愛德華生命科學 (EW) 2014 Q3 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences Corporation Third-Quarter 2014 Earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Welcome, and thank you for joining us today.

Just after the close of regular trading, we released our third-quarter 2014 financial results. During today's call, we'll discuss the results included in the Press Release and accompanying financial schedules, and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO, and Scott Ullem, CFO.

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

These statements also include our current expectations for the timing, status, and expected outcomes of our clinical trials, regulatory compliance, submissions and approvals. As well as expectations regarding industry growth, portfolio adjustments, conversions to new products, competitive positions and reimbursement. 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 the terms underlying, 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.

This quarter we are pleased with the results in all product groups and regions, with strong double-digit overall sales growth. This was highlighted by Transcatheter Heart Valve sales that exceeded our expectations, driven by the strong adoption of this therapy. In Europe, the US, and Japan, the launches of SAPIEN 3 and SAPIEN XT are strengthening our global repeat position, and allowing a greater number patients to benefit from this life-saving therapy.

Also during the quarter, we began implementing several adjustments to our portfolio, driven by our strategic planning process. These include combining the operations of our cardiac surgery systems and surgical heart therapy product lines, the redeployment of glucose monitoring resources into our enhanced surgical recovery initiative, as well as increasing investment in advanced structural heart opportunities.

Now turning to the quarterly specifics, total adjusted sales were $589 million, representing an underlying growth rate of 19%. In Transcatheter Valves, underlying global sales grew 44%, driven by strong growth in all regions. The US sales accounted for approximately half of our total THV sales.

The US and Europe sales exceeded our expectations, as adoption grew faster than we anticipated, and our new product launches reinforced our leadership position. Our global average selling price was unchanged from a year ago. Outside the US, THV sales grew 42% on an underlying basis, once again driven by strong market growth in Europe.

SAPIEN 3, now representing more than 75% of our European THV sales, gained ground across the region and continues to enjoy very positive clinician feedback. Clinicians have rapidly converted to SAPIEN 3, and we expect it to be available in all of our sites by the end of the year. Although the impact of newer competitors in Europe was limited again this quarter, we are continuing to see a modest pickup in their penetration.

In Japan, THV sales in the quarter grew to $11 million. While clinicians there are enthusiastic about our SAPIEN XT valve, the procedural success remains very high. The site certification process is gating the pace of adoption in the near-term. We continue to expect SAPIEN XT sales in Japan to be between $40 million and $50 million for 2014 and believe the opportunity for transcatheter technology for these patients is very attractive.

In the US, underlying THV sales were $126 million for the quarter, including $10 million from royalties and excluding the benefit of a net $17 million sales return reserve reversal. This represents an underlying growth rate of 46%, compared to the $86 million reported last year. Included in this quarter's results were lower clinical sales than we recorded in the second quarter, and approximately $16 million of negative impact from net stocking. The number of TAVR procedures in the US grew more rapidly than we expected.

Additionally, our performance was driven by the adoption of our lower profile SAPIEN XT and strong demand for our larger 29-millimeter valve. By the end of the quarter, we had shipped SAPIEN XT to all of our sites, and expect conversion to be largely completed by year end. We remain on track with our previously stated goal to add 45 to 65 new sites during 2014.

On the reimbursement front, two new DRGs for all endovascular valve replacement procedures, including TAVR, went into effect on October 1st. In adopting the new codes, CMS acknowledged that TAVR patients are different from typical surgical valve patients, and the new DRGs will more accurately reflect the level of hospital resources required. Our modeling suggests this change will result in an improvement in TAVR hospital economics.

Enrollment in our US SAPIEN 3 trial of 1,000 intermediate risk patients was completed last month. As a reminder, we completed enrollment of the high risk trial in January of this year, which has a one-year endpoint. Based on our estimates, we're planning for a first approval of SAPIEN 3 in 2016.

At the same time, we're actively engaging with the FDA to discuss ways to bring our latest technology to patients more quickly. We are also discussing with the FDA a limited continued access protocol for SAPIEN 3. We'll provide updates on our SAPIEN timelines at our Investor Conference in December.

In summary, we're very pleased with our global THV sales performance, which exceeded our expectations. Going forward, we believe current market growth rates are not sustainable, and expect competitive activity will increase.

Given the expected reduction in US clinical sales and the recent FX headwinds, in the fourth quarter, we expect adjusted sales dollars to be roughly comparable to the third quarter. We now expect our full-year 2014 underlying THV sales growth rate to be around 25%.

Turning to Surgical Heart Valve Therapy product group, sales were $203 million, up 6% on an underlying basis. Solid unit growth was seen across all regions, and product mix drove a slightly higher overall ASP. Globally, surgical valve sales grew 7%, led by unit growth of our premium valves. We believe that global surgical valve procedures continued to grow in the low single digits this quarter.

In Europe, strong unit growth was driven by building clinician interest in INTUITY Elite, our minimally invasive valve platform. And in Japan, our growth rate has rebounded following competitive introductions over the past few years. At the recent European Cardiac Surgery meeting, there were multiple presentations on the INTUITY valve platform. Which included three-year data from the TRITON CE Mark trial, clinical data from the foundation registry of 512 patients, and follow-up on the randomized cadence MIS Series.

These data demonstrated differentiated clinical performance, increased rates of minimally invasive surgery, and improved patient outcomes. We believe this investment in INTUITY evidence will continue to support the growing adoption of this platform around the world.

In the US, we are on track to complete patient enrollment in our Transform trial for INTUITY Elite by the end of the year. As a reminder, we report our cardiac surgery systems, or CSS, product line in the Surgical Heart Valve Therapy product group. In our Utah-based CSS operations, we've taken actions to enhance our long-term performance, and those are impacting our near-term results.

We continue to aggressively focus resources on addressing the items identified in the warning letter, and the extensive CSS remediation efforts are proceeding on track. And additionally, as part of this action, we're planning to exit non-strategic products representing annual sales of $10 million to $20 million.

Separately, we made the strategic decision to integrate the operations of our Surgical Heart Valve and CSS product lines. We are focusing our investments in surgical structural heart therapies that combine an implant, MIS products, and training that we can support with clinical evidence. We believe this combination will better serve patients, strengthen our surgeon partnerships, and extend our leadership. The integration is expected to be completed by the end of the year.

Combined, we expect these actions to have a modest negative impact on the top line over the next year, with some expense savings from operational efficiencies, offset by increased investments in our quality organization and advanced structural heart projects. These are long-term strategic adjustments to better position us to deliver new therapies for structural heart patients.

In summary, despite the disruption in our CSS product line, we're continuing to experience strength in our surgical valve product line. And still expect underlying sales growth for the total product group to be at the low-end of our previous 4% to 7% range in 2014.

Turning to the Critical Care product group, total sales for the quarter grew 4.5% on an underlying basis to $137 million. Sales performance was solid across the board, and we again experienced double-digit ESR product sales growth globally.

As a reminder ESR, or Enhanced Surgical Recovery, is designed to enhance patient outcomes and facilitate shorter hospital stays resulting from better monitoring and fluid management. These ESR products include both minimally and non-invasive monitoring sensors such as FloTrac and Clear Site.

ESR is a significant opportunity that we are well-positioned to lead, and we believe it will help even more patients and grow our Critical Care franchise. This rapidly evolving space requires investment and innovation, so we have recently made the difficult decision to refocus resources from our continuous glucose monitoring program to ESR. Although we've been successful in developing and commercializing our GlucoClear technology, there was still a significant effort needed to change clinical practice.

Separately, as you may have heard, Carlyn Solomon, our Corporate Vice President of Critical Care, has made the personal decision to leave Edwards to pursue another opportunity. We respect his decision, and express our sincere thanks to Carlyn for his many contributions as a valued member of our executive leadership team, and we wish him the very best in his future endeavors. We are actively engaged in identifying a successor.

To summarize our Critical Care product line, we are pleased with the strong results to date and continuing adoption of ESR products. Therefore, we continue to expect underlying sales growth in Critical Care to be at the high-end of our previous 3% to 6% range.

We are continuing to make progress on our Fortis transcatheter mitral program. Heart teams in four countries have been trained on our technology, and 11 patients have been treated to date.

In addition to the compassionate use patients, we're continuing our first inhuman experience in a European and Canadian multi-center protocol-driven prospective study. The purpose of this study is to continue our feasibility work in patients who are at high risk for surgery, and to enhance our understanding about patient selection.

Although the journey to commercialization may be a long one and durable success will not be known without significantly more experience. We continue to believe transcatheter technologies can help address the large need among patients with mitral valve disease, and expect clinical results to be reported at future medical meetings.

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

Thanks, Mike.

Third-quarter adjusted sales of $589 million exceeded the top end of our guidance range by about 3%, and represented 19% underlying growth over last year. Our strong sales performance in transcatheter valves drove non-GAAP diluted earnings-per-share of $0.80, which was above the top end of our guidance.

This represented 14% growth over the prior year, which includes increased incentive compensation associated with the higher sales and increased expenses associated with the portfolio adjustments Mike just mentioned. I'll cover the detail behind these top line and bottom-line results unsure guidance for the balance of the year.

Edwards reported GAAP sales in the third quarter of $607 million. Our adjusted sales of $589 million excludes the benefit associated with the transcatheter valves sales return reserve reversal. The next-generation product exchanges are almost completed in the US and in Europe, and we expect to reverse the remaining $4 million of net reserve in the fourth quarter. The sales return reserve schedule on our Investor Relations website has been updated to reflect this quarter's results.

For the quarter, our gross profit margin was 72.3% compared to 74.1% in the same period last year. This reduction was driven primarily by a 160-basis point negative impact from foreign exchange, and also 140 basis points of higher costs associated with our CSS operations in Utah. This reduction was partially offset by a more profitable product mix.

For the fourth quarter, we expect our gross profit margin, excluding special items, to be approximately 74% as the impact of foreign exchange mitigates.

Second-quarter selling, general, and administrative expenses were $222 million, or 37.7% of adjusted sales, compared to $178 million in the prior year. The largest components of the increase were driven by our transcatheter valve sales performance, including larger accruals for sales commissions and incentive compensation, which primarily impacts SG&A expense.

Incentive compensation also impacts, to a lesser extent, our cost of sales and research and development expenses. For the full-year, we continue to expect SG&A, excluding special items, to be between 37% and 38% of sales.

We continued to aggressively invest in research and development, and spending in the third quarter was $88 million, or 14.9% of adjusted sales, compared to $84 million in the prior-year period. This increase was primarily the result of additional investments in aortic and mitral valve program programs. We expect fourth-quarter R&D investments as a percent of sales to be comparable to the third quarter.

During the third quarter, we recorded three adjustments to our GAAP results, which reduced our net income by $7.6 million as follows. First, the impact of the THV sales return reserve benefited our GAAP net income by $11.6 million. Consistent with prior quarters, we excluded this impact from our non-GAAP net income.

Second, we excluded from our non-GAAP results the costs associated with the write-down of assets related to our glucose program. $2 million of these costs are included in our costs of sales, and $3 million are reflected as a special charge.

And third, consistent with prior quarters, we excluded $900,000 of intellectual property litigation expense from our non-GAAP results. A complete reconciliation of our GAAP to non-GAAP net income was included in our Press Release.

Net interest expense for the quarter increased from the prior year to $2.5 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 at the low-end of our $12 million to $15 million range.

Our reported tax rate for the quarter was 21.6%, down from 23.0% in the prior year. This quarter's favorable rate resulted primarily from an improvement in our European tax position, partially offset by higher sales of transcatheter valves in the US. We expect our rate will drop to approximately 16% in the fourth quarter, assuming renewal of the Federal Research and Development tax credit.

FX rates had a negligible impact on sales compared to the prior year. Compared to our prior guidance, FX rates had an approximate $0.01 impact on earnings-per-share. Given the weakening of the yen and the euro, at current rates, there will be additional foreign exchange drag on sales in the fourth quarter of approximately $15 million.

Free cash flow generated during the quarter was a negative $6 million, which included a $159 million tax payment related to the prior-quarter's litigation settlement. We define free cash flow as cash flow from operating activities of $12 million, less capital spending of $18 million.

Excluding the tax impacts of the prior-quarter's litigation settlement payment and of our contribution to the Edwards Lifesciences Fund, free cash flow was $139 million. For 2014, excluding special items, we now expect free cash flow to be at the high-end of our previous range of $325 million to $425 million.

Turning to our sales and earnings guidance, as Mike said earlier, given our strong performance in transcatheter valves, we now expect sales in this product group to exceed the high end of our previous range of $830 million to $900 million and total Company sales to exceed the high end of our previous range 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. And in the Critical Care product group, we continue to expect sales of $535 million to $575 million. We estimate fourth-quarter diluted shares outstanding to be between 109 million and 110 million.

For the fourth quarter of 2014, we project total sales to be between $575 million and $615 million, which reflects the additional expected foreign exchange headwinds. We expect diluted earnings-per-share, excluding special items, to be between $0.89 and $0.95. Which increases our full-year guidance for diluted earnings-per-share, excluding special items, to a range of $3.33 to $3.39.

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

Thanks, Scott.

Our strong year-to-date results reinforce our conviction in our focused innovation strategy, and point to a bright future for Edwards Lifesciences. Although competition is intensifying, we believe our pipeline of new products positions us well to drive solid organic sales growth, and help clinicians address critical unmet patient needs. We are encouraged that new therapies supported by compelling evidence are still being adopted, even in this challenging healthcare climate.

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

Thank you, Mike.

Before we open up for questions, I would like to remind you to RSVP for our 2014 Investor Conference on Monday, December 8th in New York. This event will include updates on our new technologies, as well as our outlook for 2015. More information and a registration form are available on our website.

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.

Thank you.

(Operator Instructions)

David Roman, Goldman Sachs.

Thank you, and good afternoon, everybody. I wanted just to start with maybe you're helping us with any detail you can provide on how things have changed in the transcatheter valve market over the past call it ten months?

When we started at your analyst meeting last December, I think you painted a fairly conservative or some might say bleak picture for your business, as well as the overall market. And over the course of the year, things have gone better. So can you maybe just help us understand specifically what has changed in the market, and in your own business on a year-to-date basis?

Yes, thanks, David. Good question.

I think back at Investor Conference, we acknowledged that we thought that there would be a pretty good growth rate in transcatheter heart valves globally. I want to say we projected 25% to 30% growth rate for the market. But we said it was going to be a difficult year to call. Because we had a new competitor in the US, we had new competitors coming into Europe. And at the same time, we had product launches coming from Edwards, and that led to a very broad range of outcomes.

As things have played out, probably the thing that's most significant is that we find the market is growing faster than we anticipated. It's growing faster in Europe than we thought, it's growing faster in the US than we thought. And you couple that with what I feel are very successful launches of SAPIEN 3 in Europe and SAPIEN XT in the US, and that's really resulted in the performance better than we expected.

And then as you think about the comment, both on the call and in the press pelease, about new competition coming. It's I think very reasonable for all of us to understand why growth at the level you've put up this quarter is not likely sustainable.

But that sort of begs to reason that a lot of what we saw might have been one-time in nature this year with those trialing of new products, or a bounce back in the certain markets. And what gets this market going again from here, and reinforces the longer term view in that 2014 wasn't just an easy bounce back year?

Well, I think the growth of the market speaks for itself. As I said, I feel like it's growing faster than we had originally anticipated, so this isn't just versus a weak comparison. The market it's really growing, and I think there's a number of reasons why the market is growing faster than we originally anticipated, but it is. So, the competition is coming. There's no doubt about that. We expect that to intensify, but this quarter was not really one that was one timers that drove this. This is underlying market growth, and good performance by our product groups.

Okay. And then maybe last one for me. Just thinking about how that translates then down the income statement, Scott, I understand the specifics around incentive comp and the better sales, bput what does it take to restore operating leverage to the model whereby we can get back to point where EBIT is growing faster than revenue call it, on an annual basis?

Well, thanks, David. We have to let others ask questions after this, then.

Okay.

David, this is something we're looking very hard at. Obviously as we get ready for our December conference in New York, we'll tell you more about what 2015 holds. But I can tell you that we're looking at how we can try to streamline our operations. We've got a lot of expenses running through the P&L in the third quarter, relating to CSS operations. Some of those will go away in the future, a lot of those will continue and get baked into enhancing our quality programs. But it's something that we're focused on keenly, and we'll talk more about that in December.

Got it, thank you.

Larry Biegelsen, Wells Fargo Advisors.

Good afternoon. Thanks for taking my question, and congratulations on a good quarter. I'll ask my two questions together here, and they're actually follow-ups on David's questions. So, Mike, what is temporary about the current market growth rates? Was there a pent up demand, for example, for the 29-millimeter valve? And could you be more specific about what caused the sudden acceleration that we saw? And the second question is, on the new competition intensifying, could you be more specific? Is it the US, is it Europe? Because you seem to be doing very well in Europe with SAPIEN 3. Thanks.

Thanks, Larry. Yes, in terms of what is lifting the market, there are a number of factors that we believe have lifted the market, and we probably underestimated these. The availability of these new 18 French delivery systems have just provided for much more transfemoral delivery, and that equals, in general, a less invasive procedure and shorter recovery times.

The larger valves have been significant, and that's really contributed to volume. The improving economics I think have been seen by our sites, and that is no longer a drag. And just I think the confidence in long-term outcomes continues to grow, as those results get reported and they continue to be favorable.

So, that's a high-level summary. It is possible that we are seeing a bolus of patients with 29-millimeter valves. I think we probably sold about something in the neighborhood of a quarter of the valves that we sold in the quarter were 29-millimeter valves. That's a little higher than we were when we had the XT product in Europe, and so there may be some of that that we're experiencing, Larry. So that's the key thing.

In terms of new competition, I think we know that in the US, that Medtronic is still rolling out their product. They're probably in more than half of our accounts, but they're still ramping up. So we -- I think we're yet to feel their full effect. And we know that St. Jude has been out of the marketplace, companies like Boston Scientific and Symetis are still building up their presence. So we just expect it to generally intensify.

Thanks for taking the questions.

Brooks West, Piper Jaffray.

Thanks, guys, and congratulations on a spectacular quarter. Mike, I wanted to follow-up on your FDA comments. And I understand it's a hard question to answer, but any color, granularity sense of optimism you could share with us incrementally on either an acceleration of the intermediate risk label or bringing SAPIEN 3 to the US? And then I've got one quick follow-up.

Yes. Thanks, Brooks. Really, I don't have anything to share at this point. Of course, we're optimists by nature, but we know from experience that trying to predict early FDA actions is not something that's prudent. And so, we'll certainly update you at the Investor Conference of what we learned. We are in discussions with FDA. We do ask them about accelerating the new product approvals. We are asking them about a limited continued access program, and we just don't have those answers right now.

Okay. And just a quick one for Scott. FX, I think you gave the dollar amount top line, did you give the hit to EPS for Q4?

For Q4, the hit to EPS, we haven't talked about yet. It's difficult to predict what is going to be, because we don't know where FX is going to go.

Okay, fair enough. Thanks.

Raj Denhoy, Jefferies.

Hello, good afternoon. Wonder if I could start in the US for my two questions. In terms of the dynamics you're seeing amongst the hospitals here, are you seeing deeper penetration in those bigger hospitals, or are you seeing a broadening of the utilization of this point?

Thanks, Raj. We're really seeing it pretty broadly. It's been across-the-board. We are seeing increased penetration in the larger accounts, but we're also seeing it in smaller accounts. So we're feel like everything was going our way right now.

And then within that, is there any insight into what types of patients you're seeing? Has there been this progression down the severity curve, as one might expect, or is it still largely unlabeled at this point do you think?

Yes, I still feel like we're very much seeing high risk patients, and that we're not seeing risks creep. When we look at the average age of patients, that continues to be in the same range as it has been in the past, where it's in the 80s. That's what we've seen out of the TVT registry, so it's still there.

I think there may be differing views on the part of heart teams as they're judging these patients. But no, we still think we're clearly in the high risk category. It's difficult because I know people use -- that want to use the STS score, which is not a great risk score for transcatheter heart valve patients. And so, that's still something that's evolving. You still have frailty that's part of this. So right now, I think you have heart teams doing the best they can.

If I could just squeeze one in on Europe. You mentioned this idea of competition, and I'm curious what you're seeing thus far in terms of how hospitals are adopting the technology? Are you seeing hospitals primarily bringing in one large vendor, either yourselves or Medtronic, and then maybe one of the smaller ones? Or is it a little more diffuse in that, where they might allow both yourselves and Medtronic in? Just anything in terms of how you're seeing that market develop would be helpful.

Yes, I would say the majority of our accounts have more then one supplier. And that there would be a very small I would say I don't know must be, and I'm guessing now, that under 20% of our accounts would be exclusive Edwards, it may be less than 10%. So in general, the customers would have a choice on their shelf.

Okay. Thank you.

Sure.

Rick Wise, Stifel Nicholas.

Good afternoon, Mike, and I'll say congratulations on a magnificent quarter actually. Just trying to get at the EU market growth from a different angle. While I was at London Valve, hearing a couple things, how much of your acceleration in Europe is Edwards German market share gains? I'm hearing about dramatic gains there as competitors, some of your larger competitors, have yet to launch a broad array of sizes. And how much of the growth in Europe is the move to intermediate risk patients in Europe? Which seems significant.

Yes, so a couple of things, Rick. I think I mentioned in our opening comments that we saw growth in pretty much in all countries across Europe. Of course, Germany is the largest country, and so that tends to be outsized in terms of the dollars. But the growth rate was strong in all countries.

In terms of what's driving it, there's a few things. Of course, there's a growing body of evidence. And you have to believe the fact that people are being successfully treated, and that that is driving our referral base to more positive is helpful. I also believe that the new devices further improve outcomes for patients, and that's it's accelerated the growth of procedures.

In terms of going into the intermediate risk, I don't think that's typical. I mean, one of the things worth noting is, that looking at the growth rate of our surgical heart valve business. It's been very nice in Europe, and so I really don't think that what you're watching here is a cannibalization effect.

Okay. And just one other follow-up on your comments about combining and integrating the rest of part of the business. And I heard your comments about building a separate structural heart company. I'm just trying to understand how we think about this longer-term.

Are you thinking about creating a separate structural heart company, is that Edwards or are you thinking about spinning it off or selling it? Is that how we should think about the long run here? Any color, would be grateful. Thank you.

Sorry, maybe my comments weren't clear. So here is what I was trying to say. Reported under the Surgical Heart Valve product group are two individual organizations. One that did cardiac surgery systems, which largely made tools that were used by clinicians. Some of them MIS tools, some of them tools you would use during open-heart, and the other part of that would be heart valves.

So, we've decided to combine those two organizations. And what we were trying to project here is that selling tools for minimally invasive procedures, we don't think is as good a strategy as actually being able to introduce a therapy that includes a valve, and the tools, and us being able to back it up with training and clinical evidence. So that's the direction we're going in. And we have some things in our advanced technology area, we're actually making investments in structural heart innovations that are promising. And so we're continuing to fund those and move those along.

We certainly have an idea of keeping those inside Edwards Lifesciences, that's core to our focus strategy. And if those are successful, we'll have something to talk about. But for the most part, those are still early-stage programs at this point, and we'll update you as we make some progress.

Fair enough. Thanks.

Does that make sense?

Yes, thank you.

Bruce Nudell, Credit Suisse.

Good evening, thanks for taking the question. Mike, based on our guess as to what Medtronic report, the market this quarter year-over-year in the US could have doubled. And I guess could you just help us think about the original segmentation of the surgically eligible population that fit in the NCD? It was really based on NCD score or SGS scores. Now it doesn't seem -- the SGS score is an imperfect measure. How many of the people -- what percent of the people who are in fact surgically eligible do you think really fit into the given more liberal definition of high risk?

Bruce, I know you and others are very good at modeling this. And we believe that there's a very large number of patients with severe aortic stenosis and symptoms that go untreated today, and there's a whole variety of reasons. And we believe that this transcatheter technology is broadly bringing them off the sidelines, and that that's the single biggest thing that's going on.

This is a group that traditionally had not been well studied and we're all learning more about them right now, but I still believe that that opportunity is very large. And that we're still in low numbers in terms of a penetration rate. We're going to learn more about it, frailty matters.

Right now, it is difficult to use risk scores to try and define who's in the market and who's out of it. People that are frail, people that have had radiation on the hostile chest, they have low risk scores but they're perfect candidates for this therapy. It would be a great example of that. So we're still learning. And, as I said, we didn't predict the growth rate this quarter either, so this is one that came as news to us.

Okay, great. And just switching topics, you mentioned that you're moving in a protocol driven expiration of FORTIS. Do you have any feel yet just qualitatively which side the question is really remaining on? Whether FORTIS is a workable design, or really the effort going forward is really to find out which of the patients are best served by a transcatheter mitral replacement technology?

Thanks, Bruce, good question. The fact is, we're still on a steep, steep learning curve. I think we mentioned early on in the FORTIS program, if we found something that was dramatic we might consider just stopping the FORTIS program. But obviously we didn't see anything dramatically negative, and we're continuing to think that it's promising, and we've had some results that have gone on for a while here.

So we're anxious to learn just how capable the FORTIS design is. At the same time, our initial treatment of these compassionate patients was certainly a pretty desperate group, not a good way to identify what the real applicability of this therapy is. And so right now, being able to move into a high risk surgical population is really important to us. And we'll look forward to being able to see those results, and report them to you.

Thanks so much.

Sure.

Jason Mills, Canaccord Genuity.

Mike, congrats on a great quarter. Can you hear me okay?

Yes, thanks, Jason.

Great. Clearly, all of us are trying to ascertain from your strong results just how we're going to model it going forward. And also, obviously, you're not willing at this time to give 2015 guidance. So just I was wondering if I could ask it from a qualitative standpoint. As you look at the geographies over the course of the next 18 months, US, Europe and Japan specifically, and think in terms of growth rates relative to where we're likely to end up this year. If you look at those three geographies, where do you think you'll see some growth augmentation, if you will, from growth rates going higher?

And perhaps in Germany, Medtronic has talked about being behind the eight ball because of the injunction earlier. And suggested perhaps they'll get better in Germany next year. Whether or not Europe we should be looking at growth rates slowing down a little bit. And then the US, obviously, given the results today it's tough to tell. So I'm just wondering qualitatively, if you looked at those three geographies over the course of the next 18 months, where do you see growth accelerate and growth decelerate in your mind?

Yes,thanks, Jason. First, a few qualitative comments. Overall, the fact that Europe is still growing at this stage of the game seven years after introduction, we find pretty remarkable. And we're very pleased with that, and this is without very much indication expansion. The US is obviously still adopting, and the advent of these new systems really seem to have accelerated the growth rate and the additional sizes as well. And Japan is just beginning. And again, we think that probably gets off to a slow start in general, but gains a lot of momentum.

Having said that, we're not very good at predicting how this goes on a quarterly basis, and probably you are better thinking about this on a long-term basis. We believe that the long-term growth rate for the globe is probably in this 15% to 20% growth rate, and we think that is one that we still feel comfortable with that. We've felt that way for some time, and we believe that this will continue to evolve this way. But I hesitate to hazard a guess on what various regions are going to grow in the near-term.

Okay. Thanks. That's helpful color. In the US, I believe pre-XT, your transapical to transfemoral mix was about 50/50. I'm wondering if you could correct me on that if I'm wrong? And I'm sorry if I missed it, I've been jumping between calls. But did you give that number, that mix number, for Q3, and now what you might expect on a go forward basis over the longer term in the US?

I missed the start of the question, Jason. Were you asking about the US or Europe?

Yes, US, Mike, sorry.

Yes, the US, right now, we feel like we've moved to about 75% transfemoral with XT, and so that means about 25% is some other kinds of access. We expect this to probably continue similar to that range based on our past experience.

Thanks, Mike.

Sure.

Danielle Antallffy, Leerink.

Hello, good afternoon, guys. Congrats on a fabulous quarter. Mike, sorry to harp on this market growth issue. But just curious as to why the bearish commentary when we, to your point, haven't necessarily accessed the intermediate risk patient population even necessarily in Europe. That's still coming online here in the US hopefully in the coming years.

Reimbursement is improving so I guess what's the right way to think about sustainable market growth if not at the current rate but what's the right level? Because we do have a lots of runway I would think considering intermediate risk potential or doubles the market opportunity. How do we reconcile that with the commentary today?

Again, Danielle, I just get nervous about taking a specific quarter like the last one which was just a terrific growth rate and extrapolating that. I feel like it's better to take a look at a long-term perspective as I said globally this long-term 15% to 20% perspective is a safer way to look at it. What we experienced this last quarter we just don't think is sustainable as the market growth rates and we do believe the competitive activity. So I'm not trying to be bearish and just trying to be realistic about the outlook for Edwards.

Okay. That's very helpful. One follow-up unrelated. Just on the GlucoClear program. Based on the commentary today and the asse write-down is assumed there to assume that program is now dead or what's going on with the program?

We're still discussing what might happen with that program. We do think it's very valuable. We accomplished a great deal. We have a commercial product, a clear path to commercialization in the US, a CE Mark in Europe. And so we're considering strategic options in that, including partnering.

Okay, perfect. Thanks so much, guys.

Sure.

Ben Andrew, William Blair.

Good afternoon. Mike, can you maybe update us on the contribution in terms of the retraining efforts you've been undertaking with clinics to help them speed the process of moving patients through? Is that something that's ongoing? Could that be contributing, and is that maybe an additional driver as you broaden that or is that largely played out at this point?

Yes, thanks, Ben. No, we see a high level of variability in terms of how well specific hospitals develop their referral base. It's ongoing. But one of the things that hospitals do, is they really work on their length of stay and trying to improve their economics. But other hospitals have really invested resources in developing the referral base and trying to get out there and educating people about the value of TAVR. And to try and capture the patients that really could be helped by this therapy, but might go untreated because for some reason that is just not appropriate.

If we just treated people within guidelines, there would be many more patients flowing into the system. So I would say it's still a young program, it's one that's developing. I like to think that the DRG changes generally are positive, and encourage hospitals to hopefully even put more resources into this.

And then my follow-up is, how hard are you having to work to get clinicians on the referral side to push patients in? Is that just taking on it's own momentum at this point, or is that an area where you're actively investing? Thanks.

Yes, thanks. We probably have limited impact on really being able to do much with that. We can -- awareness is growing, but you have a pretty good handle on what's going on out there in terms of consolidations, the development of narrow networks, and so forth.

And so you have more and more systems that are really trying to put their arms around groups of patients, and keep them within their system. And so you've got a high level of variability that's taking place out there, but Edwards does not have a major role in the development of just how those patients flow.

Thank you.

Sure.

David Lewis, Morgan Stanley.

Good afternoon. Mike, maybe just changing gears for a second. If we think about this particular quarter, you announced a divestiture, a product shut down, and actually division integration or segment integration. I guess the question I have is, why now? It's a fair amount of transformation in light of tremendous operational excellence, so no one is going to accuse you of not walking and chewing gum. But why now?

And the business that I think everyone has been focused on from a transformation perspective actually has been Critical Care, and there was no mention of that. So a lot of transformation, why now and what are your thoughts on Critical Care? And I had a follow-up for Scott.

Thanks, David. Well, for you and others that have been following us for a long time, you know that we have made a serious and continuous part of the way we manage our Company to actively manage our portfolio. And over the years, we've consistently walked away from things that we did not think had a bright future, and trying to add things that we thought our customers would really welcome from us. So, there has been a constant transformation of the portfolio. The primary adjustments that we're making right now are actually one of them did touch Critical Care, we say a redeployment of resources from continuous glucose monitoring into enhanced surgical recovery. That's a significant shift for us.

That's a significant amount of R&D that's going to move over. This idea of moving together the surgical heart valve operations with the cardiac surgery systems operations. And taking some of the efficiencies that come from that and being able to invest in new structural heart programs is also a key part of our strategy. And we just think that those are prudent moves that build long-term value. We would be doing that just in terms of the right thing to do for the long-term growth of our Company, independent of what's going on, we're obviously enjoying a level of success that allows us to be able to fund those changes in the near-term.

Okay. And then maybe just -- thanks, Mike. And a quick question for Scott. Scott, this whole call is focusing on the top line, and it's pretty clear that the [bull case] for the Edwards top line is certainly coming into investor focus here. So, the next real question is leverage.

And I wonder if you could talk me out of a couple of notions here. It looks like you're absolutely level of R&D spending is beginning to ebb, and you've got have a significant revenue base to leverage off of. And your TAVR business is certainly going to pop through 40% as business mix heads to next year. So can you talk me off of a notion why absolute R&D spending should not slow? And why margin trajectory on the gross margin side should not be higher or if not materially higher in 2015 and 2016 based on the trends we're seeing? Thank you.

Yes. So R&D expenses in the quarter went to $88 million, up from $84 million. So we're going to continue to grow and invest in research and development. It's a little bit lumpy because a big chunk of our R&D expense is in clinical trials, and those expenses hit at various different periods.

In terms of gross margins, we expect that gross margins are going to improve. The biggest driver of the volatility or shift in gross margins is foreign exchange, and obviously that's difficult to predict. We had 160 basis point headwind in this quarter, and we think that will mitigate going forward. But we're really focused on gross margin. It's directly tied to our sense of whether we're getting a return on those R&D investments that we're making.

Bob Hopkins, Bank of America.

Thanks, and good afternoon. So just to follow up on David's question there. I might ask it just a little bit differently. At what point do you guys think you'll be feel comfortable giving some longer-term guidance? And the primary reason I ask is that most med tech companies with the kind of momentum that you're showing, ultimately do get the operating margins that are above 30%. And so I'm wondering, one, at what point might you consider giving some longer-term guidance? And two, is there some structural reason why long-term you think you might not be able to get there?

Look, we recognize that other companies give longer-term guidance. We'll give our one-year guidance in December. Really, at this point it's tough to put a bead on where Transcatheter Heart Valves are going. So, to project out further than four quarters is difficult for us to do with any sense of accuracy. We're a long way away from a 30% operating margin. And we're, as I said before, keenly focused on trying to get leverage out of the income statement.

We think we will over time, as on a percentage basis R&D and SG&A will come down because the sales line will continue to grow well. But we're focused on it, but it's not going to be an immediate shift in our overall income statement profile. It will be over the longer term.

Just wondering, again, it wasn't really a question about this quarter or next year really. I'm just wondering if for some reason structurally, you think that that's not a level you could achieve if you continue to have success? And so, maybe if you could comment on that.

And the last question I wanted to ask was really just, Mike, if you could give us a quick sense in terms of the success in the TAVR sales outside the United States. Do you think that's really entirely market, or do you think this is maybe a quarter where you also potentially took substantial share? Thank you.

I'll try to hit the structural question. No look, structurally, we expect that we are going to continue to improve our operating margins. And I can't predict that we're going to get to 30% at some point down the road, but we really are trying to get leverage out of income statement. And it will take a little while to get there, but there aren't any structural impediments to improving the profitability ratios.

Bob, we had a pretty terrific growth rate outside the US, as I mentioned, some of that is Japan, but the bulk of that came out of Europe. The biggest lift we got was related to what we believe is the market growing faster. Might we have gained share, we might have. But we really don't -- aren't able to say that with any level of precision. Our largest competitor reports in an off quarter for us, so it is hard for us to be able to do the exact math on that. And now that we have multiple smaller players as well, it gets more challenging for us to nail market shares. But, yes, we believe we probably improved our competitive position in the quarter as well.

Great. Thanks, guys.

Michael Weinstein, JPMorgan.

Thank you. I'll add to all the different words that were used to describe the quarter, but obviously very, very strong. Let me just clarify two items. Mike, the TFTA split that you gave earlier, was that the market near view or is that Edwards?

No that was us, Mike. Thank you for your comment by the way. The 75/25 split was Edwards. I would guess that our competitor would be even higher transfemoral, but I don't -- I can't speak to that with certainty.

Right. And then I just wanted to pursue the money shift within where you're moving money out of glucose monitoring to ESR, and you're increasing the investment in advanced structural heart opportunities. I was hoping you could help describe for us what are advanced structural heart opportunities outside of the mitral replacement device?

Yes. Well, actually, the transcatheter mitral opportunity is one of those places where we will be increasing investment. In addition to that, we just think broadly in the area of structural heart that technology is available to be able to treat structural heart disease with interventional or minimally invasive technologies. And this could impact any of the valve positions, and it could even move into patients that suffer from heart failure. And we're not going to be specific on what we're working on. But we have multiple programs that are in our advanced technology area, where we're pursuing opportunities and we're hopeful that some of those come to fruition. There's some promise there, but still early.

And just last question on that. So are those all internal programs, and are any of them in humans that you could talk about?

Most of them are internal, but we also have some external programs. And in general, we'll keep you updated. When they tend to move into humans, you'll hear about them reported at medical meetings.

Perfect. Thank you, Mike.

Sure.

Thank you. Ladies and gentlemen, due to time constraints, our final question will be coming from the line of Glenn Novarro with RBC Capital Markets.

Thanks for squeezing me in, guys. So two questions, one for Mike and one for Scott. Mike, just to follow-up on mitral. It seems like there's some smaller competitors that seem to be starting more formalized trials. And you're moving to a little bit of a formalized trial with your Europe and Canadian first-in-man experience. So I'm just wondering, as you look at the landscape, where do you feel you are competitive wise? Do you feel like you're in line with some of the smaller players that are starting more formal trials, or do you feel like you're a little bit behind?

And then, Scott, you mentioned your free cash flow for the year is going to be at the high end of the range. You are buying back stock, but you're not buying back stock aggressively. So how should we think about use of cash going forward as your cash pile continues to build? Thanks.

Thanks, Glenn. I'll answer your first question. It's a tough one to call about who's ahead at this very, very early stage. Most of us all just have a small number of patients. And as you correctly noted, some of us are into some more formal studies. But those are still small studies, and so I think it remains to be seen who's in front on that dimension. I can tell you that Edwards Lifesciences has an intention to be the leader in transcatheter mitral technologies, but that's for us to work on and deliver.

And regarding the share repurchase, I'll just start with cash usage in general. Our first call on cash is investing in high returning internal organic growth opportunities. We look at outside investments as well, external acquisition opportunities. They're generally small, minority investments, joint ventures, buying intellectual property. But that's an important direction for our cash usage as well.

And then share repurchase is going to be the biggest use of cash. And we're going to, over time, be an aggressive repurchaser of shares as we have been historically. But we also want to make sure we dollar cost average, and that we make sure we're tracking over the overall macro economic and big picture stock market moves. So that we have a chance to spread out our repurchases. And that's what we're going to plan to do.

Okay. Great, thank you, guys.

Thanks, Glenn, and thanks, all for your continued interest in Edwards. Scott, and David, and I will welcome any additional questions by telephone. And with that, back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call which include underlying growth rates, sales results excluding currency impacts, and amounts adjusted for special items are included in today's press release, and can also be found in the Investor Relations section of our website at Edwards.com.

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 the conference number 13592286. Let me repeat those numbers, you dial 877-660-6853 or 201-612-7415, and the conference number is 13592286. Additionally, an audio replay will be archived on the Investor Relations section of our website. Thank you.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you very much for your participation.