David K. Erickson - VP, IR Michael A. Mussallem - Chairman and CEO Scott B. Ullem - CFO and Corporate VP.

Jason Mills - Canaccord Genuity David H. Roman - Goldman Sachs Group Inc. Bruce M. Nudell - Crédit Suisse Frederick A. Wise - Stifel, Nicolaus & Company Lawrence Biegelsen - Wells Fargo Securities Brooks E. West - Piper Jaffray Danielle Antalffy - Leerink Swann Raj Denhoy - Jefferies LLC David R. Lewis - Morgan Stanley Robert A.

Hopkins - BofA Merrill Lynch Kristen M. Stewart - Deutsche Bank Michel Weinstein - JPMorgan Glenn J. Novarro - RBC Capital Markets, LLC Ben Andrew - William Blair.

Greetings, and welcome to the Edwards Lifescience Corporation Second Quarter 2014 Earnings Conference. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder this conference is being recorded. It is now my pleasure to introduce your host, 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 second 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 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 our expectations regarding sales, gross profit margin, earnings per share, SG&A, R&D, interest expense, taxes, free cash flow and foreign currency impacts.

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

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

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

Also a quick reminder that when we use the terms underlying, excluding 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.

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. While our litigation settlement provided a large boost this quarter we are particularly pleased that our sales were better than expected across all product lines, which drove strong bottom line results. The ongoing launch of SAPIEN 3 in Europe helped drive share gains in the quarter and the launch of SAPIEN XT in the U.S.

which just got underway in June will enable treatment of an even broader group of patients while helping to reinforce our leadership position in that growing region. Strong contributions from our Surgical Valve and Critical Care product lines also helped drive the results.

Even as TAVR competition intensifies with the increasing adoption of this therapy around the globe we believe that we are poised for continued strong sales growth in the second half of 2014. Now turning to quarterly specifics. Total underlying sales grew 11% to $577 million.

These results exclude the impacts of foreign exchange, the THV sales return reserve and include the THV royalty payment which Scott will detail later. In trans-catheter valves underlying global sales grew 19% driven once again by strong OUS sales which accounted for approximately 60% of our total THV sales. U.S.

THV sales were more favorable than our earlier expectations and on a global basis pricing was stable. Outside the U.S. THV sales grew 35% on an underlying basis once again driven by strong growth in Europe and the SAPIEN XT launch in Japan.

In Europe adoption of transcatheter valve therapies continues to be quite strong and additionally we believe we gained share with SAPIEN 3. Representing more than half of our Europe THV sales SAPIEN 3 is being well received by clinicians who appreciate its best-in-class low profile and paravalvular leak solution.

We have been aggressively launching SAPIEN 3 at the highest volume hospitals and expect to complete the launch by year end. Although the impact of competitors in Europe was limited again this quarter we are beginning to see a modest pick-up in their growth.

In Japan, THV sales in the quarter were $10 million and our commercial roll-out there is proceeding on track. We continue to expect $40 million to $50 million of SAPIEN XT sales in the region this year. In the U.S.

underlying THV sales were $92 million for the quarter including a benefit of $4.7 million from royalties and adds back the $6 million sales return reserve. The $92 million underlying sales reflects increased clinical sales and an approximate $5 million negative impact from net stocking. Procedures with Edwards transcatheter valves in the U.S.

increase sequentially as well as compared to a year ago. We remain on-track with our previously stated goal to add 45 to 65 new sites during 2014.

In mid-June we were very pleased to received FDA approval of our next generation SAPIEN XT system for high risk and inoperable indications including transdermal and alternate access systems in the 23, 26 and 29 millimeter sizes.

Although with a limited impact this quarter clinician demand has been quite strong for this lower profile system particularly for the larger 29 millimeter size which has allowed for the treatment of patients with a larger native annulus. We are implementing a rapid upgrade of hospitals from SAPIEN to SAPIEN XT and it is well underway.

On the reimbursement front we are pleased that CMS proposed two new DRGs for all endovascular valve replacement procedures including TAVR. CMS recognized that TAVR patients tend to be significantly difficult from typical surgical valve patients and as a level of hospital resources required for these patients is usually higher.

Overall our primarily modeling indicates average payment increases of 10% to 15% for most hospitals. This change is expected to take effect from October 1st. Although we have always believe that the TAVR opportunity in the U.S.

to be large it appears that is an increase in the growth that is being fueled by new lower profile systems, additional valve sizes increased clinician experience and the growing body of compelling clinical evidence. Turning to our pipeline. Enrollment in our U.S.

SAPIEN 3 trial of 1,000 intermediate risk patients is on track, to be completed in the next several months. As a reminder, enrollment in the high-risk and inoperable patient arm is complete and we are focused on brining this life saving technical to patients.

Based on the enthusiasm clinicians have for SAPIEN 3 and our expectations that it will quickly become the leading transcatheter valve in Europe we have elected to slow the introduction of our Sentara valve platform. This will allow us to incorporate some enhancements that we believe will make Sentara a best in class self-expanding device.

In the mean time we continue to gain experience with Sentara and the commercial launch in Europe is now expected occur in 2014. In addition we are pleased to announce that Dr. Martin Thomas will be joining us later this year in a newly created position of Vice President of Medical Affairs for Transcatheter Heart Valves.

He is currently the clinical director of cardiovascular series at Saint Thomas Hospital in London and a global leader in transcatheter heart valve research.

In summary, we are pleased with the global THV sales performance and our increasing 2014 sales guidance excluding royalty payments we now estimate underlying sales growth in this product line to be at the high end of our previous zero to 14% range.

We continue to believe global transcatheter aortic valve replacements will grow 15% to 20% annually over the longer-term. Turning to Surgical Heart Valve Therapy group, sales were $214 million, up 4% on underlying basis driven by growth across all regions and partially offset by a small ASP decline due primarily to regional mix.

Our premium valves drove stronger growth in both aortic and mitral units. Sales of cardiac surgery system products or CSS which are part of this product group were flat compared to last year. In the U.S. Surgical Valve sales grew this quarter laid by unit growth of our premium valves.

We believe that surgical valve procedure trends continued again this quarter with an increase in overall procedures in the low single-digits. We are on track to complete patient enrollment in our TRANSFORM trial for INTUITY Elite by the end of the year as well as our COMMENCE trial studying GLX our advance tissue platform. We are introducing U.S.

hospitals to our undertreated patient access initiatives and have seen a number of hospitals begin implementing the program. The introduction of INTUITY Elite lifted results in Europe this quarter and clinician interest is building in this minimally invasive platform.

During the quarter three year data from the European CE Mark TRITON trial for our INTUITY Valve platform was presented which demonstrated that these patients had a significant improvement in hemodynamics and heart function.

Based on the continued strength of our surgical valve business but lowered by the performance in our CSS products we now expect underlying sales growth for the total product group to be at the low end of our previous 4% to 7% range in 2014.

Turning to the Critical Care Product group, total sales for the quarter grew 9% on an underlying basis to $141 million. We saw strong performance across the board and we experienced double-digit ESR product sales growth across most regions.

As a reminder ESR or enhanced surgical recovery facilitates shorter hospital stays resulting from better monitoring and fluid management. These minimally invasive and non-invasive monitoring products include FloTrac and ClearSight. During the quarter we were pleased to initiate the U.S.

launch of the ClearSight system, our non-invasive monitoring technology. We believe ClearSight which is integrated in to our EV1000 system is the most advanced non-invasive monitor of its kind.

Given our strong first half results and the continuing adoption of ESR products we now expect underlying sales growth in Critical Care to be at the high end of our previous 3% to 6% range.

Now turning to our transcatheter mitral valve program, as previously reported data about the first in human experience with our Fortis Valve were presented at EuroPCR in May. This early experience has demonstrated that the Fortis Valve can be successfully implanted and functions as intended.

Compassionate patients are continuing to be treated in this early experience with cases now having been performed at four different hospitals. We expect clinicians to report on their progress at future medical meetings.

We and the clinicians involved in the Fortis program remain enthusiastic about the opportunity to develop a transformational therapy to address the needs of the many patients who are not candidates for surgical mitral valve intervention.

Earlier this year we received a follow-up inspection to our 2013 warning letter in Draper, Utah, which resulted in multiple 483 observations. This facility produces a variety of products including CSS devices and our THV delivery systems.

To address compliance issues we are making significant investments in our CSS operations which include increased validation expenses, additional technical talent and expert consultants. Separately we have dedicated resources focused on complying with the agreed upon action plan for the SAPIEN XT delivery system that verifies compliance.

Our efforts will result in increased expenses but are not expected to impact availability of key products. During the quarter we are very pleased to reach an agreement with Medtronic to settle all outstanding patent litigation between the two companies.

Under this agreement all pending cases and appeals in courts and patent offices worldwide have been dismissed. We also agreed not to litigate patent disputes with each other in the field of Transcatheter Valves for eight years.

We're pleased that we were able to reach an agreement that preserves physician choice while also recognizing Edwards' leadership in the pioneering of Transcatheter Heart Valves.

Under the terms of a patent cross license agreement, Medtronic made a $750 million payment to Edwards this quarter and will make quarterly royalty payments through April 2022. And now I'll turn the call over to Scott. .

Thanks Mike. I am pleased to report that we achieved non-GAAP diluted earnings per share of $0.88 driven by stronger than expected sales in the quarter. Total adjusted sales in the quarter were $577 million an 11.6% growth over last year.

This includes royalties of $4.7 million and excludes the global net impact of the THV sales return reserve of $2 million. More detail regarding the sales return reserve is available in our supplemental schedule posted on www.edwards.com. For the quarter our gross profit margin was 73.7% compared to 76.1% in the same period last year.

This reduction was driven principally by a negative impact from foreign exchange as well as the smaller impact of the write-off of SAPIEN Valves in the U.S. in connection with our SAPIEN XT launch. For full year 2014 we continue to expect our gross profit margin excluding special items to be approximately 73%.

Second quarter selling, general and administrative expenses were $216 million or 37.5% of sales compared to $187 million in the prior year. The largest components of the increase were Transcatheter Valves launch related expenses and the 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 continue to aggressively invest in research and development and spending in the second quarter was $89 million or 15.5% of sales compared to $80.5 million in the prior year period.

Heart Valve critical studies continue to be one of the largest drivers of our increased spending. We also increased our investments in our Transcatheter Mitral valve programs. We continue to expect our R&D investments to remain at approximately 16% of sales for the full year.

During the second quarter we recorded four adjustments to our GAAP earnings per share results which provided a $4.21 net benefit but which are excluded from our non-GAAP earnings per share.

First, the $750 million upfront payment from Medtronic has been included in our statement of operations and it's listed as intellectual property litigation income which we exclude in our non-GAAP results. Second, the $50 million contribution to the Edwards Lifesciences Foundation.

Third, we are excluding from non-GAAP earnings, a $6.2 million benefit resulting from the release of tax reserves based upon on our current expectations of the outcome of routine tax examinations.

Fourth and finally, consistent with prior quarters we excluded the impact of THV sales return reserve in our non-GAAP results which reduced our pretax earnings by $6.1 million. A complete reconciliation of our GAAP to non-GAAP diluted EPS was included in our press release.

Net interest expense for the quarter increased from the prior year to $3.1 million primarily as a result of our $600 million issuance of five year notes last October. For the full year 2014, we now expect net interest expense to be at the low end of our $12 million to $15 million range.

Our reported tax rate for the quarter was 32.7% which was higher than normal as a result of the Medtronic payment. Excluding this and other special items our adjusted tax rate was 22.9%.

We expect our rate to be approximately 22% next quarter excluding special items and then drop to approximately 16% in the fourth quarter assuming renewal of the federal research and development tax credit. Foreign exchange rate increased second quarter sales by $5 million compared to the prior year.

Compared to our recent guidance FX rates had less than a $0.01 impact on earnings per share. Looking forward, at current rates we continue to expect a $10 million negative impact to full year sales compared to last year. Free cash flow generated during the quarter was $762 million, which included proceeds from the recent litigation settlement.

We define free cash flow as cash flow from operating activities of $778 million, less capital spending of $16 million. Excluding the impacts of the payment from Medtronic and our $50 million contribution to the Edwards Lifesciences Foundation free cash flow was $73 million.

For 2014, excluding special items we continue to expect free cash flow to be between $325 million and $425 million. In July our Board of Directors authorized a new repurchase program to acquire up to an additional $750 million of outstanding common shares. This supplements the approximately $200 million remaining on our current repurchase program.

Turning to our sales and earnings guidance. Given our second-half performance in transcatheter valves and including full year estimated royalty payments of $25 million we now expect sales in this product group to between $830 million and $900 million and total company sales at the high end of our $2.05 billion to $2.25 billion range.

For the Surgical Heart Valve Therapy group, we continue to expect sales of $810 million to $850 million and in the critical care product group we continue to expect sales of $535 million to $575 million.

We are increasing our full year guidance for dilutive earnings per share excluding special items to $3.24 to $3.34 from the previous guidance of a range around $3.10. For modeling purposes we continue to expect full year diluted shares outstanding to be approximately $108 million.

For the third quarter of 2014 we project total sales to be between $530 million and $570 million and diluted earnings per share excluding special items to be between $0.66 and $0.72. And with that, I'll hand it back to Mike..

Thank you, Scott. As we reflect on our first half results we are very pleased with the performance we have achieved across all our product lines and believe our future remains bright. Our transcatheter valve franchise is poised to drive market growth through indication expansion and next generation technologies.

Our Surgical Heart Valve product line remain strong and we are investing in innovative products to strengthen our leadership position and our critical care product line should continue to benefit from sales of our best-in-class monitoring technologies including the launch of the non-invasive ClearSight system.

Overall, we are confident in our outlook for a continued strong organic sales growth reflecting our focused innovation strategy and our commitment to helping patients. And with that, I'll turn it back over to David..

Thank you, Mike. Before we open up the question I would like to encourage you to mark your calendars for Monday, December 8th when we will be hosting our 2014 Investor Conference in New York. This event will include updates on our new technologies as well as our outlook for 2014. More information will be available in next couple of months.

In order to allow broad participation in the Q&A we ask that you please limit the number of questions. If you have additional questions please re-enter the queue and we will answer as many as we can during the remainder of the hour. Operator we are ready for questions please..

Thank you. (Operator Instruction). Our first question is coming from the line of Jason Mills with Canaccord Genuity. Your line is now open. Please proceed with your question..

Thank you, congrats on great quarter Mike.

Can you hear me okay?.

Yeah, sure can. Thanks Jason..

Great. First question for me is on the transcatheter mitral program.

Perhaps you give us a broader prospective on how you are thinking about bringing product to market there both from an internal prospective and your considerations now with the incremental cash from the incremental cash from Medtronic as you have obviously a share repurchase program authorized but perhaps talk about the acquisition of additional program, additional shots on goal.

Just generally speaking how you are thinking about building that franchise over the next couple of years?.

Sure, thanks Jason. You know we are still early on in terms of the development of Transcatheter mitral valves. We're optimistic about FORTIS program but it's still difficult to fully judge the value.

The path of commercialization of mitral transcatheter heart valve is likely to be a long and rigorous one similar to the experience that we had in SAPIEN valves. Our intention is to be the leader in this field.

We remain open in considering acquisitions to supplement our existing portfolio but as it goes along with the comments that we made previously we're not really changing acquisition strategy based on the Medtronic settlement..

Okay. Just another one. On transcatheter side this time on the aortic in the U.S.

is the SAPIEN 3 high risk valve brand [inaudible] 30 day endpoint, I was just curious what the discussions have been or what the possibility would be that you will be able to bring back to market perhaps sooner than what may have otherwise been expected if we would wait for a full one year if that’s possible?.

Yeah. Thanks Jason. We're very excited about SAPIEN 3. We think it's a best-in-class valve. Obviously we're going to work to make that valve available to U.S. patients as soon as we can. We just don't have anything specific to share at this point. .

Okay. And with that just let me drill in one another one. In the U.S. now have Medtronic on the market, one of the things that we've been discovering in our research is the length of stay is trending down. Seem to be perhaps an advantage that from we’ve heard with respect to the SAPIEN valves given the -- issues with the Core Valve.

I am wondering if there is any data to come or there’s any anecdotal discussions that you had that you like to perhaps pass along to us with respect to length of stay and the competitive landscape here in the U.S..

Yeah, thanks Jason. We're going to have let others ask some questions. Overall we have been observing length of stay fall. This is something that we've been really working on and have been focusing on for more than a year at this point.

It's too early probably for us to detail any comparison between ourselves and Core Valve but really familiar with our own experience and the clinicians that we're associated with are sharing optimism that they're able to drive better performance and we've seen certainly historically. Thank you..

Thank you. Our next question is coming from the line of David Roman with Goldman Sachs. Your line is now open. You may proceed with your question. .

David H. Roman - Goldman Sachs Group Inc.:.

Thank you and good afternoon everybody. I want to follow up a little bit on Jason's question here about the impact of Core Valve being on the market. I think Mike if I heard you correctly in your prepared remarks you listed out a few factors that you thought were helping market growth in the U.S. including new technology sizes and indications.

Could you maybe help us understand how the competitive landscape has played out over the first six months and whether in fact you are seeing an uptick in demand associated with smaller products and a second player being on the market?.

Yeah. So it's a good question, Dave. You got a few things wrapped up in there. It's difficult to peg exactly what is lifting the U.S. market but it feels like that U.S. -- the number of procedures in the U.S. has lifted.

We feel that clearly the impact of a low profile system and larger sizes clearly has impact but we also believe that the continued strong data that's been demonstrated broadly in the field of transcatheter valves is also helpful.

Did I get your question or there was more in there David? Do you want to restate?.

No, that is what I was trying to get out whether I think coming in to this year you were concerned about the share loss impact and it sounds like there might be a market growth impact to consider as well?.

That's right. .

Okay.

And then my follow up just for Scott on the gross margin line, maintaining 73% gross margin target, can I just clarify that's a GAAP number because year-to-date you're obviously trending way above that and the impact of the Medtronic royalty base you disclosed in the 8-K sounds like that would add just about a 100 basis points to gross margin for the year.

So is there anything else going on in that line that we need to consider?.

The other big thing that’s going in that line is just the effect of FX flowing through versus the rates in the second quarter of last year. So FX is the big driver of that shift in the gross margin.

Okay, but we are not rating gross margin even with the royalties is that implicitly lowering the underlying margin or is that not the right way to look at it?.

Sorry David say that one more time?.

Are you lower why would you not raise the gross margin target to give in the now inclusion of the royalty from Medtronic which I am assuming has obviously a 100% margin on it.

Are you lowering the underlying margin target here?.

It does benefit the gross margin rate to the tune of about 30 basis points but again the big factor that influencing our rate this year versus last year is the FX move..

I got it, thank you..

Thank you. Our next question is coming from the line of Mr. Bruce Nudell with Crédit Suisse. Your line is now open. Please proceed with your question..

Good afternoon, thank you. Mike just to be clear royalties and de-stocking basically cancel each other and reserves don’t count to get to your 92 and if that’s the case it sounds like based on what we know the Medtronic I mean the market to be you know $125 million #140 million so, that means the market and the U.S.

grown 35%-40% is that conceivable in your mind?.

I think just from what you said Bruce sounds like you math about our sales is correct. I think you got that right. There is a lot of moving pieces and Scott can help detail if you want to get into it. In terms of estimating what the U.S.

growth rate I don’t know it’s a little difficult there are so many moving pares right now you know we also believe that one XT is approved some of these patients that have large annulus that might be on the side line came into the system.

So, exactly pegging the growth rate is tough but it does appear that we do have lift versus what we are expecting and we are very encouraged by that..

And my follow-up is regarding Europe, could you just give us some sense of how you think market in aggregate is doing north, south Europe northern or southern Europe overall reimbursement you know constrains et cetera et cetera?.

Yeah, thanks Bruce we actually find it remarkable the results in Europe were better than we expected.

Of course we were optimistic about SAPIEN 3 but there really appears to be some strong growth in the number of procedures We think it’s probably going then in the mid-teens and that’s not exclusive to a single country that’s broadly across the continent and when we try and get into what’s behind it I think one of our belief is just the growing body of impressive clinical evidence is helping lift the use of transcatheter heart valves..

Thanks so much Mike..

Sure..

Thank you. Our next question is coming from the line of Mr. Rick Wise with Stifel Nicolaus. Your line is now open. You may proceed with your question..

Good afternoon. Mike, you talked about in Europe for the first time it sound like you are saying competing product launching, you are starting to see the impact.

Maybe if you can just expand on where you are seeing it, how you are seeing and is that certain geographic area or certain type of product or segment, maybe just give us a little more color and maybe as part of that can you discuss in the United States the impact of what seems to be an acceleration in competing U.S.

pivotal -- competing clinical trials getting underway and is that should that be something we should be concerned about longer-term as well?.

Okay, yeah, let me try and take the two pieces. First, on Europe CHV competition. Recall going into the year we indicated that we were going to have headwinds and that we are going to see the introduction of two large competitors, both Boston Scientific and Saint Jude.

Although we have seen among the same we haven’t seen substantial impact so far this year. We think that might be because their introductions have been somewhat delayed in terms of having full product line. We expect to see the more complete product from those companies later on in the year.

So, I don’t does that answer that question?.

Sure. .

And then on the U.S. side so far clinical trials in 2014 have probably have been somewhat similar to what they were in 2013. Remember 2013 we thought it probably accounted for close to 15% of all the procedures done.

We are starting to see more clinical trials, it’s tough for us to define that Rick but we do think it is going to lift in the future those competitive clinical trials..

Which should be an accelerant do you think for you…?.

Well no I would say depending on the growth of overall procedures if some of them go to competitive clinical trials we would probably feel that. But there are so many movements parts Rick it’s kind of difficult to quantify that now..

Yeah. Just a quick follow-up on CENTERA the delay and it makes sense that you’d want to keep focusing on new kind of capabilities but does this at all suggest that you are less interested or less optimistic about the software expanding segment and maybe if you can give us any color on what you are thinking about there and just the new capabilities.

Thanks so much..

Okay, yeah, thanks. No, as a matter of fact we very optimistic about CENTERA. Matter of fact we think that we have shot here to introduce a best-in-class self-expanding THP.

There is a number of opportunities though for enhancement that we identified during the initial clinical experience and so as we have seen so much enthusiasm for SAPIEN 3 we just have elected to slow down CENTERA so that we can incorporate those enhancements but no we have not lost enthusiasm. .

Thanks..

Sure..

Thank you. Our next question is coming from the line of Mr. Larry Biegelsen with Wells Fargo Advisors. Your line is now open. You may proceed with your question..

Good afternoon, thanks for taking the question and congratulations on a good quarter.

Let me start with the guidance and then I had a follow-up, so I think I guess you raised the guidance by $0.14 to $0.24, can you kind of parse that out for us? I mean the royalty when you put out the 8-K with Medtronic you expected the royalty to initially be $25 million to $28 million or by our math by about $0.16 but yeah you know you are increasing our sales guidance to the high end.

So can you just help us understand know the components of the guidance raise?.

Yeah so, I think it’s a good question and thanks Larry. The point that you mentioned of course we had a beat in the second quarter and yes we got lift from Medtronic. So those things clearly help us but I think as Scott detailed when he talked about our expenses we are going to have a little higher incentive comp.

Our performance that is performance based in the second-half of the year and also we have some new expenses related to our CSS products in Draper, Utah. So those provide somewhat of a drag Larry and that’s where it sort of nets out the lift that we have in there..

And so just to confirm the royalty you are still expecting $25 million to $28 million this year and then for my follow-up on SAPIEN 3 with the intermediate risk trial coming to an end soon how should we think about the likelihood of a cap and how should we think about clinical implants for you in the second-half of 2014 and 2015 because if you don’t get a capital you know your clinical sales which were approximately $25 million in the first-half of this year you know go away thanks?.

Hey, Larry its Scott. On the guidance for royalties we booked $4.7 million in the second quarter as you know. We expect that for the full year will be around $25 million give or take. There is nominal royalty on top of the U.S. royalty for outside U.S.

sales and that will contribute to that the total that we end up booking but $25 million range is the right assumption for now..

Thank you. And then typically -- yeah….

Yeah, and related to clinical sales as we mentioned the clinical sales were up this quarter that was driven by SAPIEN 3 we don’t have clarity on whether there was going to be continued access program or not.

You know if you are asking us to estimate at this point this might be the higher watermark for our clinical sales you know it’s difficult for us to say right now..

Thanks guys..

Sure..

Thank you. Our next question comes from the line of Brooks West with Piper Jaffray. Your line is now open. Please proceed with your question..

Thanks, thanks for taking the question. Mike I wanted to ask a question on hospital profitability and how I might think about the impact of the proposed reimbursement you have spent a lot of time helping hospitals with their profitability I am specifically thinking about the U.S. on THP procedures. Can you give us an idea of how many U.S.

hospitals are profitable all in on the procedures and how you think this proposed reimbursement increase might impact that?.

Yeah, thanks Brooks. That’s a really tough question. You know when you go from hospital to hospital you get very different accounting system and we are not sure that they are fully transparent with us about their actual profitability. So it’s tough for us to say.

I think we have estimated in the past that on average hospitals used to breakeven on transcatheter heart valves. We think that's been gradually improving overtime as they gain experience and they shorten our length of stay. We're optimistic that this change to the new DRG is going to be helpful.

And we did some modeling on this and there are lot of things that depend on. It depends on hospital case mix, on their practice pattern on their regional payment but we think on average that we model the payment could increase 10% to 15% for most hospitals. .

Okay. And then thanks for that. And then on Japan came in a little bit below what we were thinking.

You are running about $17 million for the first six month, did you see some -- other companies have seen some weakness in Japan in Q2, was anything specific there and then how should we kind of think about the drivers of the acceleration there to make $40 million or $50 million in guidance? Thanks. .

No. We didn't see anything noteworthy but we’re right on track with our plan. I think we did $7 million in the first quarter, $10 million in the second. It's clearly a ramp and it's building and we continue to expect to be in the 40 million to 50 million range this year. .

Great. Thanks Mike. .

Sure..

Thank you. Our next question is coming from the line of Danielle Antalffy with Leerink Partners. Your line is now open. You may proceed with your question. .

Hi. Good afternoon guys. Thanks so much for taking the question.

Mike I was hoping you could give a little bit more color on the SAPIEN 3 rollout in Europe specifically in the centers in which you launched how much of the growth that you're seeing is market gain versus more aggressive implanting of intermediate risk patients and how much incremental runway do you see there particularly on the intermediate risk patient side of things, any color there?.

Yeah. It's very difficult to say overall with any level of precision Danielle. Overall we would say no, it's not like a bunch of intermediate risk patients are coming into the system but if you look out our surgical heart valves business it's continued to grow and that would be a good indicator if that we're shifting.

But rather we see a general lift in the overall number of procedures and that's almost the biggest impact. We did note that we have some share gain but we think that's the smaller component of the two compared to procedure growth. .

Okay. And then just as follow up because I am viewing obviously the intermediate risk population as the next leg of growth for this market where there’s still some runway on the high risk side longer term of course need that patient population.

So what's the first key data point we should expect to see there you got several -- you and Medtronic both have registries in Europe and the U.S.

trial what should we expect to see first and when if you can put a timeline to it?.

Yeah. Broadly Danielle you're on a key point. If the data demonstrates that we can effectively treat intermediate risk patients that clearly be a lift to the field and we're optimistic that will be the case.

Because all that presented in a clinical setting and clinical meetings we really don't have complete control of that and we're not sure when it's going to happen. We're currently and our trial pointed out a two year endpoint so you know what the implications of that are.

We continue to have discussions, you can imagine on changing or looking at other options to that but we have really nothing to speak about at this point. .

Okay. Thanks so much. .

Thank you. .

Thank you. Our next question is coming from the line of Raj Denhoy with Jefferies. Your line is now open. You may proceed with your question. .

Hi. Good afternoon. What if I could ask a bit about the competitive dynamic in the U.S.

as the quarter progressed with Medtronic obviously the litigation getting settle and with the XT getting on market I am just curious how things ebbed and flowed over the quarter whether you saw accounts maybe moving away to get trained with Medtronic and then perhaps coming back once XT got approved and just trying to get a sense of how that dynamic is shaking out and how you expect this is going to play out for next quarter or two?.

Yeah. It's a good question, Raj. If you go early back to our investor conference in terms of what we assumed, we thought that they were going to get their high risk approval in Q3 and they actually got that in June so that sort of one third direction. We probably thought our XT approval would sooner although still within our guidance.

And so during that period where we have SAPIEN available at the same time they had Core Value they had the ability to treat some larger angulus patients and so we did see accounts trained we did see some larger angulus patients patient go that way and then obviously that changed once SAPIEN was available particularly the 29 millimeter valve and we know that some of these patients were being queued for that.

So I am sorry, related to the approval of XT so, there has been a lot of back and forth in the quarter. I am not sure that you can know exactly where it is we feel like we exited strong and we are strong and we probably didn’t see the Medtronic's sort to be as aggressive as we thought they were going to be during this early launch period..

Okay, fair enough and maybe just my second question I was – a about SAPIEN 4 from some clinicians you might in the know and I am curious if you can offer about that or any details you can provide on and if there is a SAPIEN 4 we might hear about anything around will be helpful?.

You are making smile Raj you know that obviously there wouldn’t be something that we would talk about. We value keeping confidential our next generation development as you might imagine we do work on next generation products.

We are working products beyond SAPIEN 3 and beyond CENTERA and you can be sure of that but we don’t have anything to announce at this point..

Fair enough, thank you..

Thank you. Our next question is coming from the line of Mr. David Lewis with Morgan Stanley. Your line is now open. Please proceed with your question..

Good afternoon. Mike you made a lot new comments about the European market specifically around S3 and there was some comment you made that was news to us, one-third conversion last quarter I think you mentioned one-half conversion second quarter, obviously those are pretty remarkable results but it slowed a little bit on the second quarter.

I guess the question I have is what do you think is the barrier why that number wasn’t two-thirds in this particular quarter, is it training is it just your focus on specific regions but we would have thought that number could actually been a little higher here in the second quarter even though it’s a pretty good number?.

Yeah I think what we said in our results are about 50% of the sales this quarter were from SAPIEN 3. So I am not sure that it speaks in to some extend the sales are probably a little bit of lagging indicator of exactly what’s going on. The conversion across Europe is happening at pretty much our planned pace which is pretty aggressive.

We first went into our largest hospitals for the most part and those have been the people we have gone to first but we are just working our way through this in a very uniform fashion. We are pleased with what’s going on. I mean you think about we have got a 35% underlying growth over U.S. and so that’s even better than we expected..

Okay, and Mike just a related question in the U.S. market around XT is there any reason to believe in across valve sizes or any XT conversion we would expect the XT conversion in the U.S.

to be much more rapid to the S3 conversion in Europe is that kind of a safe assumption, can you share with us sort of how you’d expect that mix to progress here in the U.S.?.

Yeah, there is rapid conversion that’s going on from SAPIEN to SAPIEN XT. It’s been greatly anticipated and that’s been moving very quickly. We expect the vast majority of hospitals to be converted by the end of Q3..

Okay, thank you very much..

Sure..

Thank you. Our next question is coming from the line of Mr. Bob Hopkins with Bank of America. Your line is now open. You may proceed with your question..

Hi, thank you very much and good afternoon.

Would love to start out, Mike if you can just give us a little bit of insight as to what kind of incremental clinical data you expect might come out of the coming TCT meeting here in just you know short period of time are we going to see some tier data on XT and just if you just highlight the confidence and what we should expect that would be great?.

Yeah. Thanks Bob. We expect there is going to be a number of key presentations at TCT related to the partner trail. We just don’t know right now which ones are being accepted.

Remember that partnered data in a publication office that’s jointly managed with clinicians and the exactly how that’s going to roll out is not clear to us yet but we expect there to be news..

Okay. I guess will just wait on that. And the other thing I wanted to ask on I know the question was asked earlier about SAPIEN 3 in the prospects for a time frame in the United States a little faster than people expect.

Could you just give us a sense to what data exists on SAPIEN 3 that you might to be able to show FDA they could shorten that process relative to the current expectations, does any incremental data exists on that front?.

Well as we have mentioned we already enrolled our 500 patients high risk trial that was done in 2013 and we’re rapidly enrolling the 1,000 intermediate risk that will be -- we felt like enrolled here over the next several months.

In addition to that there is European data and the European data is not only the data that was used for CE mark but there is Europe registry that’s collecting data for SAPIEN 3.

So, there is fair amount of data out there already you know quite a lot of patient and so the ability to be able to use that to access the performance will be what’s key determinant and our ability to make any more aggressive arguments..

Great, thank you very much..

Sure..

Thank you. Our next question is coming from the line of Kristen Stewart with Deutsche Bank. Your line is now open. Please proceed with your question..

Hi, thanks for taking the question. I just wanted to go back to the U.S.

sales and Mike you mentioned I think was $92 million I wasn’t exactly sure how that that broke down and sounded like it royalties added back reserves but that I am sure we are stocking clinical kind of out there?.

Yeah, Scott why don’t you…?.

Yeah, sure Kristen hey there a lot of different elements to this and maybe the easiest way to approach it is to say the re-order sales for commercial combined with clinical was $92 million.

Three other elements that influenced the GAAP result were or the net stocking charge, royalty and the sales return reserve and that’s again to that $86 million that’s on the far left hand of the schedule on the website. .

Okay. And so the $86 million would be your non-GAAP U.S.

transcatheter valve number?.

No..

Sorry?.

The $86 million is the GAAP U.S. transcatheter valve sales number for the second quarter..

Okay, so to that let me add back to get to non-GAAP your $6 million I guess in sales return or is it the $2 million?.

Yes, if you had $6 million in the sales return reserve you get the $92 million which is inclusive of the other three elements..

Okay, got it. And then just in terms of going back to SAPIEN 3 and intermediate risk.

Is it your expectation that will have a one year follow-up period at this point it seems to be adjusted by the clinicaltrials.gov site?.

Yes, that’s our understanding..

Okay, perfect. And then the last question that I had is just to go back a little bit to the lack of I guess better leverage I would have expected given the increase amounts with the royalty and the higher sales result.

Can you maybe help us quantify what the incremental cost related to the 43 observations and it sounds to me like you would be expecting to get warning letter is that fair to say? Maybe in the….

No, it’s not fair to say that we are expecting to get a warning letter I think what we say it is that we had a significant number of 483 observations in that.

We have two things that we are doing you know one is applying additional resources to our CSS operations and the other focus effort on the action plan around the XT delivery and those two things are driving from cost are not going to detail those out but those significant and they are having they are having an impact on the earnings growth here in the near term..

What exactly are the XT delivery system changes? I assume that’s within the market today?.

There are no changes. These are simply compliance issues..

Okay, thank you..

Sure..

Thank you. Our next question comes from the line of Michel Weinstein with JPMorgan. Your line is now open. You may proceed with your question..

Thanks for taking my question. Let me just clarify things from the back of -- thee you sell in U.S.

in the quarter the SAPIEN XT are you recording stocking revenue for XT, the existing accounts?.

No, we are not..

Okay, so the net stocking then we get – the positive stocking on new account and the negative account that was that did have inventory and has moved the consignment is my understanding correct?.

You understand it perfectly..

Okay, good, and then Scott I heard you say that on the 2Q you might be in a better position to talk about the use of the proceeds from the Medtronic windfall here, the current with you guys on that point.

How do you want us to think about the balance today that you got this great cash position, you're generating good cash flow but it seems like it's being underutilized. And I know that’s far from your… So could you….

Sure. It's something we've been spending a lot of time thinking about and talking about with our Board and listening to what investors are thinking and hearing out there.

At this point we think the right thing to do is to preserve the cash and liquid shorter duration investments and have it available for share repurchase and potentially down the road funding and it kind of acquisitions. But well, we like buying back our stock.

We demonstrated that we brought back stock by $800 million in 2013 or the first quarter of 2014. We also want to be careful about how much we buyback all once we believe in – averaging but you should expect that overtime we're going to active in the share repurchase market.

I don't think we likely negative – cash sitting our balance sheet but we're also very deliberate and disciplined on how we spend it. .

Mike you have been pretty clear on acquisition but more staying structural -- but the challenge there is there hasn't bit a lot of progress outside of what you’ve done internally, is that still the thought process that structural heart is where you want to stay and you want to want your assets in structural heart is that what you consider for M&A.

Thanks Mike. We're going to need to let other ask questions after this. But yeah, to your broad point, yes, our focus is structural heart but also critical care technologies so we're focused on our core. Our intention is not some kind of a broad diversification strategy.

And even though you maybe haven’t seen do anything that really sizable or public, we have been active out there looking for the new bright ideas that we might we use, that can be meaningful in the area of structural heart and critical care technologies in the future. .

Thank you. Our next question is coming from the line of Glenn Novarro with RBC Capital Markets. Your line is now open. You may proceed with your question. .

Glenn J. Novarro - RBC Capital Markets, LLC:.

Hi. Good afternoon. Just had two follow-ups. One on price.

Mike I think you said in the quarter pricing really didn’t have much of impact particularly on transcatheter valves and I was just wondering in Europe is SAPIEN 3 being priced at a premium and you’re discounting for example SAPIEN XT and I am wondering if the same dynamic maybe happening in the U.S.

so any additional color?.

Yeah. Thanks Glenn. Yeah, in an effort to make sure that we were an aggressive competitor we made the conversion from SAPIEN XT to SAPIEN 3 essentially at the same prices.

We had a few places where so for example in the UK where pound didn’t move where we made some adjustments but overall pricing is pretty much flat or pretty much constant with the one thing being some discounts for large volume customers. Much of the same is true in the U.S.

where we're moving customers are helping them move from SAPIEN to SAPIEN XT at same prices and so continuing to use the 30,000 for modeling purposes is still a good surrogate..

Okay.

And then just quickly on a follow-up on Mitral so you've done a few implants now and I am assuming that there is going to be some tweaks to the design so I am wondering if you can walk us through the timeline as to when we can see some design changes, when you can initiate maybe first like a small pilot study again and when we can get into perhaps a European transcatheter mitral pivotal trial? Thanks.

.

Yeah. Thanks Glenn. The bottom line is pretty immature to be able to anticipate a pathway to commercialization. We're still in the midst of our first in human experience still learning a lot and we want to let ourselves complete that experience and gain all that knowledge and insight before we decide on any clinical trial or regulatory pathways. .

Okay.

Maybe we'll get an update in December at the analyst meeting?.

I hope we have clarity by then, Glenn that's for sure. We will let you know if we do. .

Okay. Thank you. .

Sure. .

Thank you. Ladies and gentlemen due to time constraints we will have one final question. Our final question will be coming from the line of Ben Andrew with William Blair. Your line is open. You may proceed with your question. .

Great.

Mike can you hear me?.

Yeah. I hear you great..

Okay, good so, you have talked in the past about the different down margins on the past as kind of things scale.

How is the ramp going with SAPIEN 3 and the margin structure this year your guidance was consistent but is there an opportunity with that in the 2015 to see you know margin moving higher as volume decrease on that?.

Yeah, as you can imagine it’s a scenario of focus for us. We do get improvement that comes along with volume but you also have to anticipate that we anticipated some of that volume improvement. So that’s in front of us I hesitate to give the really guidance on margin for 2015 at this point Ben.

we will provide a lot more clarity on that when we get into our Investor Conference in December..

Okay.

And then you talked the clinicians wanted to show the mitral data is it possible to see something at PCG?.

Yeah, it is possible I think you all know the clinician community pretty well. If they have some things that they are able to report on and they get accepted by TCT it would be presented by them yeah, I just don’t know how to be able to advise you on that..

Okay, thank you..

Sure. Okay..

Thank you..

All right, thanks very much for your continued interest in Edwards; Scott and David and I welcome any additional questions by telephone and with that back to your David..

Thank you for joining us on today's call.

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

If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this please dial 877-660-6853 or 201-612-7415 and use conference number 13585946. I’ll repeat all those numbers for you 877-660-6853 or 201-612-7415 and the conference number 13585946.

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

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