David K. Erickson - Vice President-Investor Relations Michael A. Mussallem - Chairman & Chief Executive Officer Scott B. Ullem - Corporate Vice President, Chief Financial Officer.

Jason R. Mills - Canaccord Genuity, Inc. David Harrison Roman - Goldman Sachs & Co. Larry Biegelsen - Wells Fargo Securities LLC Raj S. Denhoy - Jefferies LLC Bruce M. Nudell - Credit Suisse Securities (USA) LLC (Broker) Danielle J. Antalffy - Leerink Partners LLC Benjamin Andrew - William Blair & Co. LLC James Francescone - Morgan Stanley & Co.

LLC Michael J. Weinstein - JPMorgan Securities LLC Brittany Henderson - Deutsche Bank Securities, Inc. Kevin T. Strange - Bank of America Merrill Lynch Glenn J. Novarro - RBC Capital Markets LLC Matt C. Taylor - Barclays Capital, Inc..

Greetings, ladies and gentlemen, and welcome to the Edwards Lifesciences Corporation First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded.

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

Welcome and thank you for joining us today. Just after the close of regular trading, we released our first quarter 2015 financial results. During today's call, we'll discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A.

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

These statements include but aren't limited to financial guidance and current expectations for clinical, regulatory and commercial matters. These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today.

Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences may be found in our press release, our 2014 Annual Report on Form 10-K 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 and excluding 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 2015 with first quarter results of $590 million in total sales, representing an underlying growth rate of 21%. This reflects strong performance across all product lines and regions.

Significant Transcatheter Heart Valve sales once again drove the majority of this quarter's growth with notable contributions from our minimally invasive INTUITY valve and enhanced surgical recovery platforms. And most importantly, even more patients are benefiting from our lifesaving technologies than ever before.

In THV, we continue to see strong therapy adoption. Underlying global sales grew 51%. This was driven by continuing strong procedural growth in all major geographies and sales of our innovative new products. Globally, average selling prices remained stable.

Outside the U.S., THV sales grew 38% on an underlying basis during the quarter, once again driven by strong procedure growth in Europe and the ongoing launch in Japan. I want to take you through the growth drivers by region. Starting with Europe, we estimate overall therapy adoption grew approximately 30%.

Although transcatheter valves have been commercial for eight years, we believe demand remains strong for several reasons. First, general practitioners and general cardiologists are referring more patients to TAVR. We believe this is being driven by growing awareness, favorable clinical outcomes, and stable reimbursement.

Second, advanced technologies like SAPIEN 3 are improving outcomes and stimulating procedural growth. And finally, high risk patients in Europe are being treated based on their EuroSCORE as well as physician judgment, which takes into account a combination of age, frailty and comorbidities that support the use of TAVR.

With this as a backdrop, our competitive position in Europe strengthened during the first quarter, driven by the introduction of SAPIEN 3 last year. Clinician feedback on this platform has been very positive and sales of this product in the quarter represented more than 90% of our THV sales in Europe.

In total, we estimate newer competitors' products were used in approximately 10% of procedures this last quarter. We anticipate growing competition during the remainder of the year from large competitors with newer product offerings. In Japan, our sales grew sequentially.

We recently received regulatory approval for our 20-millimeter and 29-millimeter valve sizes, and reimbursement is expected to take effect in the near future. This will help broaden the population of patients who could benefit from this technology.

We continue to believe that Japan represents an attractive opportunity for TAVR and will contribute to our growth even as competition increases. Turning to the U.S., reported THV sales for the quarter were $131 million. Although sequential growth was modest, underlying growth, including $10 million of royalties, was 67% versus the prior year.

We believe U.S. TAVR overall therapy adoption grew even faster, driven by several factors. First, awareness and adoption are still growing rapidly since the introduction of this therapy in late 2011. This confirms the large previously untreated patient population with severe aortic stenosis.

Second, newer technologies, like SAPIEN XT and clinical experience are driving improved outcomes. And finally, hospital economics are improving, in part because of shorter length of stay and improved reimbursement. Providing more clarification on the U.S.

THV results, clinical sales from our SAPIEN 3 continued access program were a modest contributor in the quarter, as required documentation took longer than expected. Stocking and consignment had a minimal impact this quarter.

Late in the quarter, at the ACC conference, 30-day SAPIEN 3 data for high and intermediate risk patients were presented, which included almost 1,600 patients from 51 U.S. centers. These data demonstrated the lowest all-cause mortality and stroke rates of any of our PARTNER studies as well as excellent results on other key metrics.

And while this was only 30-day data, the outcomes are encouraging for the future of the therapy and eventual expansion of the approved indication.

Also presented were the five-year PARTNER data for high-risk patients treated with the first-generation SAPIEN valve, which demonstrated equivalent outcomes to traditional open heart surgery and durable valve performance. These results continue to validate the benefits of our SAPIEN technology and should help support the long-term growth of TAVR.

Based on the strength of the SAPIEN 3 data presented at ACC, the very positive clinician feedback about the valve's performance and the encouraging discussions with the FDA, we believe it's becoming more likely that we will obtain U.S. approval of our latest-generation valve this year.

For modeling purposes, our updated guidance assumes sales beginning in the fourth quarter. Turning to our product pipeline, as we look ahead to the Euro PCR meeting next month, clinicians will present data on their experience with SAPIEN 3 in the commercial setting.

And our self-expanding CENTERA valve platform featuring an enhanced motorized delivery system continues to make progress. We began enrollment in our pivotal trial in Europe and continue to expect commercial launch of this new platform in 2016. In summary, we're pleased with the strength of our global THV sales performance.

We believe overall TAVR therapy adoption growth rates will moderate due to the strong uptick in the second half of 2014. Additionally, we expect competitive activity will continue to increase. However, in light of the strong start to 2015, we now expect our underlying sales growth in 2015 to be at the high end of our previous 15% to 25% range.

Turning to Surgical Heart Valve Therapy group, total sales this quarter were $197 million, up 5% on an underlying basis. Unit gains across most geographies drove the majority of this growth, while a favorable product mix also contributed to a slightly higher overall ASP.

The growth rate of this product group was impacted by the previously discussed exit of certain non-strategic products and this impact will continue throughout the year. Globally, underlying surgical valve unit growth was led by sales of our premium valves across all major regions.

Strong sales of INTUITY Elite helped drive growth in Europe, and continued adoption of our PERIMOUNT valves lifted sales in China. In the U.S., we experienced solid growth in both aortic and mitral units, driven by our premium Magna family. Our activities in support of the Edwards INTUITY Elite U.S.

approval remain on track and we continue to expect to file the PMA in 2015 and launch in 2016. In summary, we're pleased with the continued strength of our premium products in our surgical valve product line, we're continuing to exit non-strategic products as planned, and we are reiterating our underlying sales growth guidance of 1% to 3% for 2015.

Turning to the Critical Care product group, total sales for the quarter grew 3% on an underlying basis, as expected, to $125 million. Usage of Enhanced Surgical Recovery products, or ESR, including FloTrac and ClearSight, grew approximately 20%. Critical Care sales outside the U.S. were lifted by continued adoption in China.

Our ESR program, which is focused on reducing patient complications and hospital lengths of stay, plays to our strength as the leader in hemodynamic monitoring. As clinical support for ESR continues to gain momentum, it should enable us to capitalize on the global under-penetrated opportunity.

We remain on track with our plan to expand the reach of our non-invasive ClearSight system with our upcoming launch in Japan. So to summarize our Critical Care product line, we're pleased with the continuing adoption of our ESR products and we are reiterating our underlying sales growth guidance of 2% to 4%.

Before I turn it over to Scott, I'll close with a brief statement about our transcatheter mitral valve replacement program, where we're pleased with the continuing progress.

To-date, we've treated more than 20 patients globally with the FORTIS valve, all of whom had symptomatic mitral regurgitation and who were either compassionate cases or in one of our high-risk surgical registries.

And while it's still very early in the program and the road to commercialization is challenging, we are encouraged by what we are learning. As we have said previously, our clinical partners will provide outcomes information at major medical meetings. And with that, let me turn the call over to Scott..

Thank you, Mike. This quarter our sales were $590 million, including $10 million of royalties, representing an increase of 13% over 2014. The strengthening of the U.S. dollar continues to have a significant impact. Excluding last year's sales return reserve and the impact of foreign currency, growth in the first quarter was 21%.

Non-GAAP earnings per share grew 47% to $1.12, primarily driven by our THV sales performance. This earnings per share was higher than our expected range, primarily because of strong sales and some anticipated selling, general and administrative expenses and research and development spending that was delayed until the second quarter. The stronger U.S.

dollar will have an even more significant impact to sales results during 2015 than we forecasted in our last earnings call. Based on current exchange rates, we now expect 2015 sales to be reduced by $190 million compared to prior-year rates.

Like many other global companies, Edwards' earnings are subject to significant impact as a result of the large movements in currencies. However, unlike some other companies in our sector, our 2015 earnings will be largely insulated as a result of our foreign currency hedging strategy.

Recall that we enter into foreign exchange hedging contracts that generate income at the gross profit line when the U.S. dollar strengthens relative to other currencies. This quarter, our gross profit margin was significantly boosted by these contracts.

Additionally, our reported expenses from outside the United States were reduced by these exchange rates. Therefore, our operating margin benefited from the influence of FX rates. If rates remain at current levels, it is important to understand that our company will ultimately realize a significant negative FX impact on earnings in 2016.

I'll now cover the details behind our Q1 results, including guidance for the remainder of the year. For the quarter, our gross profit margin was 77%, compared to 72% in the same period last year.

This increase was driven by a nearly 250-basis point positive impact from FX, an approximate 200-basis point impact from last year's THV product exchange and a 100-basis point improvement from a more profitable product mix. These increases were partially offset by higher spending in our operations.

If foreign exchange rates remain at current levels, we expect our full-year gross profit rate to be approximately 77%, driven by the same factors that impacted this quarter. For 2016, at current rates, as favorable hedge positions roll off, we expect the foreign exchange impact to gross profits to reverse next year.

First quarter selling, general and administrative expenses increased 3% to $202 million or 34.3% of sales over the prior year. This increase was driven primarily by personnel-related expenses, largely offset by the favorable FX impact on our expenses outside the U.S.

We expect a step-up in SG&A expenses next quarter as we incur expenses originally anticipated in the first quarter. We continue to expect SG&A, excluding special items, to be between 35% and 36% of sales for the full year. Research and development investments in the quarter were $86 million or 14.6% of sales.

Although we continued to invest heavily in transcatheter valve programs, expenses were lower than anticipated as certain THV clinical expenses expected in the first quarter are now expected to occur in the second. We continue to expect our R&D investments to be between 15% and 16% of sales for the full year.

Net interest expense for the quarter was $2 million, down from $4 million in the prior year. This reduction was driven by lower debt levels and increased interest income from higher investment balances. For the full year, we continue to expect net interest expense to be approximately $10 million. Our reported tax rate for the quarter was 24%.

We continue to expect our full year tax rate, excluding special items, to be between 21% and 23%. The tax rate for the first three quarters should be higher than the fourth quarter based on our assumption of a fourth quarter renewal of the federal research and development tax credit.

Foreign exchange rates decreased first quarter sales by $41 million compared to the prior year. Compared to our February guidance, FX rates had less than a $0.01 impact on earnings per share.

As I mentioned earlier, at current rates, we now estimate a $190 million negative impact to full year 2015 sales, which is $30 million more than the impact we estimated last quarter. The resulting impact to 2015 earnings should be mitigated by our foreign exchange hedges. Free cash flow generated during the quarter was $52 million.

We define this as cash flow from operating activities of $73 million, less capital spending of $21 million. At the end of the quarter we had cash, cash equivalents and short-term investments of $1.4 billion, approximately 55% of which is outside of the U.S. Total debt was approximately $600 million.

During the quarter, we repurchased approximately 700,000 shares for $100 million. We now estimate diluted shares outstanding for the full year to be at the high end of our previous range of 109 million to 111 million shares. Now turning to our 2015 guidance.

I'll start by commenting on the potential impact of a 2015 approval for SAPIEN 3, which assumes sales beginning in the fourth quarter. We expect the SAPIEN 3 launch in the U.S. to contribute approximately $10 million in incremental sales in the first couple of months.

However, due to the required accounting and one-time expenses associated with this product introduction, like our new product introductions in 2014, we are unlikely to record significant incremental net sales or earnings per share in the first quarter of launch.

In other words, if we receive approval in the fourth quarter, we would not expect to see any upward lift from SAPIEN 3 until 2016.

Due to the strong first quarter performance in transcatheter valves and despite additional negative impact expected from foreign exchange, we expect full year total sales to be within our original guidance of $2.3 billion to $2.5 billion.

For Transcatheter Heart Valve Therapy, we expect sales to be within our original guidance of $1.0 billion to $1.1 billion.

Given the foreign exchange currency drag, we continue to expect sales for Surgical Heart Valves at the lower end of $780 million to $820 million range, and in Critical Care, at the lower end of our $520 million to $570 million range.

For full year 2015, we continue to expect free cash flow, excluding special items, to be between $375 million and $425 million.

Given the momentum of transcatheter heart valve sales coming out of the first quarter and the mitigating effect of our FX hedging program, we are narrowing our diluted earnings per share guidance to $4.10 to $4.30, excluding special items.

For the second quarter 2015, at current foreign exchange rates we project total sales to be between $580 million and $620 million and diluted earnings per share, excluding special items, to be between $1 and $1.10. And with that, I'll hand it back to Mike..

Thanks, Scott. We're very pleased with the strong start to the year and we – as we continue to focus on driving growth with our leading innovative technologies. Our foundation of leadership coupled with our robust product pipeline positions us well for continued long-term success and greater shareholder value.

We are confident in our outlook for continued strong sales growth and we remain passionate about helping more patients around the world. And with that, I'll turn it over to David..

Thank you, Mike. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions, please reenter the queue, and we'll answer as many as we can during the remainder of the hour. Operator, we're ready for questions, please..

Our first question comes from the line of Jason Mills with Canaccord Genuity. Please proceed with your question..

Hi, Mike. Thanks for taking the question.

Can you hear me okay?.

I hear you great, Jason..

Great. And I apologize if you went over some of this. I hopped on the call late; several calls this afternoon. But starting with the TAVI business, I heard Scott say obviously perhaps some impact from SAPIEN 3 in the fourth quarter.

Could you give us a sense for the first 12 months after SAPIEN 3 launch and sort of what – obviously given that the competitor is still ramping, what sort of share thoughts you have with respect to your U.S. TAVI business sort of in the first 12 months after the SAPIEN 3 finds its way to the U.S.

market?.

Yeah. We're – thanks for that, Jason. We're pleased with our position today. We already have a very strong competitive position, and we're looking forward to actually have SAPIEN 3 add to that strength.

Having said that, the only guidance that we're providing at this point is that we think that it's more likely that we get approval this year, and if it were to come in the fourth quarter, we were just explaining that they probably not going to have much financial impact on 2015; it'll occur in 2016.

We'd be getting ahead of ourselves to lay out guidance for 2016 at this point, Jason. So, we're going to let that go. I mean, our experience in Europe has been a good one, though..

Right. And the experience in Europe, how informative is it for you and for us as we look at SAPIEN 3's competitiveness there over the last 15 months? And then secondly, in Europe, I apologize again if you went over this in prepared remarks and I missed it, but our due diligence would suggest you've been getting a nice price premium with SAPIEN 3.

I'm wondering if that's held in Europe and what your thoughts are with respect to pricing SAPIEN 3 in the U.S. And I'll get back in queue. Thanks..

Thanks, Jason. Yeah, we have to be careful of not too many questions. But let me go after these. In terms of SAPIEN 3 in Europe, again we're pleased with the way that's doing. You know, it's tough to call out a perfect predictor of what's going to happen in the U.S.

A lot depends on whether our competitor gets their new product launched and where their timing is versus ours. So that may be a little different than what we've seen. We've been launching SAPIEN 3 in Europe against an older generation valve of our competition for the most part. In terms of pricing, your point is a good one.

We feel like we have commanded a premium price in Europe, and as we commented, our global ASPs are very stable. That's been stable by region, and I wouldn't expect that trend to change with the introduction of SAPIEN 3..

Thank you, Mike..

Thank you. Our next question comes from the line of David Roman with Goldman Sachs. Please proceed with your question..

Thank you, and good evening, everybody. I wanted just to start with a comment, Mike, that was in the press release this time, you brought it up on the call about in anticipation that procedure volumes are likely going to slow and competitive activity pick up.

I think you made the same comment in the third quarter 2014 earnings call and press release as well.

Could you maybe just talk about what timeline you're thinking of when you make that comment? And has anything changed about either the market or your competitive position since you initially made those comments back in October?.

Yeah. Thanks, David. Yeah, it's a good comment. I mean, for a while last year I think we were surprised at the rate that the market growth increased, and we particularly saw that uptick come, I would say, starting in about Q3, because Q3 of last year we had SAPIEN XT really kicking in in the U.S.

and there seemed to be a real jump in the procedure growth. And at the same time, it seemed as though there was a similar phenomena going on in Europe. So our feeling is that the comparisons get significantly different when you get into the second half of 2015, and we're just calling that to your attention.

And also just the fact that competition is intensifying, both from larger competitors as well as more small ones..

Okay. Understood. And then, Scott, I just want to be very clear on FX, so hopefully just bear with me for a second. So as I think about 2016 and the P&L conceptually, you're going to have, it sounds like, about a 250-basis point benefit this year from currency hedges, so essentially the underlying gross margin is 74.5%.

So as we think about 2016 we can make some assumption about what we think is going to happen from a mix standpoint, but the building point is kind of 74.5% on the gross margin because the hedges are one-time, but then as you go down the P&L, things like SG&A, if you're paying someone €100,000, for example, that – assuming rates stay where they are, that's permanently a lower number in U.S.

dollars, so the SG&A numbers wouldn't see a reversal like we see in gross profit?.

Yeah, I can make a comment, and Scott could clarify. Yeah, I think generally, your math is correct.

I think, when we estimated back at the investor conference time that we would have around a 75% gross margin, we already anticipated some FX drag, probably of 50 basis points, so some of that may have already been in our projections when we projected this year. So that's one piece. And your comments about the SG&A being lower is correct.

Those natural hedges will continue..

David, what I would just add is I think directionally, your math is right, just taking 250 basis points off of our expected 77% this year. We do expect some mix improvement, but we also expect some ongoing operating expenses to continue onto 2016, and those may grow..

Okay. Got it. Thank you..

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question..

Good afternoon. Thanks for taking the question. Let me start with Mitral. Mike, over 20 patients, that's a lot. So I guess my question is, are you willing to kind of talk about the timeline at least for CE Mark approval and the design freeze? Thanks. And then I have a follow-up..

Yeah. Thanks. No, we're very pleased to be gathering this level of experience at this point. And as I said, generally, we're encouraged by this.

I think, the way you might think about it is we'd like to make the decision before year-end whether we move forward with the FORTIS design to a CE Mark or whether we decide to wait for a next generation that incorporates a number of enhancements to move to a CE Mark. And we haven't made that determination yet.

We'd like to get some more clinical experience. But I do think that we'll make that decision yet this year..

Great. And then maybe you can talk about what impact you've seen so far from the data presented at ACC in both the U.S. and Europe? And how does the data at ACC affect your long-term market projection of over $3 billion in sales in 2019? Thanks..

Yeah. Thanks for that, Larry. Yeah, you know, the ACC meeting actually occurred late in Q1, so it's unlikely that it had any impact really on the first quarter. And it's kind of soon even now, Larry, to estimate the immediate impact on sales.

The outcomes are encouraging for the future of the therapy and the eventual expansion and the eventual approval of the indication. So that's favorable, but I don't know that we're ready to offer a formal assessment on what the overall market size will be. That'll be coming in the future..

Thanks for taking the question..

Sure..

Thank you. Our next question comes from the line of Raj Denhoy with Jefferies & Company. Please proceed with your question..

Hi. Good afternoon. I wonder if I could ask about the sequential U.S. growth. I think last quarter was relatively flat and this quarter you saw a modest uptick but still relatively flat. Perhaps you could offer a little bit as to what you see happening and is it a question of needing to train more centers? Or anything would be helpful..

Yeah. I think, your observation is a good one, Raj. We didn't grow sequentially very much from the last quarter, but we think the market remains very favorable. Historically, it's kind of tough to know a lot quarter-to-quarter. Things tend to move around, but the overall trend has been – just been for increased market adoption.

And remember, the ACC came late enough in the quarter; probably didn't have much impact. We were I'm sure impacted by the launch of our competitor, who gained some share in the U.S., probably since the end of last year..

Okay. Fair enough.

And then just a question around centers, what's been the pace there? And in terms of new centers wanting to get trained, have you seen any change in that dynamic?.

Yeah. New centers continue to want to be trained, Raj. I think there's probably something in the neighborhood of around 10 centers that were added since the beginning of the year. But remember, they have to clear the hurdles for the NCD and so they're working through that.

But the preponderance of the volume, that doesn't necessarily come from the new centers. They tend to – tends to come from existing centers..

Okay. Thank you..

Sure..

Thank you. Our next question comes from the line of Bruce Nudell with Credit Suisse. Please proceed with your question..

Good afternoon. Thanks for taking the question.

Mike, just given the success of SAPIEN 3 in Europe, how should we be thinking about CENTERA, its key product advantages and whether you have balloon expandable pretty much to yourselves? Will this really be a good advantage – a good opportunity to take more – even more share?.

Yeah. We're going to learn an awful lot about CENTERA as we go through our clinical trials, Bruce. And so that's going to be key for us and we're anxious. You know, generally we're so optimistic about SAPIEN 3, we think it's going to be not challenging and unlikely that people that are satisfied with SAPIEN 3 are going to switch over to CENTERA.

But maybe people that are comfortable with self-expanding platforms are going to like the advantages that CENTERA offers versus other self-expanding platforms. So we'll have to see how that plays out. Again, we're in a rapid-learn mode.

We did a fair amount of redesign of the delivery system on this new generation and we're just learning about that now..

And just thinking ahead to PARTNER II, I'm presuming SAPIEN 3 will be part of that approval process. And following PARTNER II, if the trial is successful and shows even superiority relative to surgery, is there ever going to be another major U.S.

indication trial?.

You know, it's a good question. It's too early to tell. It's being debated pretty heavily in the clinical community about what kind of clinical evidence becomes important. But it's just too soon. We don't have anything that's really solid to give you at this point, Bruce..

Thanks so much..

Sure..

Thank you. Our next question comes from the line of Danielle Antalffy with Leerink Partners. Please proceed with your question..

Thanks so much. Good afternoon, guys. Can you hear me okay? Sorry I'm at an airport..

Sure can, Danielle..

Okay. Great. Thank you so much. So, Mike, I just wanted to get some perspective on how you're thinking about market growth over the next 12 months to 24 months? I mean it just seems like we have so much momentum building behind the market here.

You're seeing it play out in Europe particularly where the valves have been available for several years now and it's a more competitive environment. Yet you're still growing very healthily.

And so I was hoping you could sort of provide some perspective on how – what – maybe let me ask you this way; what could derail the market from here? Or what could stop the momentum? Is there anything or is this level of growth sustainable for the foreseeable future?.

Yeah, Danielle, it's a good question. You know, we continue to think there's a large untreated population out there and that the market is going to continue to grow. And we think it's going to grow over a long-term basis because we have a lot of confidence in the fact that this therapy is going to be robust and continue to have future gains.

Having said that, it's growing at some extraordinary rate right now, and I don't think there's any reason to expect that that kind of a rate can continue.

As I mentioned, the comparisons are going to start getting tougher here in the second half of the year, and so the rate is going to come down but we think the market is still going to grow very nicely. This – broadly, this is the most studied class of heart valves ever, and the fundamentals remain strong.

We continue to feel like this estimate that it's more than $3 billion by 2019 is very solid. And so it gives you some sense for how we feel about market growth..

Got it. Thanks. And maybe to follow-up on that, one of the questions I get frequently is sort of, are intermediate-risk patients being treated aggressively in Europe and even now in the U.S.? And I'd love it if you could comment on that. I know you've commented in past calls, but any color there would be wonderful. Thanks so much..

Yeah. One of the things that I thought was quite instructive is when we had a chance to see what a large group of intermediate patients looked like in the U.S. PARTNER trial, right? So here were a group of I think around 1,000 patients that – whose average age was between 81 years and 82 years old, and these were considered intermediate risk.

And so it gives you a sense, I think at one time people used to think that risk as measured by STS would have translated to a younger group of patients. But there's a group that are quite elderly and quite frail that still have scores, STS scores and EuroSCOREs that are quite high.

And I think clinicians are using their judgment, they're looking at these patients, and they say, wow, considering their advanced age and their frailty and their comorbidities, I think I'll treat them. But I don't think you should be deluded to think that these are really healthy patients..

Thank you. Our next question comes from the line of Ben Andrew with William Blair. Please proceed with your question..

Great. Thanks very much for taking the question. You know, Mike, obviously the surgical valve revenue is holding up well per your guidance.

Do you feel like the underlying market is healthy? Or are you taking share from competitors given the referral base and things that are going on in the market?.

Yeah. Thanks. We think that was really noteworthy this quarter, Ben, the fact that in a quarter when we really had pretty explosive growth in transcatheter heart valves that our surgical valves grew really well.

And we think the primary reason is that there were just plain more procedures done and that as the market leader we got more than our fair share of that. We may have picked up a little bit of share. I think we're picking up share in places like China. But – and I know – I think, we're doing pretty well actually around the globe.

But the biggest component of this is really the market. We think that more procedures are happening..

For my follow-up, can you talk a little bit more about Japan and how the launch is going? We're a few quarters in now, put back on track and is there a chance for upside there as people start to get exposure to the therapy more broadly?.

Yeah. You know, as we mentioned, we got growth this quarter versus the fourth quarter, but it's still off a very small base. So it's not something that's really lifting us very much in that market. As we mentioned before, the adoption rate is probably slower than we originally anticipated. We got this more challenging credentialing process.

We're working really hard to drive therapy adoption. We think it's going to be helpful when we pick up these additional valve sizes that are coming up here. But we continue to think it's an attractive marketplace, that it's going to grow to this $300 million to $400 million range yet this decade, by 2019.

So we're optimistic about it, but it really hasn't taken off yet..

Great. Thank you..

Thank you. Our next question comes from the line of David Lewis, Morgan Stanley. Please proceed with your question..

Hey. Thanks for taking the question. This is actually James in for David. I wanted to follow-up on a comment that you made earlier. You broke out some math that you did on share in Europe, that now you think that some of the newer competitors in that market have about 10% procedure share.

Do you have a sense of if you were to look at that a year ago where you think that metric would have been? And to what extent do you think that the share is coming from Edwards versus coming from the other large established player in the market?.

Yeah. Good question, James. Yeah, I wasn't talking more about – I wasn't giving a forward-looking statement about where the newer competitors were. This was more of a look at the quarter. We believe that the newer competitors represented about 10% of the procedures in the quarter. If you were to go back a year, it was less than that.

I don't know what it was exactly. It was probably closer to 5% than 10%. And we think there may be a little bit of that that came from Edwards, but we think that it's been moderate. We actually have done quite well on market share overall in terms of holding..

Okay. That's helpful. And then second, just on operating expense leverage, SG&A percent of sales this quarter in the 34%s, which I believe is among the lower numbers you've posted for quite some time.

Going forward, how important is driving operating expense leverage versus investing to support growth in the business? And when do you think – or what's the year that you think we may see an inflection in terms of operating expense leverage in the P&L?.

Sure. It's Scott. I'll jump in here. First, we've been focused really carefully on trying to drive leverage in the P&L, but we're also being thoughtful about investing in two other areas.

One is making sure that our operations are positioned to meet all the requirements we need to make – to meet, and also to make sure that we are positioned to produce based upon the increased demand that we're experiencing. And so that's causing us to incur more expense at the operating line.

In terms of the other piece, it's really R&D, and we're going to continue to invest in R&D because we think we're getting very attractive returns on those investments. I think where we'll probably see some more leverage over time is on the SG&A line, and I don't think this quarter is necessarily a perfect indicator of where we're going to come out.

We still think SG&A for the year is going to be something more like 35% to 36%, but I can just tell you that we've got plans in place to leverage our scale and leverage the investments we've made in platforms like THV, and we'll continue to see improvement over time..

All right. Thanks very much..

Thank you. Our next question comes from the line of Mike Weinstein with JPMorgan Chase. Please proceed with your question..

Hi. Thanks for taking the questions. So two quick follow-ups.

So, Scott, why do you think SG&A as a percentage of sales goes up over the balance of the year?.

A couple of things. First, we expected some additional expenses in Q1 that we now believe we'll realize in Q2. Part of that is relating to ramping up for THV launch of SAPIEN 3 in the U.S. Part of it is relating to normal seasonal increases that we experience in Q2..

Okay. And then, Mike, I want to go back to, I think it was, Raj's question, just you commented about just the U.S. market, which obviously had this moonshot last year after the data at ACC, the SAPIEN XT approval and your competitor coming in. And then it seems to have flattened out at a much higher level over the last couple of quarters.

Can I ask the question since we're all here post-ACC, so kind of early indicators; has the market picked up on the back of the data we saw just a few weeks ago?.

No, I don't think we've anything new to share in that regard, Mike. I think, we – our guidance that says now we're at the high end of this 25% growth on an underlying basis for the full year incorporates our best thinking, so we're not signaling at some inflection point in the U.S. market..

Okay. But in order for that to occur I would assume you're expecting that there will be sequential growth over the balance of the year.

That would seem the – the math would seem to imply that, right?.

I think there's probably some sequential growth in there, Mike, but I don't think that it's like we – probably what we sequentially experienced in 2014..

Yeah, understood. Okay. Thank you, guys..

Sure..

Thank you. Our next question comes from the line of Kristen Stewart with Deutsche Bank. Please proceed with your question..

Hi, guys. It's Brittany Henderson in for Kristen.

Just wanted to ask a quick question, just on the heels of ACC and seeing all of the positive data, is there any update around the intermediate risk portion of the trials for both SAPIEN 3 and SAPIEN XT? Is there any way that that approval could come sooner than expected?.

Okay. Brittany, I want to make sure that I understand your question.

You're asking do – when do we think we might get the intermediate risk cohort of SAPIEN 3?.

Yes..

Yeah. So yeah, there's a couple of things that still have to happen first. The short answer is we're really not changing our guidance. We think that that's most likely out to be towards the tail end of next year. The intermediate cohort for SAPIEN 3 has not yet reached its one-year endpoint.

The XT that was studied in the PARTNER II trial has not yet reached its two-year endpoint. So we think that it's going to work through its normal course at this point..

Okay. And just a quick follow-up. I think we heard that SAPIEN XT two-year data is going to be published.

Do you have any visibility on when that might be and possibly what medical journal?.

Yeah. Let me take a look here, Brittany. I'm not positive. I believe that it's been submitted, but I'm not sure what the journal is. So we'll have to get back to you on that one..

Okay. Perfect. That's it for me. Thank you..

Sure..

Thank you. Our next question comes from the line of Bob Hopkins with Bank of America. Please proceed with your questions..

Hi. This is Kevin Strange in for Bob. Thanks for taking the questions. Maybe as my first question just on competitive dynamics in Europe, it's only been a couple of months, I know, since your competitor launched their recapturable device in Europe.

I'm just curious if you could talk a little bit about what you're seeing in the field there? And then maybe just on repositioning (45:53) ability broadly, there's about two or three players in the market in Europe that have that feature, and just in the field as you talk to clinicians, how important do you think this feature is going to be going forward?.

Yeah.

In terms of – I think your first question, is it related to Medtronic's Evolut R?.

That's correct..

Yeah. So at this point it doesn't appear to us that it's fully launched. It appears that they seem to be going at a different rate from country to country, so it's difficult for us to gauge. But we don't think that it's out there in a large way yet. So it's difficult for us to have a firm view of how it's being perceived.

And in terms of other competitors, they are gaining ground. I think the larger strategic guys are probably doing a little bit better. Overall, I mean, I think what's most noteworthy is just how well the SAPIEN 3 valve is growing. I think, the data pretty much speaks for itself and so it seems to be holding up really well under the new competitors..

Okay. That's helpful. And then just on mitral data, you mentioned that we might see some data later on in the year at large medical meetings.

Can you give us a little bit of a preview in terms of what that data might be at PCR or later in the year at TCT in terms of it's going to be more compassionate use data, is this going to be registry data, number of patients? Anything along those lines would be helpful..

Yeah. Thanks. We've tried to move away from doing compassionate use patients to instead enrolling patients in our registry. And so I think what you're more likely to see presented, at least on our side, might be an update of what's going on in those. I think our competitors are probably doing the same thing.

I don't know how much experience there is out there. I would imagine that we have probably more experience than most, but you'll get a chance to see how much clinical experience there is. But we're still at this very early stage in transcatheter mitral valve..

Great. Thanks for taking the questions..

Sure..

Thank you. Our next question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed with your questions..

Hi. Hey, thanks. Mike, in your prepared remarks you called out some softness, or maybe I shouldn't use the word softness, but impacting 1Q was the lack of CAP sales. And I think the CAP you're referring to was SAPIEN 3. So, can you give us an outlook as to when the CAP starts enrolling and the impact that it may have on the year.

Then I've another follow-up on SAPIEN 3..

Yeah. What I was referring to is, recall that we got approval to use SAPIEN 3 in intermediate use patients in a continued access registry. That, it was 1,000 patients and we expected that to begin, and actually we thought it was going to start contributing to sales in the first quarter and it turned out to have a very moderate impact.

It got a slower start than we anticipated. There were a couple of things that made the whole documentation slow. One is that we needed to do new contracts with each of the hospitals. Then also, we're now using the TVT Registry to collect that data and that added a level of complexity. This has gone slower than we thought.

We expect it to start picking up here in the second quarter and that to be exhausted during the rest of this year..

And is this what's giving you confidence to guide to the higher end of your range for overall SAPIEN sales?.

I think it helps to some extent, but it's probably our strong start, and coupled with our strength in Europe it gives us a lot of confidence, Glenn..

Okay. Then just to clarify the SAPIEN 3 comment for revenues in the fourth quarter, you're saying $10 million, but not to model $10 million.

And is that because there's going to be swap-outs of XT that serves as an offset?.

Right. So it's Scott. Yeah, modeling $10 million in net revenue is probably good assumption. That's net of the swap impact, assuming it all happened in the same period.

The issue is there are also expenses associated with potentially swapping out the product and by the time you get down to the bottom line in terms of earnings, it's really not going to have any impact in that period..

Okay.

So, I can put $10 million in SAPIEN 3 in the model, but don't have it fall to the bottom line?.

That's right..

Okay. Thanks, Scott..

And again, that's based on a lot of assumptions, like we get approval on the first of the quarter, but that's a fair modeling assumption..

Okay. Thank you..

Thank you. Our next question comes from the line of Matthew Taylor with Barclays. Please proceed with your questions..

Hi. Thanks for taking the question.

I wanted to ask one just about the mechanism by which you think you're going to get earlier approval for SAPIEN 3 and whether that informs your ability to get early approvals for anything else?.

Yeah. So with the SAPIEN 3 approval that we're talking about is the high risk indication. Each PMA is truly unique. In this case, I think, there's a good feeling that in this group of patients, which is a heavily studied group of patients, these high risk patients, that you learn an awful lot with 30-day data. And FDA is I think taking that seriously.

When you couple that with the strength of the data and then just the encouraging discussions that we've had, and the fact that we're deep in the discussions also helps inform our feeling, our guidance at this point, that's what has us believe that.

I don't think that on a wholesale basis that we should start assuming optimistic approval times on other future products..

Understood.

And I guess just because the ACC data was very good, can you talk about expectations for Medicare to revisit their policies at any point in time in terms of the centers that are allowed to do TAVR, whether there may be any changes to the overall coverage guidance?.

Yes. So overall, we would expect that there's not going to be probably any changes in 2015. Beyond that there's always a possibility that they open up the national coverage determination. Usually that's preceded by a panel. So I think there would be some warning before that would happen.

We would generally be supportive of anything that would open up access to more patients, but we don't see that it's clear that that's going to happen in the immediate future..

Great. Thanks a lot for your time..

Sure..

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed with your question..

Hi, guys. Thanks for taking the follow-up. One clarification; you raised the Transcatheter Heart Valve guidance to the high end of the range, but I didn't hear you talk about the underlying growth for overall sales. I think on the last call it was 7% to 15%.

Should we assume that the guidance now is for the high end of that range?.

Yeah. I think yes, you should. Yes, we – that's the way to think about it..

Okay.

So that still holds, the 7% to 15%, Mike?.

It's actually – hey, Larry, it's actually 7% to 11%....

7% to 11%, I apologize..

– consolidated sale growth, underlying..

I got it.

And the way to think about it is the high end at this point?.

That's right. That's a fair assumption..

Okay. Thanks for taking the follow-up question..

Thank you. Ladies and gentlemen, at this time there are no further questions. I would like to turn it back to management for any closing comments..

Okay. Thank you 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 in the Investor Relations section of our website at edwards.com.

If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this please dial 877-660-6853 or 201-612-7415 and use the conference number 13605453. I'll repeat those numbers, 877-660-6853 or 201-612-7415 and the conference number is 13605453.

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

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