much additional potential there is from having smaller valves on the market; and maybe how many patients are getting turned away for procedures now, or there's insufficient vascular access. Anything to help us understand the potential reacceleration that could come from having 18 French-sized devices on the market?

Thanks very much, David. Broadly, even if it was just SAPIEN in the market, we think the market would do some growing. But we think that there is some significant uptick will come from having valves that will treat patients with larger annulus. So, for example if our 29-millimeter valves were available, like what happened in Europe, we thought there was substantial uptick in market growth with that 29-millimeter valve.

Separate from that is just the access issue. One of the challenges associated with the SAPIEN platform, which is our earliest generation, it's the only country that we still sell it in, is this large profile. And we think when we get down to it, 18 French profile like in SAPIEN XT, that will also be an accelerator of the market. So we think that's meaningful. Let alone when you get to something like SAPIEN 3.

And to follow-up on that, if I throw out a number that some of the survey data that we've collected would show, that 20% to 30% of patients showing up for procedures are getting turned away because of insufficient vascular access, how would you respond to a number like that?

One of the things that we see, and maybe one of the ways to look at it, David, it's hard for me to be absolutely quantitative on this, is we're seeing over 50%. Sometimes as close as 60% of procedures being done transapically right now with the SAPIEN system. Once we are in Europe, and well penetrated with XT, that moves to more of a 70-30 split. And we're watching that move again with SAPIEN 3, to some kind of higher number, probably in excess of 80-20, maybe even 85-15. So it gives you some kind of signal about what happens when you get these smaller delivery profiles.

That's really helpful. And just one quick gross margin question for Scott. I know there are a lot of moving parts here, with the FX hedging contracts in the back half of the year, and then manufacturing inefficiencies. Is there any way you could help us think about what is the underlying product gross margin of the business in the context of that 73% number you expect to report?

It's a good question. It's something that we've really tried to shy away from in terms of reporting product line gross profitability. And, so, we've been intentionally vague about it, but have tried to give you a little bit of a road map to at least see through the impact of this sales swap reserve. But beyond that, we just can't get into any of the details about what's the profitability of different SAPIEN products and surgical valves, and so on.

Okay. Understood. Thank you.

Raj Denhoy, Jefferies.

Wonder if I could ask about the US market. I don't think you gave the number of centers in the quarter. Maybe you could provide that.

We didn't, Raj. Thanks for the question. We're trying to get off specific center counts.

One of the things that we did say, though, is that we're on track to meet our previously stated goal of 45 to 65 new centers in the year. So, we had a nice uptick in centers in the quarter that was very consistent with being able to stay within that target.

Okay. Maybe I could just ask about Europe. You gave some very positive commentary about both procedures being strong, but then also some share gains. And I'm curious if you could maybe offer some thoughts around what's happening in Europe, particularly on the procedures side. Are you seeing further expansion of transcatheter valves into surgical procedures? Is it more geographic expansion? Some detail would be helpful.

Sure. I think I noted the growth in Europe, it seemed like it had picked up in the second half of last year, and we think Q1 was even stronger than that, stronger than we had expected. That growth rate must have moved into the mid teens at this point. Growth seemed to be spread across the continent. So, many countries, pretty much all the countries we're engaged, including the south of Europe.

We attribute it to a combination of just the growing body of impressive clinical evidence, but also, in particular because of SAPIEN 3's lower profile in the TV leak solution; we think that may start to stimulate some clinicians to move a little faster than they might have in the past, although it's a little early to say that decisively.

And I know it's a difficult question, but you don't have a sense of where some of the more established markets, like Germany, may be in terms of penetration at this point?

No. Germany, as I think well noted, that the treatment rate in Germany is much higher than many of the other countries in Europe. But here it is, continuing to grow in double digits. So, I don't know how you'd characterize how far along that is. It's still going.

That's helpful. Thank you.

Jason Mills, Canaccord.

If you don't mind sticking with Europe for a second. If we assume, as you mentioned, that the second half of last year is when we started to see perhaps a bit of an acceleration in the European market, we'll anniversary that towards the back end of the year. So I'm just wondering if you could give us the sense for, over these last three quarters, how the, for lack of a better term, same-store sales procedure growth has gone? Some of our researchers suggest you're doing really well in markets that maybe you weren't in 12 to 15 months ago in other regions of Europe and Eastern Europe, et cetera.

And also, my second question, say, outside the US, a lot of focus on the US. I'll say outside the US and Japan, just on a qualitative and a quantitative basis, how is the development of that market going relative to what you thought it would be at this point?

Okay. Thanks, Jason. I want to make sure that answer your question correctly in Europe, so let me take a shot at it and you tell me whether I've gotten there.

As I noted, it was pretty broad-based in Europe. And even though we have had pretty consistent growth in a big place like Germany, the fact that countries like France really picked up. And that's one that has very little SAPIEN 3 at this point. And the fact that we saw southern Europe pick up, as well. That's noteworthy. And the UK, for that matter.

So, to picture it to have the kind of growth that we experienced in Europe, it needs to be pretty broad-based and we did see that. It's not just in the usual suspects. It's a little broader than that.

We're still early in the launch of SAPIEN 3 with only two months of sales. But, again, that one is going to drive more growth further on in the year. Comparisons will get tougher later on in the year, so that may affect growth rates, Jason, as you correctly noted. But at the same time, we'll see if the SAPIEN 3 effect has some impact on lifting the market.

In Japan, it's pretty much going just the way that we thought it would go. The fact that we have $7 million worth of sales in the first quarter is very consistent with the way we think that ramp will look in ramping toward $45 million to $55 million. The addition of accounts, which we suggested would be around four accounts per month, is going very consistently.

I don't know, I may have misstated what our growth rate was in Japan. It was $40 million to $50 million, I think is what we projected. Does that get at your questions?

Yes. Going back to the first one, what I'm asking is if you could break out what sorts of growth rates you were seeing from increased utilization, of procedure growth, same-store sales. And then what incremental revenue you're getting from adding new centers that weren't in the system this time last year.

A few things. One is, most of the growth is coming from existing centers. There's no doubt about that. There are some new centers, I think particularly in France, but most of it's coming from existing centers.

I think, as we noted, that where even before we launch X.3, in the accounts where XT is available and not SAPIEN 3, we're watching XT gain some market share. So, we have also experienced that. And I guess that probably gets at the key part of the question, Jason.

Thanks, Mike.

Danielle Antalffy, Leerink Partners.

I was just hoping to get some more color on US market dynamics in the quarter. Obviously this was your first quarter with a competitive valve on the market. And I was just wondering if you could provide any color about total market growth, so we could potentially back into market shares here, or give us anything on that front to go on.

Thanks, Danielle. I would say so far it's probably gone pretty much the way we expected. We don't give specific share assumptions, but we had that first mover advantage and we think there's a lot of clinical preference that goes along with that.

It's going to be important for us to get XT. Once that's approved, we think that's going to be important. The fact that we don't have XT right now means that we feel particularly some impact on these larger sizes. But short of that, I don't know that there's much else that is out of what you would expect.

Okay. And if I could follow up on that, Mike, any sense of how many, and I guess David or someone might have touched on this earlier, how many of those larger sizes are out there and may have gotten treated in the quarter? What I'm asking is, how much could market growth actually have increased because of treating a backlog of larger-sized patients? Or maybe not increased and the market shifted to larger sizes to work through the backlog and we could see some stabilization going forward once the larger-sized valves are worked through? Any perspective there?

No, not really. It's really hard to say. It's a smaller percentage of patients. And, again, if those were going to competitive products, we would probably have a little less insight on it, as well.

Great, okay. And one more question. Just looking at -- EU market growth has accelerated really nicely here. It seems like it's actually sustainable. As you see new valves hit, next-generation valves, hit the US market; so XT and then eventually hopefully SAPIEN 3, and some competitive valves, as well, do you think that that level of growth acceleration is at all representative of what we could see in the US? Or is US going to be just totally capped by CMS and FDA? I would love some perspective there to handicap longer-term growth here.

I think the fact that there are more competitors, that may have some lift. But the biggest thing about new devices is the fact that both of you have the lower profile on the way. And I think that's very attractive. And when you have larger annulus sizes that could be treated, those things are meaningful in terms of lifting the market.

When you combine it with the fact that the evidence is just continuing to build, every time we hear presentations, for the most part, it's demonstrating that it's better and better. We know that patients prefer this option. And so we think that will drive growth. And I think we've been pretty vocal in terms of what we think the growth can do in the long term.

When I reflect back at some of these clinical trials that we've been involved in, when people get randomized to surgery, we even find 10% of those patients often will opt out of the trial rather than have surgery. It tells you a little bit about the mindset of these patients and their preference for catheter-based options.

Okay. Thank you so much.

Brooks West, Piper Jaffray.

Mike, just a couple quick ones for me. Can you remind us, what are the sizes of SAPIEN 3 that are available in Europe right now?

In Europe, the 23 millimeter, 26 millimeter, and 29 millimeter is available. The 20 millimeter is still in a study. That's enrolled slowly. And we expect that, I think, sometime in 2015.

Okay. And then just circling back to your comments on data that might be at EuroPCR, any more detail on maybe the size of the data sets we might see on SAPIEN 3, or any other detail on some of the clinical experience that might be shared? And then did you mention, are we going to see anything more on percutaneous mitral from you guys at PCR?

A couple things. One, in terms of SAPIEN 3, I think we'll see some of the CE mark data on SAPIEN 3. Additionally, and I'm not sure about this, we may see some data from John Webb on his experience, or some of the Canadian experience, on SAPIEN 3. But I think it's not going to be a huge data set at this point, but it will be a good indicator.

There is a late-breaker presentation that's planned at EuroPCR for our FORTIS mitral valve. That will obviously be a small experience at this point but there is a plan for a presentation.

Great. Thanks.

David Lewis, Morgan Stanley.

Mike, you sounded very positive, obviously, on XT and 29 millimeter. And I wonder, if you think about ongoing legal process, how important are XT and 29 millimeter, either to your ongoing negotiation with Medtronic here coming up in May, as well as the federal process? And maybe you could just help us understand if you were to be successful in getting 29 millimeter and XT what percent of the market at that point do you think that you treat?

A couple of things. As it relates to the legal rulings and so forth, I think there's no doubt there's been an infringement. You've seen now jury trials that have talked about willful infringement. And that's independent of sizes. That's just taking a look at what the history is.

When it comes time to actually imply an injunction, one of the things that the judge has chosen to look at is trading off patent protection versus some of these safety issues. And when we don't have SAPIEN XT available, we aren't able to treat as broad a range of patients. And so XT becomes more meaningful in that discussion when you talk about limiting it. Does that end up answering the question, David?

Mike, just specifically, do you have a sense of, if you get 29 in XT, what percent of the patients you think you'd treat here in the US? Is that number 95%, 90%?

A vast majority, greater than 90%. Maybe 95%. We think it's going to be a big number.

Okay. And then just on your mitral timing, Mike, there's another company with a first-generation mitral valve with first-in-man implant. Can you just talk to where you are in that program, and where we can start thinking about a CE mark trial? Or whether you're comfortable that you've locked the design and you can move into a larger trial versus single site or single patient experiences?

Yes. We're still early in this, is the short answer. And it's hard to have a good feel for durable success without significantly more experience, more longer-term follow-up than we have, or any of the competitors at this point. So, this is one that I think is going to bear watching closely, David. It's too early at this stage of the game to fully judge the value or competitiveness of any program, ours included.

So, if I pushed you to 2015 CE mark initiation of trial, still not comfortable with that number?

No, we're not. We think that's premature to be thinking about that, David. We'll let you know if the data supports moving forward to a CE mark.

Great. Thanks so much.

Glenn Novarro, RBC.

Regarding the litigation with Medtronic, Mike, you sent out a letter to doctors, and you sent it to the Street, as well. And in the letter, you talked about how you've actually tried to reach out to Medtronic. There seems to be some sort of compromise that you're willing to maybe accept. Can you go through a little bit of what this compromise or what this olive branch was and what's next in that process? Thanks.

Yes. I think we've been pretty vocal here that we have tried to provide some room. And we've been consistent about that, about the fact that we have not asked that there be some outright ban of CoreValve.

When we get into these kind of discussions, they're confidential. However, we expect that they're going to continue, with respect in particular to what the District Court asked us to do, which is to work something out in conjunction with his preliminary injunction. So, I'm probably not able to provide any more color than that, Glenn, but hopefully it gives you a sense that we would like to reach resolution, as the judge indicated.

Was the compromise, though, something to do with, Medtronic is in 50, 60 sites in the US already trained. Was it to let them stay in those sites but then no further expansion?

Glenn, as you might imagine, this all happened over a matter of days. And, so, I think we went back and forth and there was, it looked like, some sincere movement by both companies. But the judge really limited the number of sites. He's the one that said that. And, so, we were operating under his instruction.

Okay. And then just one quick follow-up. In Europe when you launched SAPIEN 3, was there any stocking that was in Europe on SAPIEN 3?

Yes, there was a little bit of stocking on SAPIEN 3 but it was very small. And I mean very small. I want to say that it was probably not even, it was maybe not even 1 million.

Okay. Great. Thank you.

Kristen Stewart, Deutsche Bank.

Just following on that, was there any stocking sales for SAPIEN XT in Japan included in that figure this quarter?

No. Japan is a consignment market only.

Okay, great. And then I just want to make sure I understand all the different GAAP to non-GAAP numbers. You guys are not providing any sense of what the non-GAAP gross margin figure is this quarter.

We actually are. The guidance we provided, the 73% gross margin, is a non-GAAP number.

That's your guidance, but did you give any for the second quarter, just adjusting for all these reserves? Or is it safe to assume, that what you backed out, or what we have to add back in, I guess, as we add back in the sales to get to your pro forma number, and then add back whatever the profit would be to get to the 76%? I'm bridging to get back to that 76% non-GAAP number.

The 76%, Kristin, tell me again how you're trying to get there? You're trying to walk from GAAP, right?

Yes. From the walk from GAAP you guys are adding back the reserve to the sales line item to get to your underlying results. Presumably, then, you have a non-GAAP gross margin. Did you give the non-GAAP gross margin because in your prepared remarks you only talked to the GAAP gross margin for the first quarter.

Yes, we did. The GAAP gross margin was 72.1%. And we said roughly a couple hundred basis points of that gross margin decline versus last year represents the impact of that sales return reserve. So, call it 74%-plus gross margin if you strip out the impact of the sales returns reserve.

Perfect. Okay. And then just looking ahead, should we assume that there's embedded within your guidance for the second quarter, any reserve adjustments? Either as you presumably get SAPIEN XT, would we then be reducing that out? Or how should we think about your guidance relative to what you're expecting on the reserve front?

Again, all the guidance is exclusive of the reserve. The guidance completely disregards the accounting reserve activity. So, the 73% gross margin that we guided to is exclusive of any reserve activity, in or out.

Okay. And your sales guidance for the second quarter, does that have any --?

Same thing. That's non-GAAP sales guidance. So, the GAAP number will show the ins and outs to that sales return reserve. But, really, in terms of just modeling the year and the quarters, all the numbers that we've given you are non-GAAP.

Okay. Then just on the data front, at EuroPCR will we see any longer-term follow-up on the SAPIEN XT system? Because two years I would have thought would've been at ACC but just wondering if we'll see that at EuroPCR?

I do not expect to see the SAPIEN XT at EuroPCR. We would expect that there will probably be some two-year data sometime later on this year at a medical meeting, but not at EuroPCR.

Okay, thank you.

Michael Weinstein, JPMorgan.

This is Chris Pasquale here for Mike. I just want to circle back on the question about US TAVI math this quarter real quickly. Am I hearing you correctly? So, $78 million was the reported number, and if you back out the net stocking impact your sales would have been more like $86 million to $87 million. Is that right?

Yes.

Okay. That's up solidly year over year, but it compares to more like $80 million to $91 million over the last three quarters. Obviously, Medtronic had more of an impact this quarter. But as we step into 2Q here the comps get more challenging. So, how much confidence do you have that the market itself is not starting to plateau a little bit, just as we've seen a few quarters in a row, all in that same range?

Yes. I don't know. It's our sense that the market is going to be stimulated by the addition of valves that can treat some larger patient annulus, and also the attraction associated with smaller profiles. So we don't think it's going to be a negative trend in the market. We think it will be the opposite.

Okay. And then on the European side of the business, I'm trying to understand some of the dynamics there and that nice pickup in growth that you saw. How much of that would you attribute really to share gains with SAPIEN 3, in one bucket, versus a pickup in underlying market growth? And for that second bucket, to the extent that was a contributor, what do you think is driving that in the market that's more mature at this point?

I think what we reported was not just in Europe alone but O-US. And what we said is that over half of that growth was by just a pickup in overall procedures across the geography. And, so, that's not share gain.

In terms of the combination of SAPIEN 3 and XT did gain share. And what I tried to note in my earlier comments, that we have places where SAPIEN 3, it's only been, it's early in the introduction, so it accounted for less than a third of the O-US sales. So, in addition to whatever SAPIEN 3 share might have come, which there was some; XT was actually gaining share within the accounts where it was still isolated as the only valve available.

So, absent Japan, which obviously saw a big pickup, you weren't really there a year ago in the European market. Is there anything that you would attribute that pickup in underlying utilization to for a market that's had the technology available now for close to seven years?

Yes, it's a good question, Chris. We feel like we noted this impact had started earlier. So, the second half of last year we felt like it picked up. And Europe was going nicely.

Maybe some of that was the recovery in the South. But we also were seeing it broadly across all of Europe. It really ticked up in the first quarter, and possibly that was stimulated by SAPIEN 3's entree into the market. It may have stimulated some interest. But it's still early, Chris, and it's hard to know what's driving that.

All right. Thanks, Mike.

Bob Hopkins, Bank of America.

Just a couple of really quick ones here to cap off. On the legal side, is it safe to assume that, in your view, that this stay will last until the appeal is over?

It's a really good question, Bob. Unfortunately, the appellate court didn't give us a lot of definition. They said, pending further notice. And, so, what that means is that this is really a fluid situation that's evolving each week.

It's possible that the appellate court could act before the scheduled June hearing. But we would be guessing. And we'd also anticipate that we'd be back in front of Judge Sleet on May 21. But, again, a very fluid situation that's difficult to predict.

Okay. So, on your comment about Q3, you're putting that out there as maybe worst case? Or could this also extend much further into the year?

In particular, I think the appellate court seemed to indicate that they would hear this in Q3. There's a June 19 briefing that has been established, and the hearing would be later. So, we're expecting that would be Q3. But, again, that's our best estimate, Bob.

And then, lastly, really quickly, on your request for an extension on Andersen out into March of 2016, when will we know something about that? And then, also, is there a next milestone we should be thinking about relative to Cribier or any of your other patents?

The short answer, Bob, is we don't know when we're going to have that decision. The patent office talks to FDA about it and then we hear back. And we don't know when they're going to act on that. The Cribier patent goes to 2017, if that was a question.

Just curious as to when there's a new milestone in terms of the litigation around Cribieri, not in terms of the life.

I don't know. In the past, the appellate court has taken some time before that's taken place. I have not heard a specific date, Bob. But when we have something, I'll update you on a future call.

Thanks very much for the time. Appreciate it.

Okay. Thanks, everybody, for your continued interest in Edwards. Scott and David and I welcome any additional questions by telephone. 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 on 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 13579551. I'll repeat all those numbers. You dial 877-660-6853 or 201-612-7415. And the conference number is 13579551. Additionally, an audio replay will be archived on the Investor Relations Section of our website.

Thank you very much.

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