David Erickson Michael A. Mussallem - Chairman and Chief Executive Officer Scott B. Ullem - Chief Financial Officer and Corporate Vice President.

Lawrence Biegelsen - Wells Fargo Securities, LLC, Research Division Frederick A. Wise - Stifel, Nicolaus & Company, Incorporated, Research Division Bruce M. Nudell - Crédit Suisse AG, Research Division David H. Roman - Goldman Sachs Group Inc., Research Division Raj Denhoy - Jefferies LLC, Research Division Jason R.

Mills - Canaccord Genuity, Research Division Danielle Antalffy - Leerink Swann LLC, Research Division Brooks E. West - Piper Jaffray Companies, Research Division David R. Lewis - Morgan Stanley, Research Division Glenn J. Novarro - RBC Capital Markets, LLC, Research Division Kristen M. Stewart - Deutsche Bank AG, Research Division Christopher T.

Pasquale - JP Morgan Chase & Co, Research Division Robert A. Hopkins - BofA Merrill Lynch, Research Division.

Greetings, and welcome to the Edwards Lifesciences' First Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce, Mr. David Erickson, Vice President of Investor Relations. Thank you, Mr. Erickson, you may now begin..

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our first quarter 2014 financial results. During today's call, we'll discuss the results included in the press release and the accompanying financial schedules, and then use the remaining time for Q&A.

Our presenters on today's call are Mike Mussallem, Chairman and CEO; and Scott Ullem, CFO. Before we get started, I'd like to remind you that during today's call, we will be making forward-looking statements that are based on estimates, assumptions and projections.

These statements include, but aren't limited to our expectations regarding sales, gross profit margin, earnings per share, SG&A, R&D, interest expense, taxes, free cash flow, diluted shares outstanding and foreign currency impacts.

These statements also include our current expectations for the timing, status and expected outcomes of our clinical trials, regulatory submissions and approvals, as well as expectations regarding industry growth expectations, competitive impacts, new products, litigation and company growth.

These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements.

Information concerning factors that could cause these differences may be found in our press release, our annual report on Form 10-K for the year ended December 31, 2013, and our other SEC filings, which are available on our website at edwards.com.

Also, a quick reminder that when we use terms underlying, excluding the impact of foreign exchange, excluding special items and adjusted for special items, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results.

Additional information about our use of non-GAAP measures is included in today's press release and on our website. Now I'll turn the call over to Mike Mussallem.

Mike?.

Thank you, David. We're pleased to report a robust start to 2014 with first quarter results reflecting better-than-expected THV results and solid bottom line performance. This quarter, THV growth in Europe was very strong, even better than expected.

This portfolio was driven by strong procedural growth and share gains with SAPIEN XT and the launch of SAPIEN 3, which is off to a great start. In the U.S., we're still awaiting approval of SAPIEN XT, which is important, as it will provide greater options for U.S. patients who can benefit from the substantial enhancements in this proven platform.

And even though we continue to expect competitive headwinds to tamper growth in 2014, we remain confident that our innovative pipeline of products will enable us to lift growth in 2015 and beyond. Now turning to quarterly specifics. Total underlying sales grew 8% to $529 million.

These results exclude the impacts of foreign exchange and the THV sales return reserve, which Scott will elaborate on later. In transcatheter valves, underlying global sales grew 14%, driven by higher-than-planned OUS sales, which accounted for approximately 60% of the total sales. THV sales in the U.S. were roughly in line with our expectations.

Overall, pricing was stable. Outside the U.S., THV sales grew 33% on an underlying basis, driven by exceptionally strong growth in Europe and the ongoing rollout of SAPIEN XT in Japan.

The positive procedural growth trends in Europe that we saw in the second half of last year further strengthened so far this year, and we estimate this drove well over half of our OUS growth in the quarter.

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

Noted for its lower profile and the ability to address paravalvular leak, SAPIEN 3 represents our best technology to date, and we believe it is helping to stimulate further market growth. With just 2 months of the launch underway, SAPIEN 3 accounted for almost 1/3 of our OUS sales this quarter.

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

In the U.S., underlying THV commercial and clinical sales were $78 million for the quarter, which also included a negative net stocking amount that reduced this figure by approximately 10%. While there were limited stocking sales this quarter, they were more than offset by our rapid conversion of customers to consignment.

Excluding the impact of net stocking in both period, usage grew in the mid-teens year-over-year. During the quarter, we continued to add new commercial sites and remain on track with our previously stated goal to add 45 to 65 new sites during 2014. Clinical sales were comparable to last quarter.

As evidenced in Europe, where TAVR has been available since 2007, we believe the U.S. opportunity is large and we continue to demonstrate, and will continue to demonstrate strong growth.

This confidence is supported by the growing body of impressive clinical evidence, advancements in procedural technique and patient selection, as well as new devices that can expand access to more patients. Turning to our pipeline.

We are confident that we will receive FDA approval of our SAPIEN XT system this quarter, and we're prepared to launch immediately. Receiving these approval is important and it will provide greater options for patients who can benefit from the substantial enhancements of this proven platform. Enrollment in our U.S.

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

At EuroPCR meeting next month, clinicians will present data on the early experience with SAPIEN 3. We expect these data will demonstrate a notable reduction in PV Leak, an important complication.

In the earliest clinical experience, a higher-than-expected pacemaker rate was observed, which has subsequently been addressed by the valve placement technique. In our sizable commercial experience, pacemaker rates have returned to best-in-class levels. In summary, we're pleased with our transcatheter sales results in Europe, Japan and the U.S.

this quarter, and continue to believe global TAVR procedures will grow 15% to 20% annually over the longer term. We will provide updated guidance at our next earnings update, when SAPIEN XT is approved. Turning to the Surgical Heart Valve Therapy product group.

Sales were $203 million, up 4% on an underlying basis, driven by healthy unit growth, partially offset by a small ASP decline. The decline was a result of a change in regional selling mix, as pricing within each region remains stable. In the U.S., surgical valve sales grew 6% this quarter, led by units.

We believe the favorable surgical valve market trends continued this quarter with an overall -- with an increase in overall procedures in low-single digits. In addition, we believe many physicians continue to return to the paramount valve family after trying competitor products.

Earlier this month, we were pleased to receive CE Mark for our advanced INTUITY Elite valve system. We've initiated the launch in Europe. At the upcoming April 8, THV in Toronto, 3-year data from the European CE Mark train and trial will be presented. We expect OUS sales of INTUITY Elite to gain momentum as 2014 progresses.

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

We're also pleased that 25-year follow-up data with our valve and the mitral position has now been published in the Journal of Thoracic and Cardiovascular Surgery. This series of data demonstrated best-in-class valve durability in these 450 patients.

Given the solid start to the year and favorable market conditions, we continue to expect underlying sales growth of this product group to be in the 4% to 7% range in 2014, driven by additional traction of INTUITY Elite in Europe. Turning to the clinical care product group.

Total sales for the quarter was $131 million, which grew 5% on an underlying basis. Growth was driven by core hemodynamic products outside the U.S. and enhanced surgical recovery products in the U.S. As a reminder, ESR includes our minimally and noninvasive products, such as FloTrac and ClearSight.

During the quarter, we initiated the European launch of ClearSight, our integrated, noninvasive monitoring technology. We continue to believe ClearSight is an attractive product for hospitals that are looking for a noninvasive technology to monitor a greater number of patients. We continue to expect a U.S.

launch of ClearSight in the third quarter of this year. Given the strong start to the year, we expect to build on our strong leadership position and deliver underlying sales growth of 3% to 6%, aided by the growing adoption of ESR, which includes our new ClearSight product.

During the quarter, we reported that we successfully completed the first 3 human implants of our FORTIS mitral transcatheter heart valve, which were performed in February and March by the heart team at St. Thomas' hospital in London.

Clinicians are treating additional patients, and we expect them to report clinical results at future medical meetings, including a late breaker presentation at EuroPCR next month.

Although durable success will not be known without significantly more experience and longer term follow up, we believe mitral valve disease is undertreated worldwide, and there's a particular need among patients, who are too high-risk to benefit from traditional surgical options.

Before we get into financials, I'd like to recap how we view the protection of intellectual property. We expect to compete primarily on the merits of our technology. For over a decade, Edwards has invested more than $1 billion in TAVR technologies.

An important element to support the long-term investments needed to bring innovation to patients is the knowledge that our inventions will be honored under the law. This has prompted us to vigorously defend these inventions. As you know, there's been a lot of recent activity on the foundational THV patents in the U.S.

We've received another interim patent, term extension for the Andersen patent to May of 2015 and our request for a permanent extension to March 2016 remains under consideration at the FDA. As has been well reported, a federal district court, in response to Medtronic's continued willful infringement, ordered a preliminary injunction.

The appeals court postponed the effectiveness of this injunction pending further notice. A decision on whether the injunction was properly granted is expected in Q3. Regardless of the outcome, we remain committed to ensuring that patients continue to have access to appropriate transcatheter therapy.

Earlier in the quarter, another federal jury found Medtronic to willfully infringe a second Edwards THV patent and awarded past damages of $394 million to Edwards. This Cribier patent is valid until the end of 2017.

Although the enforcement of our IP represents potential financial upside for our company, we have not included any benefit from patent litigation in our guidance. And now, I'll turn the call over to Scott..

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

Previously, litigation costs related to protecting Edwards intellectual property were capitalized and amortized over the life of the related IP. Beginning in 2014, to improve comparability, increase visibility and better align with industry peers, we began expensing these costs as incurred.

All IP litigation expenses are reflected on a new line in our statement of operations called Intellectual Property Litigation Expense or Income. Amounts in this new line also include IP-related awards, such as the initial payment we received from Medtronic for patent infringement in the first quarter of 2013.

The timing and magnitude of these fees and awards are difficult to predict and may vary significantly from period to period. Therefore, starting this quarter, non-GAAP earnings exclude all IP litigation expenses and awards.

Regarding the full year 2014 impact of this new treatment, our original guidance assumed we would incur about $0.10 per share in litigation expenses that we will now exclude when we report adjusted earnings per share. As a result, our guidance for the year is a range around $3.10 per share under the new accounting.

We posted to our website a schedule detailing the financial impact for the past 5 years. Separately, today, we also posted on our website supplemental information detailing the quarterly impact of the sales return reserve for our transcatheter valve products.

We announced last quarter that as Edwards launches SAPIEN 3 in Europe and SAPIEN XT in the U.S., we will exchange previously sold transcatheter valves for these more advanced technologies.

Accounting rules require that we record a reserve against sales of valves that we forecast will be exchanged for next-generation products in the future, and require that we reverse this reserve when we ship the replacement product.

In order to be transparent and to improve comparability of our quarterly transcatheter heart valve sales, we are providing the impact of this reserve, which in this first quarter, reduced our THV sales by a net $6 million, from $195 million to $189 million.

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

The impact of this write-off reduced our gross profit margin by approximately 200 basis points in the first quarter. And the combined impact of these 2 THV reserves reduce our GAAP EPS by $0.10 in the first quarter. Again, further details are available in a supplemental schedule on our website.

In the quarter, our GAAP gross profit margin was 72.1%, compared to 75.6% in the same period last year. This reduction was driven by the approximate 200-basis-point impact from the THV product exchanges, higher manufacturing costs and weaker currencies.

For the full year 2014, we continue to expect our gross profit margin, excluding special items, to be approximately 73%, reflecting headwinds from our currency contracts in the second half of the year. First quarter selling, general and administrative expenses were $197 million, or 37.7% of sales, an increase of 8% over the prior year.

This increase was driven primarily by Japan and U.S. transcatheter valve-related expenses and a larger accrual for incentive compensation. We continue to expect SG&A, excluding special items, to be between 37% and 38% of sales for the full year. We are actively working to leverage our scale so that over time, revenues grow faster than expenses.

We continue to aggressively invest in research and development, and spending in the quarter grew 8% to $86 million, or 16.4% of sales. This increase was primarily the result of continued investments in heart valve clinical studies and transcatheter research and development projects.

We expect our R&D investments to remain at approximately 16% of sales for the full year. During the first quarter, we recorded a $7.5 million expense to settle all past and future obligations related to one of our intellectual property agreements.

This special charge decreased diluted GAAP earnings per share by $0.06, and this one-time expense was excluded from the calculation of non-GAAP EPS, which totaled $0.76. Net interest expense for the quarter increased to $3.5 million, primarily as a result of our $600 million issuance of 5-year notes last October.

For the full year 2014, we continue to expect net interest expense to be between $12 million and $15 million. Our reported tax rate for the quarter was 22%. Excluding the impact from special items, our adjusted tax rate was 22.5%.

We continue to expect our full year tax rate, excluding special items, to be between 20% to 22%, which anticipates renewal of the federal research and development tax credit in the fourth quarter. Foreign exchange rates decreased first quarter sales by $6 million compared to the prior year.

Compared to our recent guidance, FX rates had less than $0.01 impact on earnings per share. Looking forward, with the slight improvement in the yen and euro foreign exchange rates, at current rates, we now expect only a $10 million negative impact to full year sales compared to last year. Free cash flow generated during the quarter was $125 million.

We define this as cash flow from operating activities of $139 million, less capital spending of $14 million. For 2014, excluding special items, we continue to expect free cash flow to be between $325 million and $425 million. Turning to our 2014 guidance. For sales, we are reiterating our previous guidance for all of our product lines.

Driven by our strong performance in transcatheter valves, we continue to expect full year total sales of $2.05 billion to $2.25 billion. For the Surgical Heart Valve Therapy group, we continue to expect sales of $810 million to $850 million. In transcatheter heart valves, we expect sales of $700 million to $820 million.

And in the critical care product group, we continue to expect sales of $535 million to $575 million. As I mentioned earlier, our guidance for non-GAAP earnings per share is a range around $3.10. The increase over our previous guidance is a result of the assumed impact of the change in treatment of intellectual property litigation.

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

For the second quarter 2014, we project total sales to be between $525 million and $565 million, and diluted earnings per share, excluding special items, to be between $0.71 and $0.81. And with that, I'll hand it back to Mike..

Thanks, Scott. As the transcatheter valve procedures continue to expand and we further strengthen our competitive position with innovative new technologies, we remain as optimistic as ever about the long-term growth opportunity represented by transcatheter valves.

Edwards remains dedicated to investing in transformational structural heart disease, therapies and Critical Care technologies for clinicians and their patients around the world. And with that, I'll turn it back over to David..

Thank you, Mike. [Operator Instructions] Operator, we're ready for questions, please..

[Operator Instructions] Our first question is from Larry Biegelsen of Wells Fargo..

Mike, just one clarification.

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

That was for us, Larry..

Well, I'm having trouble -- I mean, maybe it's something we can take off-line, if you don't have the numbers handy.

But the $78 million for clinical and commercial, how are you getting into the mid-teens usage growth year-over-year?.

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

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

I got it. And so the net stocking is not the $7 million U.S.

reversal, that's separate reduction?.

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

I got it. And then just for my second question then.

On SAPIEN XT, do you still feel good about getting both high-risk in inoperable, as well as the 29-millimeter valve when XT is first approved?.

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

The next question is from Rick Wise of Stifel..

A couple of things. When you look at Europe and the rollout of SAPIEN 3, I think I heard you say that roughly 1/3 of your sales was SAPIEN 3.

How do we think about the mix in Europe going forward? Do you expect 100% conversion to SAPIEN 3? And maybe, how long does that take?.

Yes, I think, as I noted, we're about 2 months into the SAPIEN 3 launch, and what we said is about 1/3 of our OUS sales was SAPIEN 3. So that will be actually a little higher than that in Europe. And that's -- we think that's going to go pretty fast.

It'll -- might take all year for it to happen, but we largely think that when people have an option to go to SAPIEN 3, they will go there. And so that will happen. But we're just at the early stage of that.

Does that answer your question?.

Yes, yes. And Mike, you -- I think logic would have suggested that, that XT would get approval sort of midyear, you said that. But you're sounding so much more concretely confident in a second quarter approval.

Is it -- can you share with us why that confidence and why you're saying it so strongly now?.

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

The next question is from Bruce Nudell of Crédit Suisse..

Mike, one of the things that we picked up clinically from clinical sources at ACC was speculation that given the strength of TAVI, the results as a class, that it is conceivable to have PARTNER IIa conceivably looked at on a 1-year follow up as opposed to 2 years.

Is that even remotely possible?.

Yes, I think I've commented on this in the past. We really -- we don't know is the short answer. We have a 2-year endpoint on that, and I will still continue for the purpose of how you do your estimations to continue to anticipate that. Obviously, if we think there's some opportunity, we'd consider that as an alternative.

But I don't have anything that can provide clarification at this point, Bruce..

Fair enough. And there was a lot of back-and-forth legally. And my read of what the original judge said was that he was not -- he was considering the uses of the -- with regard to the extension, he was viewing it pretty broadly.

Could you comment on that aspect of this argument as to whether or not the patent Andersen applies broadly to the general use of SAPIEN, irrespective of transdermal, irrespective of size, et cetera?.

Yes, there are a couple of things. Judge Sleet, the federal judge at the district level, he has already ruled that he believes that this is worthy of an injunction. So he's already ruled on that. That is being appealed. Separate from that, there's this process that goes on that says how long will that extension go on.

And what I reported now was that we're extended until May of '15, and we have petition to go through March of '16.

So does that answer your question?.

No, I guess the counter argument was that it should be parsed just to the FDA approved indication at that instant when the patent expired.

Any comment on that?.

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

The next question is from David Roman of Goldman Sachs..

I wanted to maybe start with a follow up just on the underlying growth in the U.S. market. I know you talked about mid-teens, and obviously, there was an estimate out there for whatever Medtronic is going to do.

But I guess -- I'm wondering, can you give some perspective on where we are in kind of tapping out market potential with the current size valve on the market, meaning SAPIEN? And any sense as to how much additional potential there is from having smaller valves in the market and maybe how many patients are getting turned away for procedures now or there's insufficient tracks [ph]? Can you help us understand the potential reacceleration that could come from having 18 French devices on the market?.

Yes, yes, thanks very much, David. Broadly, even if it was just SAPIEN in the market, we think that the market would do some growing. But we think that there is some significant uptick will come from having valves that will treat patients with larger annulus.

So for example, of our 29-millimeter valve were available, like what happened in Europe, we thought there was substantial uptick in market growth with that 29-millimeter valve. Separate from that is just the access issue.

One of the challenges associated with the SAPIEN platform, which is our earliest generation, that's the only country that we still sell it in is this large profile. And we think when we get down to an 18 French profile, like in SAPIEN XT, that will also be an accelerator of the market.

So we think that's maybe, let alone, when you get do something like SAPIEN 3..

And then, I guess, there is a follow-up of that. If I throw out a number that some of the survey data that we've collected would show that 20% to 30% of patients showing up for procedures are getting turned away because of insufficient, faster access.

How would you respond to a number like that?.

Yes, one of the things that we see and maybe one of ways to look at it, David, it's hard for anyone to be absolutely quantitative on this, is we're seeing over 50%. Sometimes it's close to 60% of procedures being done transapically, right now with the SAPIEN system. Once we are in Europe, well penetrated with XT that move to more of a 70-30 split.

And we're watching that move again with SAPIEN 3 to some kind of higher numbers, probably in excess of 80-20, maybe even 85-15. So it gives us some kind of signal about what happens when you get these smaller delivery profiles..

That's very helpful. Just one quick gross margin question for Scott. I know there are a lot of moving parts here with the FX hedging lags, the contracts in the back half of the year and then manufacturing inefficiencies.

Is there anyway you can help us think about what is like the underlying product gross margin of the business in the context of that 72% number you expect to report?.

It's a good question. It's something that we've really tried to shy away from in terms of reporting product line gross profitability. And so we've been intentionally vague about it. But I'll try to give you a little bit of roadmap to at least see through the impact of this sales swap reserve.

But beyond that, we just can't get any the details about what's the profitability of different SAPIEN products and surgical valves and so on..

The next question is from Raj Denhoy of Jefferies..

Wondered if I could ask about the U.S. market.

I don't think you gave the number of centers in the quarter, maybe if you could provide that?.

We've been, Raj -- I mean, thanks for the question. We're trying to get off specific center accounts. One of the things that we did say, though, is that we're on track to meet our previously stated goal of 45 to 65 new centers in the year.

So we had a nice uptick in centers in the quarter that was very consistent with being able to stay within that target..

And maybe I could just ask about Europe, you gave some very positive commentary about both procedures being strong, but then also some share gains.

I'm curious, if you could maybe offer some thoughts around what's happening in Europe, particularly on the procedure side? Are you seeing further expansion of transcatheter valves into surgical procedures? Is it more geographic expansion? Some detail will be helpful..

Sure. I think, I noted that the growth in Europe, it seemed like it had picked up in the second half of last year. And we think Q1 was even stronger than that, stronger than we had expected. That growth rate must have moved into the mid-teens at this point. Growth seem to be spread across the continent.

So many countries, pretty much all the countries, were engaged, including the south of Europe. And I -- we attribute it to a combination of sort of just the growing body of impressive clinical evidence.

But also, in particular, because of S -- SAPIEN 3 is lower profile and the PV Leak solution, we think that may start to stimulate some clinicians to move a little faster than they might have in the past, although it's a little early to say that decisively..

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

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

The next question is from Jason Mills of Canaccord..

If you don't mind, stay with Europe for a second. I'm just -- if we assume that you mentioned that second half of last year is when we start to see perhaps a bit of an acceleration to the European market. We'll anniversary that sort of towards the back end of the year.

So I'm just wondering, if you can give us a sense for, over these last 3 quarters, how same -- sort of for a lack of a better term, same-store sales procedure growth has gone? And are some of our researchers suggest you are doing really well in markets that maybe you weren't in 12 to 15 months ago, in other regions in Europe and Eastern Europe, et cetera? And also, I guess, my second question stay outside of the U.S, lot of focus on the U.S., outside of U.S., in Japan.

Just trying to -- I guess, on a qualitative and a quantitative basis, how is the development that market going relative to what you thought it would be at this point?.

Okay. Thanks, Jason. So I want to make sure that I answer your question correctly in Europe. So let me take a shot at it, and you tell me whether I've gotten there. As I noted, it was pretty broad-based in Europe. And even though we have had pretty consistent growth in a big place like Germany, the fact that countries, like France, really picked up.

And that's one that has very little SAPIEN 3 at this point or within the fact that we saw Southern Europe pickup as well. That's noteworthy, and the U.K. for that matter. So you -- the picture to have the kind of growth that we experienced in Europe, it needs to be pretty broad-based, and we did see that. So it's not just in the usual suspects.

It's a little broader than that. Did that -- we're still early in the launch of SAPIEN 3, with only 2 months of sales. But again, that one is going to drive more growth further on in the year.

Comparisons will get tougher later on in the year so that may affect growth rate, Jason, as you correctly noted, but at the same time, we'll see if this, the SAPIEN 3 effect, has some impact on lifting the market. In Japan, it's pretty much going just the way that we thought it would go.

The fact that we have $7 million worth of sales in the first quarter is very consistent with the way we think that ramp will look in ramping toward $45 million to $55 million. The addition of accounts, which we suggested would be around 4 accounts per month, is going very consistently.

I don't know, I may have misstated what our growth rate was in Japan, it was $40 million to $50 million, I think, is what we projected.

So does that answer your questions?.

Yes.

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

Yes. Well, a few things. One is, we are getting -- most of the growth is coming from existing centers, there's no doubt about that. We're -- there are some new centers, I think, particularly in France, but most of it is coming from existing centers.

I think, as we noted, that where -- even before we've launched S3 in the accounts, where XT is available and not SAPIEN 3, we're watching XT gain some market share. So we've also experienced that. And I guess, that probably gets at the key part of the question, Jason..

The next question is from Danielle Antalffy of Leerink Partners..

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

Thanks, Danielle. What I would say so far, it's probably gone pretty much the way we expect it. We don't give specific share assumptions, but we have that first mover advantage, and we think there's a lot of clinical preference that goes along with that. It's going to be important for us to get XT.

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

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

Any perspective there?.

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

And one more question. Just looking at EU, EU market growth has accelerated really nicely here. Seems like it's actually sustainable. As you see new valves hit -- next-generation valves hit the U.S.

market, so XT and then eventually, hopefully, SAPIEN 3 and some competitive valves as well, do you think that, that level of growth acceleration is at all representative of what we could see the U.S.? Or is U.S. going to be just totally capped by CMS and FDA? I would love some perspective there for -- to indicate any longer-term growth here..

Yes. So I think the fact that there are more competitors, that may have some lift. But the biggest thing about new devices, is the fact that both you have the slower -- the lower profile on the way, and I think that's very attractive, and when you have a larger annular sizes that could be treated.

Those things are meaningful in terms of lifting the market. When you combine it with the fact that the evidence is just continuing to build, every time we hear presentations for the most part, it's demonstrating that it's better and better, we know that patients prefer this option. And so we think that will drive growth.

And I think, we've been pretty vocal in terms of what we think that growth can do long-term. When I reflect back, it's some of these clinical trials that we've been involved in. So when people get randomized for surgery, we even find 10% of those patients off and will opt out of the trial rather than have surgery.

It tells you a little bit about the mindset of these patients and their preference for catheter-based options..

The next question is from Brooks West of Piper Jaffray..

Mike, just a couple of quick ones from me.

Can you remind us, what are the sizes of SAPIEN 3 that are available in Europe right now?.

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

And then on -- just circling back to your comments on data that might be at EuroPCR.

Any more detail on maybe the size of the data sets we might see on SAPIEN 3? Or any other detail on some of the clinical experience that might be shared? And then, did you mentioned, are we going to see anything more on percutaneous mitral from you guys at PCR?.

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

But it'll give a -- it'll be a good indicator. We -- there is a late breaker presentation that's planned at EuroPCR for our FORTIS mitral valve. So that will, obviously, be a small experience at this point, but there is a plan for a presentation..

The next question is from David Lewis of Morgan Stanley..

Mike, can you just -- you sounded very positive, obviously, on XT and 29-millimeter.

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

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

When it comes time to actually imply an injunction, one of the things that the judge has chosen to look at is sort of trading of patent protection versus some of the safety issues, and when we don't have SAPIEN XT available, we aren't able to treat as broad a range of patients.

So XT becomes more meaningful in that discussion, when you talk about limiting it.

So does that end up answering the question, David?.

I might -- just specifically do you have a sense of -- if you get 29 in XT, what percent of the patients you think you treat here in the U.S.? And is that number 95%, 90%?.

Yes, a vast majority. Greater than 90%, maybe 95%. We think it's going to be a big number..

And then just on your mitral timing, Mike, there is another company with a first-generation mitral valve for the first human implant, can you just talk to us where you are in that program? And where we can start thinking about a CE Mark trial? Or whether you're comfortable that you sort locked the design you can move into a larger trial versus a single slide or single patient experiences?.

Yes. We're still early in this is the short answer. And you just -- it's hard to have a good feel for durable success without significantly more experience and more longer term follow-up than we have or any of the competitors at this point. So this is one that I think is going to bear watching closely, David.

It's too early at this stage of the game to fully judge the value or competitiveness of any program, ours included..

So if I push you to 2015 CE Mark initiation of the trial, that's still not comfortable with that number?.

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

The next question is from Glenn Novarro of RBC..

Regarding the litigation with Medtronic, Mike, you sent out a letter to doctors, and you sent it to The Street as well. And in the letter, you talked about how you've actually tried to reach out to Medtronic, and there seems to be some sort of compromise that you're willing to maybe accept.

Can you maybe go through a little bit of what this compromise -- or what this olive branch was, and kind of what's next in their process?.

Yes, I think we have been pretty vocal to hear that we have tried to provide some room. And we've been consistent about that, about the fact that we have not asked that there be some out right ban of core valve. When we get into these kinds of discussions, they're confidential.

However, we expect that they're going to continue with respect in particular to what the district court has asked us to do, which is to work something out in conjunction with this preliminary injunction.

So I'm not able to provide any more color other than that, Glenn, but hopefully it gives you a sense that we would like to reach resolution, as the judge indicated..

Was the compromise something to do with, okay, Medtronic is in 50, 60 sites in the U.S.

already trained, was it to let them stay in those sites, but then no further expansion?.

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

And then just one quick follow-up.

In Europe, when you launched SAPIEN 3, was there any stocking that was in Europe on SAPIEN 3?.

Yes, there was a little bit of stocking in SAPIEN 3, but it was very small. And I mean, very small, I don't want to say that it was probably not even -- it was just small. Maybe not even 1 million or so..

The next question is from Kristen Stewart of Deutsche Bank..

I guess just following on that, was there any stocking sales for SAPIEN XT in Japan included in that figure this quarter?.

No, Japan is a consignment market only..

Okay, great. And then on -- I just want to make sure I understand all the different GAAP to non-GAAP numbers.

You guys are not providing any sort of sense of what the non-GAAP gross margin figure is this quarter?.

No, we actually are. The guidance we provided, the 73% gross margin, is a non-GAAP number..

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

I'm just having a time bridging to get back to that 76% non-GAAP number..

In the 76%, Kristen, tell me again how you're trying to get there? You're going to walk from GAAP, right?.

Yes. So from the walk from GAAP you guys are adding back the reserve to the sales line item to get to your underlying results..

Right..

Presumably then you have a non-GAAP gross margin.

Did you give the non-GAAP gross margin in your prepared remarks? You only talked to the GAAP gross margin for the first quarter?.

Yes, we did. The non-GAAP gross -- the GAAP gross margin was 72.1%. And we said, roughly a couple of 100 basis points of that gross margin decline versus last year represents the impact of that sales return reserve. So call it, 74-plus percent gross margin, if you strip out the impact of the sales returns reserve..

Perfect, okay.

And then just looking ahead, should we assume that they are error embedded within your guidance for the second quarter? Any sort of reserve adjustments, either as you, I guess, presumably get SAPIEN XT, would be then reducing that out? Or how should we just think about your guidance relative to what you're expecting on the reserve front?.

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

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

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

And then just on the data front, at EuroPCR, will we see any longer term follow-up on the SAPIEN XT system? Because 2 years, I would have thought it would have been a ACC, but I'm just wondering if we will see that at EuroPCR?.

I do not expect to see the SAPIEN XT at EuroPCR. We would expect that there probably be some 2-year data sometime later on this year at a medical meeting, but not at EuroPCR..

The next question is from Michael Weinstein of JPMorgan..

This is Chris Pasquale in here for Mike. I just want circle back on the question about the a U.S. TAVI in at this quarter, real quickly.

Am I hearing you correctly, so $78 million was your reported number? And if you back out the next stocking impacts, your sales would have been more like $86 million to $87 million, is that right?.

Yes..

So that's up solidly year-over-year, but it compares to more like $88 million to $91 million over the last 3 quarters. Now obviously Medtronic had more of an impact this quarter, but as we step into 2Q here, the comps get more challenging.

So how much confidence do you have that the market itself is not starting to fly total [ph] but just recently in a few quarters in a row on that same range?.

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

And then on the European side of the business. I'm trying to understand some of the dynamics there and that the nice pickup in growth that you saw.

How much of that would you attribute really to share gains with SAPIEN 3 and kind of 1 bucket versus a pickup in underlying market growth? And for that second bucket, to the extent that it was a contributor, what do think is driving that in the market that's more mature at this point?.

Yes. I think what we've reported was not just Europe alone, but OUS. And what we said is that over half of that growth was by -- it is just a pickup in overall procedures across the geographies, and so that's not share gain. In terms of the combination of SAPIEN 3 and XT did gain share.

And I -- what I tried to note in my earlier comments that we have places where SAPIEN 3 -- it's only been -- it's early in the introduction. So it's accounted for less than 1/3 of the OUS sales.

In the -- so in addition to whatever SAPIEN 3 share might have come, which there was some, the XT was actually gaining share within the accounts where it was still isolated as the only valve available..

So absent Japan, which obviously saw a big pickup because you weren't really there 1 year ago, in the European market, is there anything that you would attribute that pickup in underlying utilization to for the market that's had the technology available now for close to 7 years?.

Yes. It's a good question, Chris. We feel like we noted this impact had started earlier. So the second half of last year, we felt like it picked up, and Europe was going nicely, maybe some of that was the recovery in the South, but we're also are seeing it broadly across all of Europe. It really ticked up in the first quarter.

And possibly that was stimulated by SAPIEN 3's entree into the market. It may have stimulated some interest. But it's still early, Chris, and it's hard to know what's driving that..

And our final question comes from Bob Hopkins of Bank of America..

Just a couple of really quick ones here to cap off.

So on the legal side, is it safe to assume that this, in your view, that this stay will last until the appeal is over?.

It's a really good question, Bob. Unfortunately, the appellate court didn't give us a lot of definition. They said pending further notice. And so what that means is that this is really a fluid situation that's evolving each week. It's possible that the appellate court could act before the scheduled June hearing, but we would be guessing.

And we'd also anticipate that we'd be back in front of Judge Sleet on May 21. But again, a very fluid situation that's difficult to predict..

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

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

And then lastly, really quickly on the -- your request for an extension on Andersen out into March of 2016.

When will we know something about that? And then also, is there a next milestone we should be thinking about relative to Cribier or any of your other patents?.

Yes, the short answer, Bob, is we don't know when we're going to have that decision. The patent office talks to FDA about it, and then we hear back. And we don't know when they're going to act on that.

The Cribier patent goes to 2017, if that was a question, right?.

I was just curious whenever there is some -- a new milestone in terms of the litigation around Cribier, not in terms of the Life?.

Yes. I don't know. The -- in the past, the appellate court has taken some time before that's taken place. So I have not heard of specific date, Bob. But when we have something, I'll update you on the future call. Okay, well, thanks, everybody, for your continued interest in Edwards. Scott and David and I welcome any additional questions by telephone.

With that, back to you, David..

Thank you for joining us on today's call.

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

If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial (877) 660-6853 or (201) 612-7415 and use conference number 13579551. Additionally, an audio replay will be archived on the Investor Relations section of our website. Thank you very much..

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