愛德華生命科學 (EW) 2016 Q3 法說會逐字稿

Greetings and welcome to the Edwards Life Sciences third-quarter 2016 earnings conference call. At this time all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(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 2016 financial results. During today's call we will 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 financial guidance and current expectations for clinical regulatory reimbursement and competitive matters, as well is trends in therapy adoption and foreign currency movements. 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.

Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in our press release, our 2015 annual report on form 10-K and our other SEC filings, all of which are available on our website at Edwards.com. Also, a quick reminder that when we use the terms underlying and adjusted 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 strong third quarter underlying sales growth of 18%, which is consistent with our increased expectations. 2016 has been a remarkable year for our Company, with your to date sales growth rate of 20%, about double our original expected growth rate. This reflects continued strong global adoption of our SAPIEN 3 platform which remains on track to generate over $300 million more in sales then we originally expected for the year.

During the quarter, we were also pleased to receive a number of important regulatory approvals in each of our business units to drive future growth. Consistent with our strategy, we are aggressively investing to bring breakthrough therapies to an even broader group of patients around the world.

In transcatheter heart valves global sales were $410 million, up 37% on an underlying basis over the prior year. Growth was led by continued strong therapy adoption across all geographies with notable strength in the US and Japan. Globally, average selling prices were stable in each geography. In the US, transcatheter heart valves sales for the quarter were $260 million and grew 55% on an underlying basis versus the prior year.

Overall, growth was consistent with our expectations with robust performance driven by continued strong procedure growth in both large and small TAVR programs. As expected, in mid-August we received FDA approval to expand the use of SAPIEN 3 or intermediate risk patients which is the first TAVR therapy to obtain this indication in the United States.

The high-volume clinical sites already treating intermediate risk patients are under our continued access protocol and they have now transitioned to commercial sales. Enrollment continues in our PARTNER III low risk trial with more than 50 of our trial sites actively engaged. We believe this randomized trial should be enrolled by mid-2017 and we will provide an updated at our December investor conference.

Outside of the US underlying THV sales grew 15%. We continue to be encourage by the strong adoption of TAVR in Japan with the rollout of SAPIEN 3 expected to be completed during the fourth quarter. In Europe, we saw strong procedure growth across the majority of countries. We estimate total procedures grew around 20% in the third quarter compared to last year. However, Edwards growth rate was lower primarily due to reduced selling in France.

We are pleased to be resolving the issue we described last quarter related to the French policy that effectively limited the number of TAVR procedures in 2016. Very strong therapy adoption caused the cap to be reached during the third quarter, earlier than expected. As a result, we reduced shipments in the third quarter, which impacted our sales by about $5 million.

Fourth quarter results will also be impacted as we have just now resumed shipments and expect to return to a near normal run rate by year end. Our 2016 sales guidance reflects the current situation, and we are working toward a long-term resolution for 2017 and beyond. Also during the quarter, we received an intermediate risk indication for SAPIEN 3 in Europe. We continue to anticipate gradual expansion into these patients as clinical guidelines are revised and reimbursement policies our updated.

We continue to expect that our new Ultra System featuring an on balloon delivery system and next generation sheath technology will be launched in Europe in the second half of 2017. We anticipate routine clinical updates on our SAPIEN platform at the upcoming PCT meeting. These include long-term PARTNER I data and quality of life data from PARTNER II. Although we anticipate an update on the Centerra System, we expect a more robust data set at euro PCR in 2017.

In summary, based on our strong year-to-date results, we are reiterating our 2016 THV sales guidance of between $1.5 billion to $1.7 billion. We continue to expect our 2016 underlying sales growth to exceed 30% as momentum of global therapy adoption remains strong.

Turning to the surgical heart valves, sales for the third quarter were $191 million and were flat compared to last year's results as micro valve sales were covered and grew slightly, while aortic valve sales declined modestly. Globally our ASP was slightly higher due to product and regional mix. We have addressed the surgical mitral valve production matter that affected us last quarter. Globally, sales are recovering as inventories are being replenished. In the third quarter, global surgical aortic valve sales were soft, which we believe was due to the impact of TAVR including a possible pent-up demand among US intermediate risk patients and a spillover effect from the mitral shortage.

This quarter we received two approvals for our innovative surgical valve platforms designed for the future needs of patients requiring surgical interventions who are not indicated for transcatheter therapy. Our INTUITY Elite system was approved in the US. Clinician feedback from the initial implants has been positive and we are positioning INTUITY Elite as a premium valve procedure and supporting it with the evidence of a strong value proposition. We also recently received the CE Mark for our INSPIRIS RESILIA aortic valve. The first in a new class of resilient heart valves that we expect to become our leading surgical valve platform globally. We are planning an initial introduction of INSPIRIS in Europe during the fourth quarter with the full launch expected in 2017.

In summary, given our year to date results, we continue to expect 2016 underlying sales growth for the full year to be between 0% and 2%. Although we believe we are beginning to see -- although we are beginning to see the impact of TAVR, we expect our new product launches will lift our growth in 2017. In the Critical Care product group sales for the quarter were $138 million and grew 3% on an underlying basis. Our results were driven primarily by double-digit growth of our enhanced surgical recovery program across most regions. As expected growth was lower this quarter due to prior year comparisons.

As we announced previously, during the quarter we received CE Mark for a key new technology. The Acumen HPI software suite with our new FloTrac IQ Smart Disposable. This system provides the first of its kind hypotension, or low blood pressure, probability indicator during hemodynamic monitoring. Both are planned for targeted commercial release in Europe this year with a full launch in 2017.

Based on our year to date results we are maintaining our Critical Care underlying sales growth expectation to be between 5% and 7% for 2016. In our structural heart initiatives, we continue to make progress on our Forma System for reducing tricuspid regurgitation and our CardiAQ Edwards transcatheter mitral valve platform.

In our CardiAQ mitral valve replacement program, we are focused primarily on system enhancements and gaining clinical experience. Our clinical investigators believe that a less invasive transseptal approach will be preferred for treating patients suffering from mitral regurgitation and heart failure. During the third quarter our investigators began treating patients with our improved transseptal delivery system in our US early feasibility study.

Our CE Mark trial is expected to begin soon. This trial, called the relief trial, has been delayed due to more challenging regulatory processes then were anticipated for our most recent submission. As we indicated last quarter the relief trial is expected to include approximately 15 centers in Europe and Canada and will include transapical and transseptal delivery systems consistent will be desires of our clinicians. This single arm study will include patients suffering from functional and degenerative mitral regurgitation and we expect clinical program updates will be shared at scientific meetings in 2017.

In our Forma Program we have begun our CE Mark trial, The Spacer Trial, to evaluate this technology in patients with clinically significant symptomatic tricuspid valve regurgitation who are at high risk for surgery. The Forma device is a spacer placed within the native tricuspid valve designed to improve valve performance and patient symptoms. The primary safety endpoint is 30 days with longer-term follow-up. We're also engaged in a US early feasibility study, and expect a presentation at TCV -- TCT next week on our compassionate use experience.

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

Thanks, Mike.

Another strong performance in transcatheter valve sales drove significant top-line and bottom-line growth this quarter versus the prior year. Our results were consistent with our guidance, which we raised three times this year as we delivered underlying sales growth of 18%. Adjusted earnings-per-share grew 26% reflecting significant leverage during the quarter. Adjusted earnings-per-share was $0.68 and GAAP earnings per share was $0.65, which includes our customary adjustments for intellectual property litigation expenses and amortization of intangibles. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release.

For the quarter, our gross profit margin was 72.8% compared to 76.2% in the same period last year. This decrease, which we expected, was driven predominantly by the same foreign-exchange factors that negatively impacted our gross margins in the first half of 2016. We expect this to continue through the fourth quarter, and our full-year 2016 gross profit margin guidance remains unchanged at 73% to 74% excluding special items. We expect gross margins to strengthen in 2017 as product mix improvement continues. And we will discuss those expectations at our investor conference in December.

Turning to selling general and administrative expenses, third quarter expenses increased 8% over the prior-year to $230 million, or 31.1% of sales. This increase was driven by sales and personnel related expenses, primarily in transcatheter heart valves, partially offset by the suspension of the medical device excise tax. We continue to expect SG&A excluding special items to be between 30% and 32% of sales for the full-year.

We've increased investments in structural heart initiatives with the benefit of this year's medical device excise tax suspension. R&D investments in the quarter increased 12% over the prior year to $113 million or 15.3% of sales. This increase was primarily the result of continued investments in our aortic and mitral transcatheter valve programs. We expect our R&D investments, excluding special items, to be between 15% and 16% of sales in the fourth quarter. Our reported tax rate for the quarter was 23.7%, up from 21.6% in the prior-year period. This increase was driven by improved results in the US, our region with the highest tax rate. We continue to expect our full-year tax rate, excluding special items to be between 22% and 23%.

Starting in 2017 our tax rate will reflect the new accounting standard for employees stock option exercises. It is difficult to predict the impact, given the uncertainty of these exercises and our stock price. Rather than simply reflecting the expected benefit of this accounting change in 2017, our intention is to provide adjusted earnings-per-share guidance that excludes this impact to facilitate transparent year-over-year comparisons.

Foreign-exchange rates increased third quarter sales by $8 million compared to the prior year. Compared to our July guidance, FX rates favorably impacted EPS by $0.01 in the third quarter. Free cash flow generated during the quarter was $158 million. We define this as cash flow from operating activities of $206 million less capital investments of $48 million.

Turning to the balance sheet, at the end of the quarter we had cash, cash equivalents, and short-term investments of approximately $1.2 billion. Total debt was approximately $600 million. Average shares outstanding during the quarter were 218 million, which is consistent with our assumption for the fourth quarter and full-year.

Now turning to our 2016 guidance, for 2016 we are reiterating all of our full-year sales guidance ranges. For transcatheter heart valves, we continue to expect sales of $1.5 billion to $1.7 billion. For surgical heart valves we expect sales of $780 million to $720 million and for Critical Care we expect sales of $540 million to of $580 million. For total Edwards we continue to expect sales at the high-end of our $2.7 billion to $3 billion range.

Given our strong performance in the third quarter we are increasing our guidance for adjusted earnings-per-share to be between $2.82 and $2.92. And we continue to expect free cash flow, excluding special items, to be between $500 million and $600 million. For the fourth quarter of 2016, at current foreign-exchange rates, we project sales to be between $750 million and $790 million and adjusted earnings-per-share to be between $0.67 and $0.77.

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

Thanks, Scott.

We are very pleased with our strong year to date financial performance. As patients and clinicians increasingly prefer TAVR, we remain as optimistic as ever about the long-term growth opportunity. We are committed to aggressively investing in our future consistent with our focus innovation strategy, and we are confident that these investments will result in innovative therapies that will enable us to treat a broader group of patients and drive continued strong organic growth.

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

Thank you, Mike.

Before we open it up for questions I would like to remind you to mark your calendars for Thursday, December 8, when we will be hosting our 2016 investor conference in New York. This event will include updates on our latest technologies, as well as our outlook for 2017. More information will be available in the coming weeks on our website.

In order to allow broad participation in our Q&A we ask that you please limit the number of questions. If you have additional questions please reenter the queue and we will answer as many as we can during the remainder of the hour.

Operator we are ready questions, please.

(Operator Instructions)

Larry Biegelsen with Wells Fargo.

Hi, good afternoon, guys, thanks for taking the question.

Let me start, Mike, with the US and the intermediate risk indication. Can you talk a little but more about what you are seeing since the approval in August? Even though you had very strong growth this quarter, I think people will look at the deceleration in the US TAVR growth in Q3 versus Q2.

We had heard at the Cleveland clinic that maybe there was some confusion about the reimbursement, whether it was already in place for intermediate risk. So any update you can give us there would be helpful. And I did have a follow-up.

Sure, happy to take the question, Larry.

We are pleased with the sales performance in the quarter and 2016 in general. Pretty much the approval came as we expected in terms of the approval timing. And in terms of what we thought our sales would be, actually the US probably came in just slightly stronger than what we anticipated.

So it's pretty consistent with our expectation. Remember we have a growth rate that I think was 55% in the quarter compared to something that was in the 60%s last quarter. So not a lot of difference there, and I don't know that you should read too much into that.

That's helpful.

And then you grew again, I think, about 21% in the second quarter. 18% underlying the third quarter. But I think the Q4 guidance is about 13% to 19% growth. So what would get you to the high end versus the low end there? Thanks for taking the questions.

Are you talking about what the fourth quarter might be globally for Edwards?

Yes, the guidance implies about 13% to 19%. So just trying to understand what gets you to the low end versus the high end there.

I think our guidance tried to speak for itself. We had felt going into this quarter that we were going to end the year toward the high end of that range that put us close to $3 billion. And we continue to feel that way. And given that this quarter was pretty consistent with what we expected, we think the fourth quarter will also go that way.

I don't know what other color to offer, Larry. But we feel pretty good about the way things are going. The situation in France was one that was unexpected. We didn't expect it to hit us in the third quarter, so that was a little bit of a curveball. But not much else is off-track.

Thanks for taking the questions, guys.

Mike Weinstein with JPMorgan.

Thanks for taking the questions.

Mike, I know that the US, and it sounds like the US performance maybe ex-France, was in line with your expectations. But you are the victim of your own death, unfortunately. The Company has beaten your own expectations and street expectations on revenues nine straight quarters in earnings 13 straight. That's why you've got some consternation on the phone tonight.

So, Mike, when you look at the market and the dynamics, particularly with intermediate risk coming next quarter here in the US and later in the quarter in Europe, anything change your thoughts on the trajectory of the business? Or any reason why you think there were some slowdowns sequentially versus what we have seen in the prior three quarters?

No, I really don't have a reason to talk about a sequential slowdown, Michael. As you know, the numbers are getting larger every quarter. So there is something to consider there.

But when we go to the big picture, we continue to think we are early on in the TAVR adoption cycle. We expect this to be more than $5 billion in 2021 and to grow quite a bit beyond that. I wouldn't read too much into any particular quarter.

We are very pleased to get this intermediate risk. It came pretty consistent with what we thought. The labeling is quite consistent with what we thought. And it's just going to take a little time for people to change their practice. I don't think can anybody -- if they are anticipating a step function, then they must not be following exactly the way this has gone. Generally, it's been more of a gradual ramp for us.

Understood.

Let me ask one question on the CardiAQ Program, if I can. It sounds like you are expecting some trials to start shortly. If we look forward to 2017, do think you will be in a position, given you just started the US feasibility and the release study is just about to get underway, that you would have some 30-day data at PCR? Or do think we will probably be waiting until TCT to see that?

I hate to project when we are going to have results, Michael. You know this is a high-priority program. We are very pleased to be enrolling patients with a transseptal delivery system in the US. And actually, our clinicians in Canada and Europe are looking forward to that as well. But we will try to give you a little bit more guidance at the investor conference in terms of what to expect in 2017.

That would be great. Thank you, Mike, for taking the questions.

Matt Miksic with UBS.

Hi, thanks for taking my questions. So one question just looking at the -- call it deceleration, but I guess slower year-over-year growth in the third quarter versus the second quarter. That is not all that dissimilar to what was the last summer and in the third quarter compared to the second quarter.

Just wondering if you could speak to any color on -- is there a seasonal pattern here we should pay attention to that's in play? Is there a transition to centers that are ramping up in advance of an intermediate indication that is a factor here we should be mindful of, putting aside how great this opportunity is over the long term?

And then I have a follow-up.

Sure, Matt. A couple of things. One is that, yes, we always see a seasonal impact. So it is not unusual for us to be slow in July and August and for that to strengthen in September. And that's indeed the way the third quarter went.

If we start looking around the country, we saw both large and small hospitals grow. Remember what we said about the continued access switching up. So you had the 50, which in many cases where the largest centers that flipped over from doing clinical cases to doing commercial cases. So you should keep that in mind. And so that's probably the bigger picture.

I don't know. If you are looking at global numbers, I think it's worth noting that France impacted us negatively. We ventured around $5 million in the quarter. So that may help with some of that as well.

Sure, thanks.

And then on just a follow-up on CENTERRA. You mentioned some data here at TCP, but then more meaningful data next year. If you could maybe, given how successful and how well the clinical data has progressed for SAPIEN 3, maybe flush out what is the role? Remind us again of where this fits in, in the armamentarium, and how you see it playing a role in your product lineup as we get closer to that coming to market.

Yes thanks. I wouldn't be surprised if there is some kind of data that gets presented at TCP, but I'm not sure of the nature of it. What we thought is that actually the CE Mark trial is likely to be presented at PCR. So that's what we were referring to about 2017.

Over the long-term, our commercial strategy will be more clearly defined as we actually see that data ourselves. But the way we've looked at it going into it, there has been a number of users. It's been the minority, but a number of users that have preferred a self-expanding system. And we think CENTERRA is a pretty outstanding self expanding system. So that's been our rationale up to now. But what will be most important to us it to see what that clinical data looks like.

Got it, thank you, Mike.

Yes.

Bruce Nudell with SunTrust Robinson Humphrey.

Good afternoon. Thanks for taking the question.

Mike, as we called around in Europe, we saw or we heard of a large price differential with you guys maintaining price in a very disciplined manner. How much of a market share impact is this playing? And you feel the need to play along with it given the excellence of your data?

And I have a follow-up.

Yes, I'm sorry -- there seems like there is a little bit of noise online. Hopefully you can hear me okay.

Indeed we do operate with a price premium. In many cases, it might be as much as 20%. And it's possible that we lose some market share as a result of that.

You are right, we have every intention of maintaining our discipline. It's difficult to quantify exactly how that works. We are convinced that we can maintain a strong leadership position by doing that because of the high level of differentiation there is with SAPIEN 3 valve. It just performs at an extremely high level, and so we expect it to continue to do that.

And again, when you're thinking about market share we noted that Europe grew at 20% this quarter; and we grew less than that. Remember the impact of this situation in France is part of that, a big part of it.

And my follow-up pertains to mitral. How is it feeling to you? Do you see commercialization on the not-too-distant horizon? Or do you really feel that there is a lot of fundamental work left to be done?

We have -- thanks, Bruce. We have got just a lot to learn at this point. We are very pleased to be engaged in doing cases. It's the single most important thing we can do. And we are glad to be engaged in the US right now.

And we are going to be ramping up here pretty good in Canada, in Europe as well. That's going to be very meaningful to us. We have cautioned you please not to include any kind of revenue expectation in 2017. And I hesitate to say much more than that, Bruce.

You can tell we are enthusiastic. We would not be beginning a CE Mark trial if we weren't enthusiastic about this. But there is a lot be proven. And the only way for us to really know the answer is to have some good experience.

Thanks so much, Mike.

Jason Mills with Canaccord Genuity.

Hi, Mike, can you hear me okay?

Yes, I hear you great. Are we coming through okay, Jason?

You are. It is just occasionally you hear some echo. I will just go ahead, and let me know if you need me to repeat it.

Just wanted to say on the topic of international transcatheter valves, you highlighted Japan, Mike. And that has been a burgeoning market for a while. I am wondering if you can segment it a bit for us, as far as you are willing to quantify, just how big a market Japan is. And how much of the growth that you saw. The market saw 20%; how much of that is coming from Japan? And structurally, if there's anything in Japan that's changed over the last several months to make it a more tapable market, if you will?

Thanks, Jason. Early on, I think we projected that Japan was likely to be a market in the $300 million to $400 million range. We have to refine that. As we noted, it got started a little slower than we thought.

They created some structural barriers, including a different approval process for a site to start. And we thought that slowed us down. But like many things in Japan now, although they might start slowly, as they start adopting the therapy, it starts catching on. We think it is likely to be maybe just under $100 million opportunity in 2016. But the SAPIEN 3 launch is probably one of the stimulus to growth in Japan, and we are experiencing that right now.

Got it. So did your European business ex-France -- did have growth in the quarter -- in TAVI?

Oh, yes. It grew. It probably grew at low double digits, but it grew. It just didn't grow as fast as the market, and the biggest impact was what happened in France.

That's helpful.

As a follow-up, in the United States, I think it was asked earlier. I didn't hear a response. Just to the reimbursement landscape for TAVR and specifically intermediate risk. Obviously the guidelines accommodate reimbursement for evidence development. And intermediate risk obviously has that evidence out.

Is there any indication to you that anybody anywhere in the country is having an issue with respect to reimbursement for intermediate risk patients or categorizing the intermediate risk patients? Is that, at all, having any impact on the penetration of that segment? Thanks, Mike.

Thanks, Jason, we are going to need to let others ask some questions too.

I can't tell you that I'm aware of anybody that is having a particular reimbursement problem. We have situations around the country where customers will push back on price; that happens. But we have a lot of confidence in the fact that TAVR delivers great value to all the stakeholders. And so I wouldn't call it an obstacle.

Thanks, Mike.

Brooks West with Piper Jaffray.

Hi, thanks, can you hear me?

Yes, Brooks.

Okay, great. Mike, I just want to make sure I have the mechanics of the intermediate US launch correct. I know you got the indication mid August. You brought the guys in out of the field for some training. So I'm assuming by early September you were out detailing accounts.

Can you talk about -- did I hear you correctly in saying that it was just the IDE sites that were doing intermediate risk patients in September? And how has that progressed? Or was it literally like a light switch going on, and everybody was doing intermediate cases right out of the gates?

No, it's closer to being the light switch, if you will, Brooks. So, yes, we got the approval; we had our team already trained. Remember, this was just a label change; so people already had the valves on their shelf.

When I was talking about the IDE sites, what I was trying to indicate is they were already treating their intermediate risk patients through the continued access protocol. And so those sites flipped over from treating them within this clinical protocol into commercial sales. So not a big change in practice for them. And for the others, there was some that our team help them out with some coding.

But again, you need to think about what broadly happens in medicine. This is a referral process, and it takes a while for the referral process to really get rewired. So I don't think anybody should expect that there is a step function that went along with this approval.

Okay, great. That's all I had. Thanks, Mike.

Sure.

David Lewis with Morgan Stanley.

Good afternoon. So, Scott and Mike, I wanted to come back to your guidance for TAVR of $1.5 billion to $1.7 billion. I think we are all familiar tonight the debate is that the business didn't grow. The US TAVR business double digits, but the $1.5 billion to $1.7 billion guidance doesn't really answer that debate for shareholders.

Scott, I was wondering, maybe you can help us understand the construction of guidance. Because the debate really centers on whether you do $1.65 billion to $1.7 billion. So is it a safe assumption if you felt that $1.7 billion, the top in your guidance, was not achievable by the fourth quarter, you would have revised that guidance? Help us understand how you were thinking about the construction of not changing the $1.5 billion to $1.7 billion.

Keep in mind our philosophy on guidance is to aim for the midpoint. And that's what we do for our business units and for the Company in total. I think that we achieved our guidance this quarter for the first time in quite a while. And it reflects the fact that we've got three guidance increases during the course of the year. We intentionally have not increased guidance for any of the business units or consolidated going into Q4.

It still growing very rapidly. The Company grew 20% in the first quarter, 21% in the second quarter, 18% in the third quarter. We have TAVR growing in the US at 55%, compared to 60-some% some in Q2 and Q1. So we feel really good about the growth. We still feel good about the market expansion opportunity. But, no, we are not expecting any different range than what we have already talked about for TAVR for the Company.

Okay, Scott, obviously at $1.6 billion -- sorry to push you here. $1.6 billion obviously is a deceleration, frankly, in the US market and $1.7 billion. And we are realizing we are spending too much time thinking about the growth deceleration because obviously the business is back on track. And that's why I am pushing here.

So your view that $1.6 billion is still the right way of thinking about it still holds, even though we are really heading into the fourth quarter of the year?

If you just do the year-to-date results and extrapolate a reasonable growth rate assumption, then sure. The midpoint of that range is a good assumption going into the fourth quarter and probably a little bit above that. It is tough to get a perfect beat on because when we've got a business in the US that is grown 55% and 60% range year to date, it's tough to have a lot of precision. But I think aiming for the mid-part of the range is a much better assumption then aiming for $1.7 billion.

Okay and, Mike, real quickly, a clinical question for you. On TCT, embolic protection is something you talked about several years ago. But in the last couple of years you have talked less about as, frankly, clinical endpoints have gotten dramatically better for TAVR procedures. If we see successful embolic protection data next week at TCT, does that matter to you or your business and change your strategic direction? Or are you still just focused on making the TAVR procedure better without embolic protection? Thanks so much.

Thanks, David. We've got such robust data. You have to think of what we been through. We've been through the PARTNER I and now the PARTNER II data. And the PARTNER II data with SAPIEN 3 suggested there was a 1% stroke rate. And this was heavily adjudicated. And remember, a neurological assessment before, during, and after TAVR. So hard to imagine that this isn't really high-quality evidence.

So it's going to be tough for us to anticipate that anything that could be presented that is going to suggest we would have to argue that we are going to take it less than 1%. If there was some argument and there was that sound of data, that would be interesting. But it's a pretty high hurdle for us to believe that's an important part of future therapy.

Okay, thank you very much.

Sure.

Bob Hopkins with Bank of America.

Thanks and good afternoon.

Hey, Bob.

Hey. Just a couple of really quick ones. A lot of the key questions have been asked.

Scott, maybe a quick question for you. Looking forward to the Analyst Day here in a little bit. And I know you are not going to give any thoughts on 2017 in any sort of concrete way today. But consensus is at about 12% revenue growth for 2017 and about 19% earnings growth for 2017.

Maybe at a minimum, could you just help us think through some of the important puts and takes that we should be considering? And if you think people aren't considering things, please point that out. Just any preliminary thoughts on major puts and takes as we think about modeling for next year.

Sure. You are right. It is premature to give you specific underlying growth rate expectations for the top-line, but maybe I can take you through the P&L. For gross profit margin, this year's guidance was 73% to 74%. I think we will get a little bit of a lift from that in 2017. Keep in mind, we are still going to be investing and growing capacity and investing in our operations. But we should get a little bit of lift in our gross margin.

For SG&A, we continue to drive expenses down. Our guidance for the year was 30% to 32%; this quarter we came in at 31%. It's reasonable that we can continue to improve on SG&A. Again, it's going to be a slower improvement curve than what we achieved over the last 18 months when we went from the high 30%s to the low 30%s. But we are going to keep working on trying to drive efficiency in the back office and overhead expenses.

On R&D, this year's R&D as a percentage of sales rate is probably a good assumption because you think about ramping up the low risk trial for TAVR and the investments we're making in our transcatheter mitral valve and other programs, that's probably a good indicator of where the spend should come in, in 2017.

The other big one is just the tax rate, and we are still puzzling what the tax rate forecast should look like. There has been upward pressure to the tune of 200 basis points this quarter. We're doing a lot of things internally to try to mitigate that upper pressure. But as we continue to grow in the US, it's something we are going to continue to fight.

Hopefully that gives you some of the pushes and takes. And we will get more into the details in December.

Okay, that's very helpful. One really quick follow-up.

First, Scott, do think people are missing anything significantly that is worth calling out on the top line?

And then just really quickly on mitral. Mike, do you still expect the CE Mark trial to start this year, or could that push into early next? Thank you very much.

No, we think we're pretty close here. We think it's going to start very soon.

On the top line, I think this is pretty reflective of the strength of the business. And so we may be victims of our own success in terms of coming in almost exactly where we had expected, but we are still really pleased with our top-line performance. At the beginning of the year, we thought consolidated top-line underlying growth was going to be something like 7% to 11%. And now we are running at 18% this quarter, 20% range in Q2 and Q1.

We originally thought TAVR was going to be 10% to 18%; now we are running 37% in third quarter. So there's a lot of tailwind to our growth rates. And especially after increasing our guidance $300 million on the year, we are feeling really good about executing on a pretty high bar.

Great, thank you very much.

Glenn Novarro with RBC Capital Markets.

Thanks.

Mike, just had a question on Europe and the competitive landscape. I think on past calls you said that beyond even Medtronic, the smaller players had about 10% to 15% European market share. Is that the case? Has anything changed?

Because when I look at Europe and I take out France, Europe still came in a little bit light. So I was wondering if some of that could be just the competitive dynamics. Thanks.

Thanks, Glenn. I think there was a little bit of share loss beyond France. So that's fair in Europe. But it doesn't look like it came much from the smaller competitors.

I think that last quarter we said the smaller competitors were around 15%. And it still seems that they are pretty close to that. There may be a little bit of movement amongst them; but if anything, we might've lost a little bit of share to Medtronic this quarter.

Okay, and just as a follow-up to surgical valves now. You made the comment in your prepared remarks that you thought intermediate was starting to slow down the US surgical market. How should we think about this market going forward? Should we start modeling this as a flat to down market overall?

And I think you said that you thought you had actually grow your surgical valves next year. So a flat to down market, with Edwards maybe taking shares, is that how should we think about it over the next couple of years? Thanks.

We're looking at that very carefully. And you know the big SAPIEN 3 data that was presented at the ACC probably caused us and everybody else to think about this a little bit differently. So we are watching them very closely.

I think it's logical to assume what you said, which is that the conversion to TAVR is likely to slow that down and maybe to be a zero -- something in that range in the US -- a zero growth rate. We are pleased that we've got a number of innovations in the surgical valves space that are going to be exciting, that we think are going to drive our own growth and help us with that headwind.

Okay, thanks, Mike.

Sure.

Danielle Antalffy of Leerink Partners.

Good afternoon, guys. Thank you so much for taking the question.

Mike, you mentioned as we think about the intermediate risk indication, it's not necessarily a light switch. Part of that is the referral network. The sense I get from talking to folks, as well as centers having to build capacity. And so I'm wondering how much of either of those are you seeing as the gating factor in the intermediate risk indication. And if there is a point at which we do see an inflection point, once the capacity comes online and once the referral network starts really moving.

Thanks, Danielle. You can imagine, it is difficult to know in any exact sense on those points that you mentioned. But if you were to ask our team, they would say that they don't believe that hospital capacity is a big issue. They would say that they have been impressed with the sites' ability to add cases and add capacity particularly with SAPIEN 3.

That more of what they will refer to is the referral network has to change. And so minds have to change, the minds of surgeons. And remember, you've got many hospitals out there that are not TAVR centers right now. So you've got a fair amount of that change that needs to be implemented, and that is part of what drives the curve.

Okay, great and one quick question about France. Have you provided us with what the annual run rate last year was for France? Just to get a sense of -- I know you said it was $5 million to this quarter, but just as we think about going forward.

We have not done that. I don't have that handy. It is our second largest country in Europe, and it has been growing quite fast. It's actually more recently been growing faster than the rest of Europe, so it is significant. And so we are glad to be working toward a solution in France because that is important to patients there.

I assume you were a market share leader in France as well, so you are disproportionately affected. Yes, as a matter fact, in 2016 there are only two companies that are approved in France, Edwards and Medtronic. And we are a clear leader. Okay. Thank you so much.

Ben Andrew with William Blair.

Good afternoon.

Scott, maybe just talk a little bit about, if you will, 2017 gross margin. We've talked in the past about a new manufacturing facility coming online in Costa Rica over the first part of the year. So might we think of that cadence of gross margin improvement being more back-half weighted, just for modeling purposes?

Probably not a whole lot of benefit from Costa Rica coming online in 2017. Our plan is that we are going to start production on a limited basis toward the back half of the year. But it's really not going to start moving the needle on gross profit margin. In fact, we are going to be continue to be investing to help support that development.

We are going to get mix improvement though in 2017. This quarter, we got probably 200 basis points of mix improvement on our gross profit margin. I'm not sure we are going to be able to accomplish that much in 2017. But I think you're going to have this lift that I mentioned earlier coming from some mix improvement offset by that continuing investment in operations.

Okay. And then a totally unrelated follow-up. I apologize, but might we see any valve durability data coming up here at TCT on near-term? Or are there discussion of next steps on that front? Thank you.

This is Mike. Thanks, Ben.

I don't know what is going to be out there. I am not aware of any substantial valve data. We haven't heard it be a big issue in the marketplace.

I think there is some late-breaking data that is echo related from PARTNER I. So there may be something there that is helpful. When you actually see the five-year data from PARTNER I, I think that could be helpful. But I don't that there is going to be much incremental beyond that.

Thank you.

Joanne Wuensch with BMO Capital Markets.

Hi, can you hear me okay?

Yes. I hear you fine, Joanne.

Wonderful, thank you for taking the question. It's actually two parts and completely unrelated.

The first part is use of cash. With $1.1 billion sitting on the balance sheet, how should we think about you deploying this one?

And then my second question has to do with when we would talk with physicians, we hear about adding rooms, adding days, adding lots of capacity. Are we anywhere near worrying about capacity constraints in the US yet? Thank you.

Why don't I take the cash piece, Mike, and you take the second piece.

On use of cash, our priorities have not changed at all. Our first priority is still to make sure we are investing in high return, important, long-term growth therapies. And in terms of free cash flow, we fund episodic acquisitions.

They're going to continue to be likely not great big acquisitions. Historically, they are smaller investments, minority investments, options to buy Companies' funding, start-up, joint venture types of companies. But we will continue to be investing in external growth.

And of course we have been active repurchasers of our shares. And we're going to continue to do that on an opportunistic basis to at least offset the dilutive effects of incentive compensation. And we would like to continue to reduce the share count as well, which we have done here over the last several years.

One of the big issues we are dealing with is we have $1.2 billion in cash, but a lot of it is stranded outside of the US. So that's cash that is not available for share repurchase. And that is something that we are going to continue to work on in terms of how we structure our assets and where we realize profits and cash around the world.

And, Joanne, your question about capacity and are we concerned. We are not concerned about it. What we have primarily seen is people adding cases to the day that they already do TAVR.

Just because the SAPIEN 3 cases go faster, they are so much more efficient, they are so much more problem three free. People find they can do more cases of the same day without making a significant investment. There are, of course, people that are adding days; there are some people that are adding capacity. But we think those are secondary to people adding cases in a day.

Thank you.

Josh Jennings with Cowen and Company.

Hi, good evening. Thanks, gentlemen.

I was hoping to just ask on post intermediate approval. We've gotten some feedback from clinicians about segmenting the intermediate risk population between the PARTNER II trial and FTS scores that are in the higher end and older patients, 75 and above, versus lower STS scores in the three to four range in the 70 or younger age range.

I know this is still very early days, but are you seeing any differential penetration rates in those two segments with an intermediate risk? And how do you see that evolving in terms of your ability to penetrate that lower end of the intermediate risk range?

Thanks, Josh. It's a little tough. I know when you go out there and talk to customers, sometimes you can find people with their own points of view. And so you will always be subject to that.

We fall back on the PARTNER II trial. It was a big trial, it was robust, and I think it told heart teams a lot about the practice. And I think more or less, it has not differentiated but been said that you should split this group of patients. It was very clear; it said that intermediate patients did better with SAPIEN 3 than they did with surgery. And we certainly know what the patient preference would be.

So we think it is clear. It's just going to take some people time to work through their own thoughts and biases. You remember that surgeons broadly feel that they do a great job with these patients. And so they don't believe that the procedures are very dangerous and so forth. And so this is just part of the process of medicine going through change.

Thanks for that.

And then just a follow-up one, low risk trial in moment. We had just gotten some feedback from a couple of centers that it's a little bit slower than they anticipated. Low-risk patients are trying to circumnavigate randomization to surgery. Don't know if that's broad-based, but if you have any thoughts on that.

And just lastly, good luck with the Cubs tonight.

Thanks very much, Josh.

We got off to a little bit of a slow start because contracting in this start-up phase of the trial did go a little longer than we thought. These were new contracts with each of these sites.

Enrollment is underway. We've got about 50 sites that are engaged. And although it may be started a little slow, it seems like it has picked up. We have not changed our guidance, and we continue to believe that it is mid-next year.

Again, we are watching that closely. And we will update you at the Investor Conference as we get a chance to get a little more experience.

And thank you about the comments for the Cubs.

Kristen Stewart with Deutsche Bank.

Good evening, everybody. Thanks for taking the question.

Just want to go back to the question that Glenn had asked. In the beginning, I thought you had said that aortic valves were down globally. And I think Glenn had said in the US. I just wanted to see what the difference was with the aortic valves in the US versus globally, and just clarify your thoughts on that measure after you answer.

We are talking about surgical aortic valves, not transcatheter valves, right, Kristen?

Correct.

They were slightly negative in the US. They also were a little negative globally.

Okay, and then I guess just a little surprised given that this quarter you just got the intermediate risk. How do you think that that suggests that they are now negative in the US so soon? Does that then suggest that there might have been some penetration into the intermediate already? Or do think this is just more of a digesting process? Or how should we interpret that so soon?

We are trying to sort it out right now. I tried to address this in our comments; and maybe it wasn't really clear, Kristen.

We believe that there is a TAVR effective of some sort. There also were some sites where they inferred that there may have been some pent-up demand amongst intermediate risk patients. In addition to that, we thought that there may have been some spillover effect from the mitrals.

So you can picture a patient that would need a double valve replacement. An aortic and mitral valve. Often a surgeon will choose to make those be the same valve type. So those things may all have influence, and we only have about a month's worth of experience. So tough for us to deduce anything big picture.

We will keep you filled in as we learn a little bit more. But there does seem to be something that happened in this quarter compared to what we have seen in the past. And we will watch it closely and keep you tuned in.

Was it consistent across the quarter?

No. No, it really wasn't; but then again the quarter is always a little bit odd, Kristen. We always have a softer July and August, in both our surgical business and our TAVR business. And it takes up in September. It's tough to tell is this normal seasonality or is it somehow related to the approval? It is just too soon to tell.

And just from a reimbursement standpoint in talking with hospitals. I know you said it wasn't really an issue, but have you talked to hospitals just about the reimbursement for surgical valves versus TAVR? Just because surgical valves, I know, are very very profitable from a hospital perspective.

I think that's right, Kristen. I think broadly -- I think if you were to generalize you would say that surgical valve replacement is a very profitable procedure. In many cases more profitable than TAVR.

But having said that, heart teams are tending to do what they think is right for the patient. Plus at this point, an efficient TAVR program does make money. And when it is a growth program on top of it, it is one that hospitals are incentivized to build.

Okay, thanks very much. And go Cubs.

Thank you.

Matt Taylor with Barclays.

Thanks for taking the question.

I had a clarification question when you talked about France working towards a longer-term resolution. Can you characterize what that might be? And what it would mean for your opportunity there? And are there any other O-US (inaudible) where there are limitations?

Sure. One of these new innovations is reimbursement does end up stimulating demand. Because without reimbursement, it is just not as robust. So the French have a particular system in which they provide reimbursement before DRG goes in place. And they have employed that on TAVR. And they sort of anticipate the number of procedures each year and have designed their system around that.

What happened is TAVR grew so fast in 2016, it grew beyond their number. And that is what has created the situation. We are in pretty deep conversations with them, trying to help them understand the situation and the need of their patients.

And so we are hopeful we have a resolution for 2016 that's pretty robust. And we have engaged in conversations about 2017 and beyond. So it's productive. We are hopeful. Again, we will keep you tuned in if there are new developments. But we are hopeful that we are going to be heading back toward normal.

Okay thanks. Any other places where there might be limitations like that or where you have to get in front of regulators about -- ?

Okay, yes, and we are going to end questions here pretty soon, guys.

But, yes, it's not unusual for us to have these situations. You know that countries that have really good reimbursements tend to have heavier penetration rates. And I think we have shown you some of the countries in Europe in the past where reimbursement is in place and well-known. There is a higher penetration rate. Maybe that's something that we can highlight at our Investor Conference and lay that out for you in terms of where reimbursement exists and where it doesn't. But generally, that's evolving as the therapy becomes proven. So generally our dossiers are so strong on TAVR and it's value proposition that that situation is improving over time.

Thank you.

Chris Pasquale with Guggenheim.

Thanks, and thanks for squeezing me in here.

Mike, you guys have highlighted a number of times how strong the first half of the year was and how much your expectations rose as a result compared to what you were originally expecting. Now we have 3Q results that were very good on an absolute basis, but really didn't reflect a big new indication coming online the way investors may have been expecting.

So how confident are you that the unexpected first-half strength didn't include some pulling forward of demand within that intermediate risk cohort, and that's why the inflection wasn't as sharp this quarter?

Yes, I suppose anything is possible, Chris. I like to think that one of the big inflection points was the PARTNER II data that was presented in April. And so we didn't really see a big difference between Q1 and Q2, so it's difficult to tell.

We never expected a step function. We always expected a gradual increase. And although we've done a reasonably good job of projecting the TAVR opportunity in the long-term, it has been a challenge for us to predict actual quarters. Actually, we probably have done a better job predicting this quarter then we have over the recent past. But I don't have much more explanation than that.

All right, thanks, Mike.

Okay, thanks, everybody for your continued interest in Edwards. Scott, David, and I 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 sales and growth rates 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 these dial (877) 660-6853. Or area (201) 612-7415 and use the conference number 13646430.

I will repeat those numbers. (877) 660-6853. Or (201) 612-7415. And the conference number is 13646430.

Additionally, an audio replay will be available on the Investor Relations section of our website. Thank you very much.

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation. (End of Transcript)