愛德華生命科學 (EW) 2017 Q3 法說會逐字稿

Greetings, and welcome to the Edwards Lifesciences Third Quarter 2017 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Erickson, Vice President, Investor Relations. Thank you, sir. Please begin.

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2017 financial results. During today's call, we'll discuss the results included in the press release and the accompanying financial schedules and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO; and Scott Ullem, CFO.

Before we begin, I'd like to remind you that during today's call, we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to, financial guidance and current expectations for new product approvals, benefits and launches, clinical and regulatory timelines, competitive matters, trends in therapy adoption and foreign currency fluctuations. 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 2016 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, 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 performance that continued to deliver double-digit overall organic growth, driven by robust sales on our innovative therapies. Total sales grew 13% on an underlying basis, which was in line with our expectations. Sales were lifted by strong global growth in TAVR and are consistent with our projection of a plus-$5 billion market opportunity by 2021. We continue to aggressively pursue breakthrough structural heart therapies with a potential to drive significant future growth and help an even broader group of patients.

Before we get into the product line results, I'd like to say a few words about the impact from recent natural disasters in the Caribbean and the U.S. Edwards has significant operations in Puerto Rico and the Dominican Republic, which are the principal manufacturing locations for our Critical Care products. Our Puerto Rico facilities sustained some flooding, which temporarily affected manufacturing operations there until we resumed full production a couple of weeks ago. None of our heart valve manufacturing is conducted in those areas.

Most importantly, all of our employees have been accounted for and are safe. And although a number have reported significant damage to their homes and loss of personal belongings, Edwards and our employees across the globe are generously making contributions in support of our people there. I was able to personally visit the area recently and was very inspired by our employees' resolve and eagerness to return to work so they can continue to help patients.

While a number of the procedures in Houston and Florida were postponed during the hurricanes, fortunately, we believe a substantial number of these patients have since been treated. The majority of these affected hospitals have resumed normal operations, and we estimate the total impact on our third quarter sales was a couple of million dollars.

Turning to Transcatheter Heart Valve Therapy. Adjusted global sales were $498 million, up 20% on an underlying basis over the prior year, including the anticipated adjustment for the consumption of stocking inventory in Germany. Growth was driven by continued strong therapy adoption, both inside and outside the U.S. Globally, our average selling price remained stable.

In the U.S., transcatheter heart valve sales for the quarter were $312 million representing 20% growth versus the prior year. We estimate that the procedure growth in the U.S. was about the same. These results were consistent with our expectations and the typical seasonal slowdown.

Strong adoption continued to fuel an increase in procedures broadly across our network of hospitals, led by our best-in-class SAPIEN 3 valve.

We continue to be encouraged by the strong international adoption of TAVR, particularly where overall therapy penetration is still relatively low. Outside the U.S., our underlying growth rate was an impressive 21%, with a strong contribution from Japan, where TAVR was introduced more recently.

We estimate procedure growth in Europe was in the low teens compared to last year, with Edwards' growth about the same. We estimate our competitive position this quarter remained unchanged.

Consistent with our previous comments, our results reflected little benefit from a competitor's product recall earlier this year and others were the primary beneficiaries.

Growth in European countries with lower TAVR adoption rates continued to outpace countries where the therapy is more established.

Turning to our near-term product pipeline, we recently introduced our CE Mark-pending SAPIEN 3 Ultra System at the PCR London Valves meeting. This system features advancements designed to help TAVR heart teams simplify procedures, save time and reduce the chance of complications. The Ultra System also adds a taller outer skirt on the valve, which is designed to further improve its outstanding performance. We expect to initiate a launch in Europe by the end of the year and plan to introduce this system in the U.S. in late 2018.

At the London Valves conference, excellent 6-month clinical data results were presented on our CENTERA system, continuing the positive trend seen in the 30-day data presented earlier this year. We expect to launch this premium self-expanding valve system in Europe by year-end, and we'll use that experience to inform our U.S. and global plans.

Enrollment on our PARTNER III low-risk trial is progressing, and our goal remains to have this randomized trial enrolled around year-end. And as a reminder, our groundbreaking EARLY-TAVR Trial, the first of its kind to study severe aortic stenosis patients without diagnosed symptoms, continues to enroll.

In summary, we expect our full year THVT underlying sales growth to be around the midpoint of our previous 20% to 25% guidance. This reflects significantly better results than our original sales guidance of 15% to 20%.

Turning to Surgical Heart Valve Therapy. Sales for the quarter was $196 million and were up 2% on an underlying basis, consistent with our expectations. Growth was driven by strong performance of our INTUITY Elite valve system and the solid growth in our core products outside the U.S. This growth was partially offset by the continuing shift from our surgical aortic valves to SAPIEN 3 valves in the U.S. and Europe.

Our INTUITY valve was recently approved for Medicare's new-tech add-on payment effective October 1 of this year. This recognized INTUITY as a new technology that provides substantial clinical improvement over conventional valves. We believe many hospitals will be helped by this add-on payment over the next year, and this should simplify adoption of this rapid-deployment valve that shortens minimally invasive and complex procedures.

Our INSPIRIS RESILIA aortic valve has been launched in Europe, and we're looking forward to launching this platform globally. Our newest surgical valve features RESILIA tissue and is designed for potential future valve-in-valve procedures. We believe this offers an ideal platform for active patients and patients seeking alternatives to mechanical valves, which carry the risks associated with blood thinners. We continue to plan for a 2018 launch in the U.S. and Europe.

In summary, surgical heart -- in [surgical heart] valves, we continue to expect full year underlying sales growth of 3% to 4%.

In Critical Care, sales for the quarter were $145 million and grew 5% on an underlying basis. This performance was driven by solid growth of our core products and our Enhanced Surgical Recovery Program, particularly in the U.S. and Asia Pacific. We expect the global launch of HemoSphere, our next-generation advanced monitoring platform, to be a significant contributor to our longer-term success. While sales were minimal this quarter, the launch is expected to continue to ramp into 2018. HemoSphere is designed to provide greater clarity on a patient's hemodynamic status to enable clinicians to make timely, potentially life-saving decisions. This system is modular in design, and we plan to add enhanced surgical recovery capabilities to this all-in-one platform in the future.

We are in the process of introducing our Acumen Software suite with our new FloTrac IQ smart disposables in Europe. This is a low blood pressure or hypotension probability indicator to alert physicians in advance of this dangerous condition.

In summary, we continue to expect full year underlying sales growth in Critical Care to be at the high end of 5% to 7%.

Turning to our structural heart programs. We are enthusiastic about the opportunities in our transcatheter therapies to treat patients suffering from tricuspid and mitral disease. Today, I will cover some select updates, and you can expect additional updates at next week's TCT medical conference and a more complete overview of our portfolio at our investor conference in December.

Physician enthusiasm continues to be strong around tricuspid therapy. At TCT, we expect updates on Cardioband in the tricuspid position and our FORMA system.

During the quarter, we are pleased to begin treating U.S. patients in the Cardioband mitral IDE trial called the ACTIVE Trial. In Europe, we recorded approximately $1 million in commercial sales this quarter, which are reported in the THVT product line. We continue to believe that the annular reduction provided by Cardioband can be an important first-line repair therapy for many mitral patients.

We've begun treating patients in the CE Mark trial called CLASP for our PASCAL transcatheter mitral repair program and are actively expanding this trial into multiple centers. We continue to treat patients and incorporate learnings with our Edwards CardiAQ mitral valve replacement system. We have decided to sharpen our focus based on our recent clinical experience and now plan to commercialize the valve system that incorporates a number of significant enhancements. This system features several important advantages, including a smaller profile to enhance transseptal delivery via the femoral vein, rather than between the ribs.

We believe this strategy accelerates our progress to achieve our goal to introduce a true transcatheter therapy that stimulates adoptions and serves a much broader group of patients. We are refining our CE Mark timing and will provide an update on our investor conference. This change has financial implications, which Scott will discuss in a few minutes.

Over all, while still early, we remain excited about our portfolio of transcatheter mitral and tricuspid offerings. We are aggressively investing in R&D, operations and commercial infrastructure to support these emerging therapies with significant upside potential.

Separately, clinical data collection remains on track for Harpoon Medical's minimally invasive cordal repair system. Edwards has an option to acquire this technology, and we expect to make a decision by the end of the year.

And before I turn it over to Scott, following a thorough analysis of our global supply chain, we recently made a decision to close our small heart valve plant in Switzerland and absorb these operations into our evolving global network. We plan to support the impacted employees and appreciate their dedicated service. We expect to wind down operations in early 2018 and are recognizing a $10 million charge this quarter.

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

Thank you, Mike. I am pleased to report another quarter of double-digit underlying sales growth, which generated strong earnings-per-share growth. Adjusted sales were $838 million, up 13% over 2016. These results were consistent with our expectations and the typical seasonal slowdown.

In addition, adjusted sales include $17 million of Germany destocking sales. We continue to expect 2017 to be an excellent year with underlying sales growth above our original expectation of 10% to 14%.

Our operating margin expanded over 2016 and is on track to achieve attractive levels this year. Adjusted earnings per share growth was 24%. Adjusted EPS was $0.84 and GAAP EPS was $0.79, which includes the $10 million charge related to closing our small manufacturing plant in Switzerland that Mike discussed as well as other customary adjustments consistent with prior quarters.

As we've previously discussed, forecasting earnings per share is less predictable because of the new accounting for stock-based compensation. Adjusted earnings per share would have been $0.88 this quarter, based on the excess tax benefit we estimated in our guidance last quarter.

For the quarter, our gross profit margin was 74% compared to 72.8% in the same period last year. This improvement primarily reflects the benefit of a more profitable business mix, led by growing sales of TAVR as well as a favorable comparison of supply chain expenses. Partially offsetting these benefits were expenses associated with flooding from Hurricane Maria in Puerto Rico and the planned closure of our manufacturing plant in Switzerland. We continue to expect our full year 2017 gross profit margin, excluding special items, to be at the midpoint of 74% and 76%. Going forward, this is a good near-term modeling assumption, anticipating mix improvements offset by planned capacity improvements. We'll discuss those expectations at our investor conference in December.

Turning to selling, general and administrative expenses. Third quarter expenses increased 7% over the prior year to $245 million or 29.8% of sales. This increase was driven by personnel- and sales-related expenses, primarily in support of our Transcatheter Heart Valve Therapy product line. We continue to expect full year SG&A, excluding special items, to be between 28% and 29% of sales for the full year.

Research and development investments in the quarter increased 26% over the prior year to $143 million or 17.4% of sales. This increase was primarily the result of continued investments in our transcatheter valve programs. We continue to expect R&D, excluding special items, to be between 16% and 17% of sales for the full year.

During the third quarter, we recorded a $17 million net reduction in the fair value of our contingent consideration liabilities. This reduction was primarily the result of the cardiac plans Mike mentioned earlier, which reduced the likelihood of a European regulatory milestone payment. Our reported tax rate for the quarter was 19.7%, down from 23.7% in the prior year period. This quarter's rate benefited 350 basis points from the new accounting for employee stock-based compensation. However, as I mentioned earlier, this benefit was lower than we estimated in our guidance last quarter. We continue to expect our full year tax rate, excluding special items, to be between 17% and 19%.

Foreign exchange rates increased third quarter sales growth by 0.4% compared to the prior year. At current rates, we now expect a de minimis impact to full year 2017 sales compared to the prior year.

Free cash flow generated during the quarter was $269 million. We define this as cash flow from operating activities of $311 million, less capital investments of $42 million. Our capital spending reflects investments we are making to increase valve manufacturing capacity.

Turning to the balance sheet. At the end of the quarter, we had cash, cash equivalents and short-term investments of $1.4 billion. Total debt was approximately $1 billion. Average shares outstanding during the quarter were 216 million, which is consistent with our assumption for the fourth quarter and full year.

Now turning to our 2017 guidance. For 2017, we are reaffirming all of our full year sales guidance ranges. For Transcatheter Heart Valve Therapy, we continue to expect sales at the high end of $1.7 billion to $2.0 billion. For Surgical Heart Valve Therapy, we expect sales of $780 million to $810 million. And for Critical Care, we expect the sales at the high end of $560 million to $600 million.

For total Edwards, we continue to expect sales at the high end of our $3.2 billion to $3.4 billion range. We also remain confident in our full year guidance for adjusted earnings per share to be between $3.65 and $3.85.

Lastly, we continue to expect free cash flow, excluding special items, to exceed the top end of our $625 million and $675 million range.

For the fourth quarter 2017, at current foreign exchange rates, we project adjusted sales to be between $855 million and $895 million and adjusted earnings per share to be between $0.84 and $0.94. And with that, I'll hand it back to Mike.

Thank you, Scott. We're very pleased with the performance achieved across all our product lines and believe our future remains bright. Our innovative TAVR therapies continue to deliver value to patients, and our transcatheter mitral and tricuspid valve technologies continue to represent exciting opportunities for breakthrough therapies. Overall, we're confident that our important innovations will result in a continued strong outlook as we deliver valuable solutions for the patients we serve. And with that, I'll turn the call back over to David.

Thank you, Mike. Before we open it up for questions, I'd like to remind you about 2 upcoming events. First is an informal Q&A with [Dr. David Cullin] at TCT in Denver next Tuesday. If you haven't RSVP-ed, please do so this week. Second is our 2017 investor conference on Thursday, December 7, in New York, which will include updates on our latest technologies as well as our outlook for 2018. More information about this event will be available in the coming weeks. We're ready to take questions now.

(Operator Instructions)

Operator, please go ahead.

(Operator Instructions) Our first question comes from the line of Mike Weinstein with JPMorgan.

So let me just touch first on the TAVR business. So the TAVR business grew, on an underlying basis, 20%, 21% this quarter, 25% in the first 9 months of the year, and the midpoint guidance for the 20%, 25% range for the year would seem to imply about 16% growth in the fourth quarter. So I guess, one, is that, right? Is that what you meant to imply? Two, can you just talk about your view of the TAVR market this quarter? Obviously, the U.S. market -- U.S. business was down sequentially, which was a little bit below The Street's expectations, but the U.S. business was stronger. And just how should we think about TAVR market growth, really, over the next, let's call it, 1.5 years before we potentially get a readout on PARTNER III and how you think about the market growth for that next big catalyst?

Yes. Thanks, Mike, I appreciate the question. Yes, you -- the math that you did around the remainder of the year sounds like it's pretty close. That was the signal that we were trying to send. And yes, it is a correct observation that the sales growth during the course of the year is lower in the second half than it was in the first half. We're really pleased -- we were surprised at the high level of sales growth in the first half. It was extraordinary from our perspective. Remember, we went into the year thinking far less. And the second half of the year has kind of turned out the way that we expected. Remember, this is a long-term growth platform. We're very pleased that this many years after the introduction, we're still growing strong. We think it's particularly remarkable outside the U.S., where we started introducing in Europe 10 years ago. To be growing at 20% OUS is something that we think is pretty impressive. But broadly, we have a long-term view. We projected that we think that this market opportunity will be more than $5 billion by 2021, and we think that the results that we're putting up this year, including the way we [expect is] in line with that. So yes, I don't expect that we're going to have the heady 60% growth rates that we had just a year ago and that we're going to settle into something that's more moderate. We'll give specific guidance at our investor conference in December, but I think the way that you characterize it is accurate.

Okay. And then Scott, it's probably been several quarters since you guys haven't reported a quarter and then raised guidance for the full year. Could you just maybe try and tease out some of the different moving parts that you're running through in your prepared commentary? Obviously, the hurricanes had some impact on the business, but can you just kind of run through some other items you think may be holding back earnings in the third and fourth quarter?

Yes. So we feel really good about where we are year-to-date, and we're glad that we had a third quarter that met our expectations. It's pretty lofty expectations, and as Mike said, a lot higher than we originally expected to be end of the year. So I don't think anything is really holding back our continued growth. I think that there will be some changes in fourth -- in the fourth quarter around gross margin. We'll get a little bit less help from FX, which will impact earnings per share. But that's in our guidance, I'm not sure it's really noteworthy. Beyond that, fourth quarter is looking pretty much the way we thought it would earlier this year, and we think we're off to a -- we think we're on the right path.

Our next question comes from the line of David Lewis with Morgan Stanley.

Mike, I just want to start with a couple of product questions and maybe a quick follow-up. On CardiAQ, I appreciate the update. Can you just give us a general sense of this sort of reformulation of the product? What rough sense would you have in terms of the delay? And then the CE mark trial, we're assuming we stopped, but then you restarted. Should we be thinking more of a 6-month delay to restarting that trial or 12-month? And for the December Analyst Day, is there a chance we'd get an update on the next-generation SAPIEN platform? And then I have a quick follow-up.

Yes. Thanks, David. You know what, we're not prepared to lay out specific CE Mark timing. We should be prepared to do that when we get to the investor conference, David. The bigger point that we wanted to do today was to share with you the change of strategy, and which we felt that it was appropriate to implement these significant enhancements that we think are going to be really meaningful, that it's important for us to jump at. Overall, I think it actually is going to collapse our time to success, the time to long-term success, although it might delay for sales. But we think that's going to be -- this is going to be a good trade-off in the eyes of investors. In terms of next-generation SAPIEN valve, I don't know that we're going to get into details on that for competitive reasons. We're really pleased that we're going to be launching both the Ultra System and CENTERA here before year-end, and we think there'll be a lot of customer excitement around that. And as you correctly identified, we are working on next-generation systems that could be even more exciting, but we're probably not ready to share that yet.

Okay. And then Mike, just wanted to come back to the U.S. market dynamics again. Obviously, you tried to quantify what the hurricane impact was and it seems sort of minimal, but just given the fact that other companies that have reported so far in their earnings have actually shown some rather weak U.S. utilization numbers. And each quarter for Edwards in the U.S. market has not been particularly predictive of, let's say, the next quarter from a sequential growth perspective. Is there anything from a share perspective or utilization of certain accounts or the rate in which accounts came onboard here in the third quarter that surprised you in any way?

Yes. Thanks, David. Yes, I think that the share positions have continued to be pretty consistent, pretty stable, both inside and outside the U.S. because -- compared to a quarter ago. So probably not a lot of news from that perspective. The competitive dynamics probably haven't changed quite as much as we thought they might. That could still be in our future. In particular, the -- we noted that the exit of Lotus from the marketplace probably didn't help us very much; it may have helped our competitors. But I don't know that there's a lot of other dynamics that are going on. We feel like the market is still growing nicely and that we're pretty much growing in line with market growth.

Our next question comes from the line of Larry Biegelsen with Wells Fargo.

Let me ask the ubiquitous 2018 question maybe a different way. It sounds like, Mike, based on your recent comments in September, public comments, you expect the TAVR and the Critical Care business to grow at a similar rate next year as 2017. I guess the question is, are you willing to talk a little bit about the contribution from mitral and tricuspid next year? And big picture, should we think about 2018 as a transition year before we see the low-risk risk data at ACC presumably in early 2019? And on the P&L, it sounds like you plan to invest in a dedicated mitral and tricuspid sales force next year in Europe, which will offset any leverage in the P&L. Is that fair?

Yes. Thanks, Larry. So a few things. First of all, we're -- as you've correctly pointed out, we're not ready to share specific guidance for 2018. You all know quite a bit about our Critical Care business and our heart valve business and our transcatheter aortic business, and all those businesses have some pretty clear trajectories that, I think, we've been clear in terms of what we think is possible. We think they are both -- they're all going to be really nice growers and maintain their leadership. So that's that. In terms of transcatheter mitral and tricuspid, I don't expect 2018 to be much of a sales year. I think it's going to be a really important year in terms of us making progress towards key milestones, creating value, sort of cracking the code on what's most important and laying evidence in place. So it'll be an important year, but in -- not one that probably is going to drive sales growth. We're more focused on what kind of growth those platforms will provide some time out, more in the mid- to long term. So you should think about it from that perspective. In terms of investments, we're always thoughtful about that. Of course, some investments are going to need to be made in advance, and you know we were spending pretty aggressively in R&D, particularly to support of clinical trials. But we will add the field resources, and we'll try and be thoughtful on that and try not to get too far ahead of ourselves, although some of that will be advanced investments. So I don't think you should see an overly dominant effect for that in the 2018 plan.

Our next question comes from the line of Bob Hopkins with Bank of America Merrill Lynch.

So just first of all, just a clarifying question on the TAVR business and the THV sales in the quarter. Because of the -- what happened in Germany, I think there's maybe a little bit of confusion. So just to be clear, in the third quarter, your worldwide THV sales adjusted for Germany were $498 million, and that compares to, on an apples-to-apples basis, $510 million in the second quarter. Is that right?

So Bob, it's Scott. Yes, the $498 million is adjusted for $17 million of Germany stocking. And relative to the second quarter, $510 million. Hold on one second, let me just make sure we're giving you the apples-to-apples number. Yes, so it's $510 million, also adding back the consumption of sales -- stocking sales in Germany.

Okay. And then just, Mike, to clarify your comments on the U.S. market, because obviously, the one change this quarter was your competitor did get approval for intermediate risk. So you think that you basically held share that -- despite that approval and that the market growth rate will be around this 20% level?

Yes. Thanks, Bob. Yes, we think that this has been pretty consistent, that there wasn't a big change in share. It's hard -- it's always tough to estimate because that -- we report out of cycle with each other. But our best estimate is that we're probably growing in line with the market, and we basically have factored those approvals into our guidance.

Okay, and then maybe one quick comment on Japan that's a clear bright spot in the quarter. How sustainable is that growth in your view? Just give us a sense as to the market dynamics in Japan currently.

Yes. The adoption in that country is still early. They're continuing to add centers, as we expected. And we continue to believe that, right now, they're primarily just treating high-risk patients. And so the opportunity for expansion is still significant there. Hard for us to quantify, but we could talk about that one more in December as well.

Our next question comes from the line of Chris Pasquale with Guggenheim.

Mike, just a couple for you to start on the mitral program, and it's been hard to tell, obviously, this year from the revenue piece of what's going on with Cardioband. But you guys, along the way, have been making some investments to lay the foundation there? Could you just give us an update at this point of what your European transcatheter mitral sales organization looks like? How many people have you actually added this year?

Yes. I'm not sure of the exact numbers, Chris. But yes, we have been adding people to the Cardioband organization in Europe. Maybe one of the things that's not apparent here is we believe that Cardioband is not only applicable in the mitral position but also in the tricuspid position. So in addition to our field resources and, well, all of our resources for that matter, supporting Cardioband mitral cases, they're also supporting Cardioband tricuspid cases. And we think Cardioband could be an important contributor there. We don't get any sales credit, no commercial sales for the tricuspid cases. Those are all still commercial at this time. So we've ramped up. There's probably maybe a few more resources. But basically, we're where we want to be right now, that sort of leveling out here in the fourth quarter.

Okay. And then one for Scott. Just following up on Larry's question about the potential to drive operating leverage next year, and I know we'll get into this in a lot more detail in December, but it seems like you guys have been in investment mode of one form or another, really, every year for the last several years. Are you trying to signal that you're thinking about 2018 differently from what we've seen in the last couple in terms of the level of investment that's required and, therefore, the potential for operating leverage? Or is it just shifting to new priorities as they come along?

We are going to continue to invest aggressively in the business, especially around research and development. We've made a lot of progress over the last 2 years just in leveraging SG&A. As we've gotten more global, we've continued to drive that "SG&A as a percentage of sales" ratio down and we're looking for opportunities to continue to get more efficient. That said, we're going to invest, as Mike said, in field resources to support our transcatheter mitral and tricuspid therapies. But I think, overall, our operating margin continues to look very favorable. It's improved over the last couple of years and it's an area of focus. But again, primary focus at Edwards is driving top line organic growth.

Our next question comes from the line of Matt Miksic with UBS.

Yes, I'm sorry, I just had to unmute there. So I had one, Mike, and many questions here on the U.S. growth, and one thing that you didn't mention, I don't think, was -- some of the comments you made in the first half of the year, I was kind of surprised in terms of performance of the smaller, newer centers entering the market and expanding geographically in the U.S. I just wanted to get a sense if you had any comment or color on what that looked like in Q3.

Yes. We continue to have new centers join. We probably had, I don't know, maybe a dozen new centers join in the quarter, so we're probably in excess now of 550 centers. And we do get a contribution from those. And so we're actually seeing a contribution across the board from large centers to small. It seems as though, when new centers come in, that they unlock a group of patients that maybe weren't being seen by the centers that were already present. Maybe because people were in their own networks or they just did -- weren't inside a referral pattern that found them into a TAVR Center. So we are getting a contribution from that. But as you can imagine, the number's getting large. And so this just validates for us the undertreatment that's going on in TAVR and gives us confidence that this is going to have quite a bit of runway in front of us.

And just a follow-on to that for my follow-up. On the market, I think there's a perception that we have intermediate risk of this last indication, and now it's going to be until early '19 before we get another catalyst in terms of data. But entering the intermediate-risk market did substantially expand the number of patients that can be treated in the U.S. I'd love to get your sense as to -- there may not be another clinical catalyst for TAVR until early '19, but where are you in terms of -- do you feel like penetration? Or is this something where we'd expect to quickly get through this number of patients or is this a group of patients that you expect to be kind of growing into over the next 2 to 3 years?

Yes. Thanks, Matt. Yes, we've tried to talk about this before. We really believe that there's a dramatic underpenetration of patients. When we looked at severe aortic stenosis patients in 2016 with symptoms, we felt that less than 20% were being treated. And so we have a big opportunity. And even though we have the intermediate-risk approval, it takes time for clinical practice to change. It takes time for the guidelines to change, it takes time for referral patters to change. And that's been happening, and overall, we're pleased. We've seen some nice growth, but we're not coming close to the full potential that was unlocked with that indication, let alone what's still in front of us. So we continue to have work on that. So TAVR's still underutilized. The new data that we continually present, I think, is very helpful in terms of making the argument. And we've got some data that's actually coming up at the upcoming TCT where they're going to highlight the economics, which will be interesting to see how contemporary economics compare to the economics that were last measured within the PARTNER trial.

Our next question comes from the line of Jason Mills with Canaccord Genuity.

Mike, can you hear me okay? I'm on a cellphone.

Yes, Jason. I hear you fine.

Super. So I'll start with mitral. I'm sure you've had a chance to take a look, at least a cursory look, at the Intrepid TMVR trial of Medtronic announced first patient enrollment. Perhaps, interested in your comments juxtaposing the inclusion, exclusion criteria and as far as you've had a chance to really evaluate one versus the other to Cardioband. And your broader thoughts on moving towards commercialization of products in the United States for a function of mitral regurgitation and sort of how those will play out. I know it's probably hard to discern at this point, but just interested in what you learned or what your observations are coming out of the commencement of both of those trials.

Yes. Thanks, Jason. Yes, I'm not sure going deep into the inclusion or exclusion criteria or deep into trial design is all that insightful. But I think the portfolios themselves and the strategies are more interesting. We're going to drill deep on that when we get to our investor conference. But broadly, you can see that our competitors feel comfortable moving forward with a transapical system, and we have chosen a different tact here. We really believe that transseptal is going to be necessary to unlock this, and so that's going to be important. We also think that repair is going to play an important role in mitral therapies, and we're pursuing a couple of technologies very aggressively there. We'll talk about exactly how that might all come together, but in the near term, you know that mitrals are primarily a repair marketplace, and we have to -- there has to be some pretty impressive data presented to make the case that replacement technologies are ready to unseat them. And so what we stay focused on is the -- really, the long-term in terms of being able to treat the most patients with therapies and really cause the practice of medicine to change. Right now, these mitral patients just do not get treated. Surgery is not considered an interesting alternative. And until we have catheter-based technologies which are safe and effective, it's not going to change. And we do think it's going to be a toolbox, which is why we have a full portfolio. And we are feeling pretty good about what we're able to see. We're on steep learning curves, and so we're gathering a lot of experience with all of our systems, and that's informing our strategy. So we'll try and paint a more comprehensive picture when we're together in December, but maybe that's a good starter.

It is. Thanks, Mike. Look forward to that. And then as a follow-up, on the TAVR side, going back to Mike's question, initially to started the call, it looks like fourth quarter, sort of in that mid- to high teens range, 16%, 17%. But what was interesting this quarter is you pointed out the U.S. business grew a little bit slower, perhaps, than you maybe expected and the OUS business outperformed. Do expect that trend to hold in the fourth quarter? Do you think that U.S. will reaccelerate perhaps and grow a little bit faster than international markets? And then, Scott, just as a sneak-in for you. Gross margins, it seems that you guys seemed to imply we're going to see a step-up in the fourth quarter, and I wanted to make sure I got that right.

Yes. Thanks, Jason. I may have sent an inappropriate signal if I suggested that the U.S. was below our expectations. It was right in line with our expectations. Remember, when our surprise was, was early in the year. When we projected what we thought would happen across the TAVR world in 2017, we originally had a projection of 15% to 20% growth, and that was based on growth both inside and outside the U.S. The -- do I think the U.S. will get slower? Well, I think there's a law of large numbers where some of that is probably going to be likely. One of the things that is impressive is that the OUS, where penetration is low, is continuing to be strong. But I don't expect any sort of really big, dramatic changes, Jason, if that's what you're asking.

And Jason, it's Scott. Regarding fourth quarter and gross margins, actually, we think that the gross margins may be under pressure in Q4 versus Q3 if foreign currencies stay at their current levels. We had a little bit of benefit from FX in the third quarter, and at current rates, we would probably not see that same benefit.

Our next question comes from the line of Raj Denhoy with Jefferies.

I wonder if I could just ask if there's any additional color you can give us on the PASCAL trial, the CLASP trial, I think, you told us today. Where is that in terms of enrollment? And when do you expect to get that product approved in Europe?

Yes. Thanks, Raj. One of the things that I might call your attention to, I don't know if you noticed that there actually was a Lancet article that was published in August about our early feasibility results in PASCAL. This had, I think it was about a 23-patient experience, that was really a feasibility study. And it walked away with a conclusion that they were impressed with the high rate of technical success in the reduction of mitral regurgitation. And so the fact that such a new technology would gain that kind of profile, we think we were pleased with, and we think that's relatively noteworthy. And so we're, today, engaged in this. We think that there -- well, you should expect that there's going to be a presentation at TCT. So I think it's that same Lancet group that you're going to see 6-month results at TCT. That's our belief. And you're going to see -- we'll share more about this. The trial itself is on ClinicalTrials.gov. It's more-than-100-patient trial with, I think, a 6-month primary endpoint. So maybe you could certainly refer to what's on that website to give you a little more information.

I guess, the question is more as we think about the opportunity for that product, right? I mean, as you know, MitraClip is doing several hundred million dollars in Europe, and you think about potentially getting on the market next year. Is that maybe too aggressive of a time line? And then, if -- when you do get there, what are your thoughts or expectations around what you can do in that market?

Well, I think the timeline sounds aggressive. I mean, obviously, we're going to move as fast as we responsibly can move, but I wouldn't be penciling anything in at 2018 at this point. We're very optimistic about the product line. We think it is -- it's one that users are going to like. We've gotten some nice feedback at this point, but it's still early in the evolution, and I think it's one that we're going to like to see a little bit more data. It'll be interesting to see what's discussed at TCT next week.

Okay, fair enough. And maybe I'll ask one on surgical valves. You don't get asked that very often. But in terms of the new-technology add-on payment for INTUITY, any thoughts around what that could do to growth for that product or adoption of that product in the United States?

Yes. We're really pleased that we got the new technology out. We think it's going to have a positive impact. It went into effect October 1 of this year, and it's going to help hospitals -- remember, when hospitals try to adopt these new technologies, often, it's a real burden on their cost system. So for Medicare patients, this helps defray some of that. And so what it allows people to do is to get involved with an innovation like INTUITY, and we think that it's going to provide, hopefully, some longer-term impact because they're going to have a chance to experience the product and have, we think, some very positive results associated with it, and they'll want to continue.

Our next question comes from the line of Isaac Ro with Goldman Sachs.

First question was on the U.S. TAVR market, specifically with regards to OR capacity. Just curious if you could share with us, you said you have visibility, what percentage or portion of ORs do you guys have out there active today? Or this sort of new approach, the theoretical limit in terms of the procedures they're going to handle for TAVR. And I'm wondering if you think, to the extent that, that's an issue, you'll see any alleviation of those capacity constraints on a timely fashion. Just trying to figure out if the demand side here is starting to hit any rate-limiting items.

Thanks, Isaac. I appreciate the question. And we've been asked that before. We continue to feel the same way. We just don't see this capacity as an issue as it relates to the TAVR. We see places where, within an existing system, they're able to do 6 and even 7 TAVRs in a day, so it's remarkable the way that they're able to expand the capacity. And the bigger question is their ability to add teams. And hospitals can be pretty resourceful. I think they find -- most hospitals find that they're able to be profitable and they will make the addition to teams. So far, capacity has not really been an issue for us.

Okay. And then maybe just a follow-up on the competitive landscape as you look to 2018 and beyond. What's your best guess when you think about how a lot of your U.S. customers behave in terms of how they're going to think about maintaining the training required for multiple platforms? is there sort of a rule of thumb here you can share with us with regards to whether or not 2 or 3 or more platforms starts to become problematic from a training perspective? And just kind of curious what you think that means, if -- whether or not that would change in the event that pricing were to become more aggressive from some of the new entrants?

Yes. I -- we think, typically, most hospitals like to have more than one system on the shelf, either because of anatomical reasons or just competitive reasons, they like to have more than one. But we find that, typically, they will have -- we'll call it a workhorse product or one valve that they're going to go to most of the time. They get very comfortable with it, they have good outcomes. We think that will continue to be the case, and that'll be the primary dynamics you'll experience. I think it'll be unusual to see 3 or 4 systems on a hospital shelf for the exact reasons that you mentioned.

Our next question comes from the line of Bruce Nudell with SunTrust Robinson Humphrey.

I -- Mike, I had a question about the fourth quarter. Are you just basically assuming that the U.S. market decelerates below 20%?

Yes, it's tough to know. It's -- probably that's the case. There may be a little bit of share in there, but it's probably moving in that direction over time. So we don't expect that there's going to be a big share shift necessarily in the quarter. So I would expect the market to grow probably in line with our expectations. So I don't know, that 15% to 20% range is probably moving in that direction.

Okay, perfect. And then just changing gears to PARTNER III. What's the average age in that trial of the patients? And also, is there enough data in there to really allow for aggressive use in younger bicuspid patients?

Yes. So unfortunately, we're not able to see the age or -- and I don't think -- I'm not supposed to see the age of these patients. This data set has not been opened up yet, so I don't have -- I can't really share the characteristics of it. The PARTNER III study should support indication expansion for -- with no particular age limit, so I don't know that age is going to be important. In terms of bicuspid, I don't know if I have a really clear answer for you. We're running a registry just for that group of patients, and so hopefully, we get some insight into that.

Our next question comes from the line of Josh Denning with Cowen and Company.

I was hoping to ask about the SAPIEN 3 Ultra valve, and when could we expect to see data? And with the added features of a good outskirt, how low should we be thinking about the PVL rate going on the SAPIEN 3 Ultra?

Yes. So the -- yes, we're excited about getting the SAPIEN 3 Ultra out there. It's -- it will have a CE Mark, and so you'll see the data ultimately following the CE Mark. So I would imagine, maybe mid-next year, look at some of the data. In terms of its performance, it's got a couple of features around that skirt that could really improve the leak performance. It's a taller skirt, which should make it -- but we should get a little better acute results. And then the skirt is also made of a different material, which should promote tissue ingrowth, and so we're hopeful that, that has some improvement on the long-term results. So we're optimistic about this valve platform. But again, I think it's one of those things that you start seeing it maybe in the middle of next year, and then we'll certainly be following it over time.

Great. And then it sounds like the U.S. approval will be in front of potential low-risk approval. I wanted to ask about the low-risk indication, with a trial enrollment completion slated for the end of this year, are you expecting to have a Continued Access Program ongoing in 2018?

Okay. So first, yes, we would expect that we would be able to get the Ultra valve into the U.S. because it should be a PMA supplement. So we would hope, by the end of 2018, that we'd get there. I don't know if we've made a decision on continued access. I wouldn't necessarily count on that. So it's probably too soon. We -- I'm certain we'll be in discussions with FDA about it, but right now, I don't have any good answer for you or clear one.

Our next question comes from the line of Kristen Stewart with Deutsche Bank.

I was wondering, Scott, if you could go into the gross margins for this current quarter and maybe quantify what the impact of Puerto Rico was, or just cost from the hurricanes, and then maybe just compare quarter-to-quarter what some of the puts and takes were. And then I had a follow-up after that.

Sure, sure, Kristen. So Hurricane Maria, about 40 basis points. But let me take you through the whole gross margin profile. It was pretty much as we expected, it would turn out, like, excluding special events. So we ended up about 120 basis points higher than third quarter of 2016. 220 basis points higher driven by mix, and about 140 basis points FX of, about 0.5 point in supply chain and manufacturing, benefits year-over-year of about 30 basis points. It was offset by, Maria, which we talked about, or of the closure of our Swiss facility and accelerating some depreciation on those assets is about 20 basis points. And then other items, about 40 basis points. So overall, it's pretty much like we expected. It turned into earnings per share of $0.88, excluding the actual excess tax benefit versus what we had expected. So we expected a higher ETB than we thought we'd achieve, which is why our EPS looks like $0.84, but the way we're thinking about it and modeling it, it's more like $0.88.

Okay, perfect. And then, Mike, just regarding CENTERA. I know that you'd said you're going to use the experience early on what -- to guide your use, but what exactly are you looking for? I mean, you guys know the transcatheter valve market very well at this stage, so what are going to be some of the milestones that you will be looking at and considering in order to determine what exactly will be definitive, I guess, to inform whether or not you'll pursue, I guess, an expanded launch of CENTERA in Europe or a launch in the United States? (inaudible)

Yes. For us -- it's going to be interesting, Kristen, for us to observe the -- particular the behavior of physicians when they have CENTERA in their hands. CENTERA has a lot of advantages associated with it. Some of those physicians that are probably use self-expanding systems are probably spending much less at this point, and so we're going to have a chance to see just how they feel about an improved system that maybe has a higher price than the systems that they're using today. And we look forward to that feedback, and that's going to teach us a lot about what we need to think about for the future.

So it's just maybe a cost, I guess, differential in your mind?

I -- there probably is a cost differential, but that's not really driving us. It's -- what we're really interested here in is seeing the -- whether the value framework for CENTERA is the way that we believe it will be. We think physicians are going to be pleased with it and are going to prefer CENTERA, but we'd really like to see that proven in clinical practice.

Our next question comes from the line of John Gillings with JMP Securities.

Just one for me tonight, big-picture one on the mitral segment. So given that we're in the earlier stages of developing treatments for mitral disease and you've got what's shaping up to be a pretty robust portfolio of mitral products, can you help us understand the extent to which there's cross-pollination of ideas between these teams and how that's shaping Edwards' overall approach to mitral disease product development? And maybe if that portfolio view had any impact on the decision to make some of the changes to the CardiAQ valve.

Yes. Thanks. Inside Edwards, we've decided to organize our transcatheter mitral and tricuspid programs into a team that works together. So even though there are dedicated teams for each of these technologies, they share a lot of learnings. Certainly, there's a lot of commonality and sharing across the clinical team, across the regulatory team, across the operations and supply chain team. It actually goes throughout the organization. The management team sit together and they talk about their progress and their setbacks. And it very much does inform our strategy. So yes, it's a key opportunity that we have by having this portfolio of products that we're able to learn from each other. So we think it's going to pay off. Actually, we think it will be a key success factor for Edwards in the long run. And we're using that insight to actually shape our strategy today. Again, you'll get a chance to hear more of that. We feel like it's a little tough to do on a quarterly conference call but will able to get into a little deeper at our investor conference in December.

Okay. Well, thank you your continued interest at Edwards. Scott and 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, please dial (877) 660-6853 or (201) 612-7415 and use the conference number 13670702. In addition, 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.