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. Larry Biegelsen - Wells Fargo Securities LLC Michael J. Weinstein - JPMorgan Securities LLC David Harrison Roman - Goldman Sachs & Co. Rick Wise - Stifel, Nicolaus & Co., Inc. David Ryan Lewis - Morgan Stanley & Co. LLC Raj S. Denhoy - Jefferies LLC Glenn J. Novarro - RBC Capital Markets LLC Matthew J.

Keeler - Credit Suisse Securities (USA) LLC (Broker) Matthew S. Miksic - UBS Securities LLC Danielle J. Antalffy - Leerink Partners LLC Joshua Jennings - Cowen & Co. LLC Ben C. Andrew - William Blair & Co. LLC Kristen M. Stewart - Deutsche Bank Securities, Inc. Suraj A. Kalia - Northland Securities, Inc..

Greetings, and welcome to the Edwards Lifesciences Third 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. I would now like to turn the conference over to Mr.

David Erickson, Vice President, 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 third 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 as well as expansion of our markets. These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today.

Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially.

Information concerning factors that could cause these differences and important product safety information may be found on our press release, on our 2014 Annual Report on Form 10-K and our other SEC filings, all of which are available on our website at edwards.com.

Also, a quick reminder that when we use the terms underlying and excluding 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, we're very pleased to report strong third quarter results driven by total underlying sales growth of 14% and non-GAAP earnings per share growth of 34%. Strong bottom line growth was aided by our foreign exchange hedging program which provided a benefit that's offset the strengthening dollar in 2015.

Adoption of our SAPIEN 3 Transcatheter Valve System continue to propel our growth which exceeded our expectations.

We remain optimistic that transcatheter valve procedure adoption is still at its early stages and the growing body of compelling clinical outcomes gives us confidence that with expanded evidence larger populations of patients suffering from aortic stenosis will be eligible for TAVR.

In Transcatheter Heart Valves, underlying global sales were up 29% over last year, led by growth of our market-leading products in the U.S. and Europe. Globally, average selling prices remain stable. In the U.S., underlying THV sales for the quarter grew 33% versus the prior year to $168 million.

The contribution from clinical sales this quarter was similar to both last quarter and the year-ago period. Our performance was driven by strong procedure growth and the ongoing SAPIEN 3 launch, and clinicians are rapidly adopting our best-in-class technology. We remain on track to have SAPIEN 3 in all of our existing accounts by the end of the year.

Stocking sales are of minimal impact as we roll-out this product since the majority of our sites are on consignment contracts. Outside the U.S., underlying THV sales grew 25% which was roughly in line with procedural growth overall. Our performance was once again driven by strong therapy adoption in Europe and the continued roll-out in Japan.

In Europe, we estimate overall therapy adoption grew in excess of 20% in the third quarter, and our sales grew about the same.

Overall, demand remain strong as patients continue to come off the sidelines aided by growing therapy awareness and increasing trend of physicians referring more patients to TAVR, continued positive data, and favorable clinical experience.

While we saw strong growth across the majority of countries, growth rates in some of the more penetrated countries moderated this quarter. To summarize, our quarterly THV results, we are confident in our continued leadership in TAVR, even as competition increases.

We are very encouraged by the strength of THV through the third quarter, and now expect our underlying sales growth in 2015 to be at the high-end of our previous 25% to 35% range. Now, turning to other TAVR items. Expanding the indication to treat intermediate risk patients remains a key focus.

We expect the data on both SAPIEN XT versus surgery, as well as well SAPIEN 3 intermediate risk cohorts to be presented at ACC in 2016. Assuming a positive trial and an expedited FDA review, we plan for a late 2016 U.S. approval with minimal contribution to sales next year.

We expect our Continued Access Program for intermediate risk patients in the U.S. to continue until commercial approval. Assuming the intermediate risk data are favorable, we plan to use the U.S. data in a CE Mark submission in Europe. Clinical evidence continues to be generated for our self-expanding CENTERA valve platform.

Given the strong adoption and success of our SAPIEN 3 valve, we have reprioritized the timing of CENTERA, and now plan to launch in Europe in 2017. At the TCT Conference earlier this month, data on high-risk and inoperable SAPIEN 3 patients at one year was presented.

These data showed that recipients of the SAPIEN 3 valve demonstrated a high survival rate and low rates of stroke and paravalvular leak at one year. The presenter noted that these excellent results support the use of TAVR as the preferred therapy for patients at high or greater risk for surgical aortic valve replacement.

Additionally, one year data from the PARTNER II Valve-in-Valve study were also presented at this meeting. These data demonstrated high survival and low stroke rates for patients with prosthetic valves in need of replacement. We also announced FDA approval for SAPIEN XT in these high-risk patients.

Turning to the Surgical Heart Valve Therapy product group. Total sales this quarter were $188 million, up slightly over last year on an underlying basis. Against the tough year-over-year comparison, global Surgical Heart Valve units grew, but were mostly offset by the continued exit of non-strategic products. Overall, product prices were stable.

Sales of our premium products contributed to solid heart valve performance across all major regions. INTUITY Elite was a contributor to sales growth in Europe, and procedure volumes in Asia-Pacific and Latin America led the growth in the rest of the world. Our activities in support of the U.S.

approval for EDWARDS INTUITY Elite remain on track and we still expect the launch in 2016. In the quarter, we received FDA approval to begin an IDE study of our Magna valve with our new RESILIA tissue platform in young patients with congenital heart disease.

This study will be led by surgeons at Boston Children's Hospital, and we believe this technology has the potential to significantly improve clinical outcomes and quality of life in this underserved population.

In summary, growth in our Surgical Valve product group continued as expected in 2015, tempered by the planned exit of our non-strategic products. As such, we expect underlying sales growth will be within our 1% to 3% range in 2015.

Separately, a recent study has generated discussion regarding a subclinical imaging observation in bioprosthetic aortic valves. As you know, patient safety is our top priority.

Both the FDA and a joint statement by two leading physician societies, the ACC and STS released last Friday noted the extensive clinical data supporting the use of transcatheter and surgical valves and recommended no changes to clinical care while we are engaged in further study.

In the Critical Care product group, total sales for the quarter were $132 million and grew 5% on an underlying basis. Global growth was driven primarily by sales in the U.S. with double-digit growth coming from our Enhanced Surgical Recovery Program across most regions.

Our core Hemodynamic Monitoring products also recorded solid growth this quarter, and in Japan, we are now launching ClearSight in the fourth quarter, given the recent decision granting physician reimbursement.

In an effort to assist clinicians with enhanced surgical recovery, we recently entered into a collaboration agreement with CareFusion, a unit of BD. It is intended to connect Hemodynamic Monitoring Systems and Infusion Devices in a semi-closed loop approach to managing a patient's fluid levels before, during, and after surgery.

Overall, we're pleased with the continuing adoption of our ESR products, which are still expected to grow in double-digits this year, and we continue to expect Critical Care underlying sales growth of 2% to 4% in 2015. Now to update you on our transcatheter mitral valves. In August, we announced the completed acquisition of CardiAQ Valve Technologies.

We're pleased with the progress we've made with the integration of the team and our FORTIS team into a single unit. Clinical experience with our mitral technology is our top program priority and we expect to continue enrolling soon. As part of the integration, the development and clinical research of these two programs will be merged.

Our lead program now referred to as the CardiAQ Edwards Valve will feature the CardiAQ Valve, which will be used in our CE Mark and U.S. early feasibility studies. Planned enhancements to this valve platform include additional sizes, delivery system refinements, and the addition of Edwards' clinically-proven bovine pericardial tissue.

We're also developing next generation transcatheter mitral valve replacement products that leverage both our FORTIS and CardiAQ experience.

We are very excited about the promise of TMVR technology, and although commercialization timelines are still unclear, we continue to believe that TMVR will ultimately benefit more patients with mitral valve disease who aren't well served today.

Additionally, at the TCT Conference, details on the 13 first in human compassionate-use cases with our FORMA Transcatheter Tricuspid Repair System were presented.

Clinicians participating in the early experience were encouraged by the early results with FORMA system, and noted that patients had positive changes in their heart failure symptoms and quality of life. Many patients suffer from severe tricuspid regurgitation which is an under-recognized and under-treated condition associated with a poor prognosis.

Plans are underway for an early feasibility study in the U.S. as well as a multicenter European and Canadian study. You should expect to see additional clinical updates at future medical meetings. And now, I'll turn the call over to Scott..

Thanks, Mike. Another strong sales performance in Transcatheter Valves drove earnings per share of $1.07 this quarter. This represented 34% non-GAAP EPS growth over the prior year. Our non-GAAP sales were $617 million, at the higher end of our guidance range, and reflected nearly 14% underlying growth compared to last year. The strong U.S.

dollar continued to have a significant negative impact on reported sales which grew 1.3%. U.S. THV's non-GAAP sales of $168 million were lifted by $1 million related to the sales return reserve for the launch of SAPIEN 3. In addition, we partially reversed our reserve for the cost of SAPIEN XT products that won't be resold.

The combined impact of the sales and inventory reserves increased our GAAP earnings per share by $0.02. Our non-GAAP earnings per share of $1.07 excludes this impact. I'll now cover the details behind our results including guidance for the remainder of the year.

For the quarter, our gross profit margin was 76.2%, a 390 basis point improvement over the prior year. Approximately 220 basis points was attributable to favorable foreign exchange. Approximately, 110 basis points related to favorable product mix, and 60 basis points from other items including the impact of the THV sales return reserve.

If foreign exchange rates remain at current levels, we expect our gross profit margin in the fourth quarter of 2015 to be approximately 75%. Given the significance of foreign exchange contracts as a component of net foreign exchange this quarter, we thought it would be helpful to provide more specific detail for modeling purposes.

Our third quarter gross profit margin includes hedge contract gains of $20 million, compared to losses of $3 million in the prior year period. This brings our year-to-date hedge contract gains to approximately $50 million.

And if FX rates remain at current levels, we expect our hedge contract gains for the full year 2015 to be approximately $70 million, a substantial increase over hedge gains in 2014 of $8 million. At current exchange rates, our FX hedge contract gains in 2016 would be approximately $20 million. Turning to selling, general and administrative expenses.

Third quarter expenses decreased $10 million to $212 million or 34.4% of sales. This decrease was driven by the favorable FX impact on our expenses outside the U.S., partially offset by somewhat higher sales and marketing expenses related to Transcatheter Valves.

For the fourth quarter, we expect SG&A as a percentage of sales to be comparable to the third quarter. Research and development investments in the quarter increased 15% to $101 million, or 16.4% of sales. This increase was primarily a result of continued investments in our valve programs, including the recent acquisition of CardiAQ.

We expect fourth quarter R&D investments as a percentage of sales to be comparable to this quarter. Net interest expense for the quarter was $2.5 million, consistent with the prior year. For the full year, we continue to expect net interest expense to be approximately $10 million.

Our reported tax rate for the quarter was 21.6%, which benefited from an improved country income mix. We expect our rate will drop to approximately 17% in the fourth quarter, assuming renewal of the Federal Research and Development Tax Credit. For the full 2015, we expect our average effective tax rate to be approximately 21%.

Compared to our July guidance, foreign exchange rates had a negligible impact on third quarter earnings per share. Given the recent strengthening of the euro, at current rates we now estimate an approximately $170 million negative impact of full year 2015 sales. Free cash flow generated during the quarter was $176 million.

We define this as cash flow from operating activities of $202 million less capital spending of $26 million. Year-to-date free cash flow was $381 million.

At the end of the quarter, we had cash and cash equivalents and short-term investments of approximately $1.3 billion, which reflects a $348 million payment in the third quarter for the acquisition of CardiAQ. Total debt was approximately $605 million. We estimate fourth quarter diluted shares outstanding to be between 110 million and 111 million.

Now, turning to our 2015 guidance, all of which assumes current foreign exchange rates. For Transcatheter Heart Valve Therapy, due to our strong third quarter performance, we are raising our full year sales guidance to be between $1.1 billion and $1.2 billion.

We continue to expect sales for Surgical Heart Valves at the lower end of our $780 million to $820 million range. And for Critical Care, at the lower end of our $520 million to $570 million range. We continue to expect total sales of between $2.3 billion and $2.5 billion.

For the fourth quarter 2015, we project total sales to be between $620 million and $660 million, and diluted earnings per share, excluding special items, to be between $1.11 and $1.21, which increases our full year guidance to a range of $4.43 and $4.53. And with that, I'll hand it back to Mike..

Thanks, Scott. In conclusion, our strong year-to-date financial performance demonstrates the strength of our market-leading product portfolio. We believe our strategy of focused innovation can transform patient care and drive value into the healthcare system and to shareholders.

In light of the impressive body of clinical evidence, we're enthusiastic about the continued expansion of transcatheter-based therapies for the many structural heart patients still in need, positioning us for a bright future. And with that, I'll turn it back over to David..

Thank you, Mike. Before we open it up for questions, I would like to remind you to mark your calendars for the evening of Tuesday, December 8 and Wednesday, December 9 when we will be hosting our 2015 Investor Conference at our corporate headquarters in Irvine, California.

This event will include discussions with key opinion leaders, updates on our latest technologies, and views on longer term market potential as well as our outlook for 2016. More information will be available in the coming weeks on our website. 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'll answer as many as we can during the remainder of the hour. Operator, we're ready for questions, please..

Thank you. We'll now be conducting a question-and-answer session. Our first question is from Jason Mills of Canaccord. Please go ahead..

Hi, Mike. Thanks for taking the question.

Can you hear me okay?.

Sure can, Jason..

Super. First question just with respect to the U.S. TAVI market in SAPIEN 3 in particular. You mentioned that you expect to be able to service the full demand of existing accounts by the end of the year, but it seems like you made great progress during the quarter.

Can you give us quantitatively the number of accounts that you were able to service with SAPIEN 3 during the quarter?.

I think that in terms of the number of units sold, I think it was just under 50%, Jason. In terms of the number of accounts, I think it also was less than half. But you should in that assume that we probably got to some of the larger accounts first, if that's helpful..

That is helpful. And my follow-up question is more of a longer term one. Clearly, what we've seen, investors have seen, is strong quarterly reports driven by TAVI, and we're waiting on, obviously, intermediate risk data that may expand that opportunity. At the same time, folks ask us a lot about the transcatheter mitral opportunity.

So can you talk about the longer term growth of the company as you think about transcatheter valve, aortic valves over the next couple of years, perhaps maintaining strong growth, but eventually you're going to run up against a lot of large numbers and higher penetration rates? And also, juxtapose your thoughts on when transcatheter mitral might contribute to the P&L eventually, and sort of what that means for sort of a long-term, sustainable growth rate, both top line and the ability to leverage that to earnings growth over the longer term.

I presume you'll touch on some of this at your Analyst Meeting, but we get the question a lot, so I just wanted to ask it..

Thanks, Jason. That's a perfect question. I'm not sure that I can do it full justice now. You're right; we're going to make this a key focus of our conversation at the Investor Conference. I think all of your observations are something that I agree with.

First of all, is our transcatheter mitral's a big opportunity? Yes, it's a very big opportunity, but it is early, Jason, and I would just caution people to say, it's a little early to be talking about when sales might happen and exactly how big that would be. We really need to get more clinical experience.

But as you know, we're very excited about it and we're focused on trying to take a leadership position in that field. Probably one that has less risk from our perspective is the opportunity for indication expansion in aortic.

We think that we're only treating the oldest and sickest patients today, and with the marvelous results that we've seen clinicians get with transcatheter valves so far, we really believe that the aortics are a big opportunity in the future, and we're also going to try to bring that to life a little bit more.

I would call that a lower risk, more certain long-term opportunity..

Okay. Mike, thanks. I'll get back in queue..

Sure..

Thank you. The next question is from Larry Biegelsen of Wells Fargo. Please go ahead..

Good afternoon. Thanks for taking the question. Scott, can you confirm, by our math the implied Q4 underlying growth in the guidance is about 7% to 14%.

Is that accurate?.

Larry, it is close. It's sort of in the middle of that range. It's probably 10% underlying growth for Q4..

Okay. And recognizing that you're not giving guidance yet for 2016, Mike, can you just talk a little bit about some puts and takes on the top line next year, recognizing that you're not probably going to get an intermediate indication to the end of the year? And I did have one follow-up..

Yeah. We've been really pleased at the way the U.S. and Europe have been growing. But I think as you've correctly surmised, both of those countries are going to be coming up against tough comparisons in 2016. And we have a tough time predicting exactly what's going to happen quarter-by-quarter. We've demonstrated that in the past.

But we have a lot of confidence in the long-term. Probably the next time that growth really kicks up again is, once we get that intermediate risk approval. So we'll be trying to bring that to light more, Larry, when we lay it out, and I assume your question is primarily about sales growth. I think you probably have a pretty good idea.

I don't expect any big surprises in surgical valves or Critical Care.

Did that get to your question?.

Yes, it did. Thanks. That's very helpful. And Mike, so the STS database suggests that intermediate risk patients or STS 4 to 8 (25:22) represent about 20% of all surgical patients. It sounds like you think that opportunity could be bigger. Could you expand on that a little bit more, and how should we think about Europe? Thanks for taking the questions..

You know what becomes difficult Larry is when you use the STS database to define the size of the population, you potentially run into a problem because it doesn't speak to about the number of patients that are on the sideline. We're going to try and work to bring that to life. These risk scores don't tell the whole story.

And so, that's what I think is misinterpreted. I think it's a fair representation of who gets surgery, but it's not a fair representation of who is out there. And again, we'll try and make this a key focus of the investor conference to get a little deeper on that..

Thanks for taking the questions..

Sure..

Thank you. The next question is from Mike Weinstein of JPMorgan. Please go ahead..

Thank you for taking the questions. So let me follow up just on a couple of items. Of the discussion around the transcatheter mitral valve program was helpful. Can you just talk about your latest thoughts on timing of both the CE Mark study and the U.S.

feasibility?.

Yeah, we're a little bit ahead of ourselves, Mike. The short answer is, we'll try and be a little bit more clear on the timing when we get to the Investor Conference. So we want to work through our operating plan process internally and be able to say something that we can have some level of confidence in.

Know that, our top priority is to get clinical experience and we'd like to think that the CardiAQ Edwards valve is one that we are going to move forward with, for example, towards a CE Mark. But we're not ready to talk you about specific timing yet..

Okay. Then Scott, let me just rewind your commentary on the hedging gains this year that will roll off next year. So the math would imply that's about a 200 basis point headwind to gross margin next year, and about $0.35 to EPS.

Is that how we should think about it?.

That's right.

Yes, 200 basis points for next year, but what's your $0.35? Are you talking about 2015 or 2016?.

Well, 2016 versus 2015. So if you've got $70 million of gains this year dropping to $20 million next year..

Yeah, the GAAP, $50million is there something of that magnitude....

Depends on....

I think it's actually a little bit less than that Mike because you've got to tax affect the gains..

Tax affected U.S.

rates?.

Yes..

Okay. So it's a little bit less than that, then. Okay. That's what I wanted to clarify. Okay, perfect. Thank you..

You're welcome..

Thank you. The next question is from David Roman of Goldman Sachs. Please go ahead..

Thank you. I wanted to just come back to the earlier question that was asked about sustainability of revenue growth in the THV market. Mike, in your prepared remarks, you made the comment that patients are continuing to come off the sidelines. I assume I think that was both Europe and the U.S.

But if you think about the patients you're treating today, at what point do we start to dip into the prevalence pool, whereby today's revenue comes out of sort of tomorrow's opportunity versus actually sort of expanding that denominator from a penetration standpoint?.

Well, I mean, there's a fair amount of – it's a really good question, David. And it's hard to know exactly those answers. It's probably more difficult to get at in Europe than it is in the U.S. In the U.S., you have a fair amount of discipline because CMS has an NCD in place, and they basically only reimburse for labels.

So I think there is a lot of compliance for people to stay on a high-risk inoperable patient pool. In Europe, we know that physicians sometimes consider age, for example, where that wouldn't necessarily be in risk scores.

But bigger picture, we're still just in the oldest and the sickest overall, and I think that there's a big opportunity in intermediate and even beyond intermediate, David, for there to be growth within this field. And again, we'll try and get into it in a higher level of detail..

Okay. That's helpful. I know you'll give us more in December. And then Scott, just a follow-up on the FX commentary and a financial item.

Obviously, you do have the headwind from foreign exchange rates, but I think is it reasonable to assume that there are offsets in there as it relates to potential mix benefit, and I know you had some manufacturing cost headwinds this year you talked about earlier.

Maybe just help us think about the puts and takes on the gross profit line? For SG&A, this is simply a math issue with respect to what you're compensating people within Europe by assuming – and your G&A just getting translated back at a lower rate. So next year we'll see a more natural progression of your discretionary spending.

And lastly, how are you keeping the tax rates so low, given the U.S.

growing as a percentage of total sales?.

Sure. Well, let's start with the tax rate. In the third quarter, there was some country profitability mix that helped to keep the tax rate low. And we're going to continue to do everything we can to try to generate lower tax rate, but certainly there's upward pressure as we continue to grow our THV business in the highest tax jurisdiction.

And SG&A, yeah, we've got the natural hedges built in, and I think that we're going to continue to see benefit from that as foreign exchange rates, if foreign exchange rates stay where they are today. In terms of gross profit margin, yes, there was some mix shift improvement and we expect that that will continue.

In terms of the operating expenses, we have incurred additional operating expenses over the last several quarters. I'd like to think that that abates and we're working really hard on trying to keep operating expenses down as the company grows.

But I'm not counting on a lot of improvement on just the manufacturing expenses, because we'll continue to make investments to make sure that we're operating the way we want to be operating..

Great. Thank you very much..

Thank you. The next question is from Rick Wise of Stifel. Please go ahead..

Good afternoon, everybody. Mike, you mentioned that growth in penetrated countries moderated, earlier in the call.

Can you just expand on your comments there, and any color you could give us around what's happening, I mean is this the start of something that a process that would suggest that you are more penetrated in those markets, or is this because of competition – you often speak about competition on the call, you didn't say much about it tonight?.

Yeah, thanks. Rick. Yeah, I'll tell you what I was trying to do is just provide more clarity if possible. It's too early to signal a trend of what's happening in Europe. Growth continued to be strong. We are in excess of 20% growth in the quarter.

But we just tried to provide you with a little bit of color because we normally draw that question in terms of what do we see across the continent.

And what we saw, and it was really a small minority of countries, but some of the most penetrated countries the growth rate started to drop, and at the same time in some of the less penetrated countries the growth rate picked up. So it sort of netted out pretty similar to what it's been doing earlier in the year.

But it's a phenomenon; it might be a signal that, as comparisons get tougher, things slow down. But we're watching it very closely; probably the next thing, again, we've seen growth move in spurts when intermediate risk would actually come to Europe and that might not happen until 2017.

You might think that there would be an uptick in growth at that point..

Right..

I don't know what I said.

But I meant to say 2017 in terms of when it would come, right?.

Yeah. You did..

Okay..

Turning to some of the hot topics at TCT, obviously, the Lazy Leaflet thrombus issue was a noisy one there. I left feeling encouraged that just talking to a lot of physicians that this was not going to be any near-term or longer term hindrance to TAVR adoption.

I was also concerned about any possible impact it might have on intermediate risks time-to-market from an FDA perspective. It's been a couple weeks. You had an opportunity to talk to folks and think about it yourself. Just your latest thoughts on that issue, is it an issue, is that the right takeaway? Thanks, Mike..

Yeah. Thanks, Rick. A good question. Yeah. This whole conversation around the imaging observations are one that, obviously, we watch very closely.

We were gratified that the two main societies that have been engaged in heart valves, the American College of Cardiology and the Society of Thoracic Surgeons put out a joint statement, as a matter of fact, just this last Friday. If you haven't seen it, it's posted on their website.

That speaks for this issue, and it's a good, solid comforting message for patients that cites the facts that there's a lot of data that supports the use of this technology and their practice should not change until there's more data. And we're certainly committed to study this.

So having said that, we, at this point, have not detected any impact on our results in the Transcatheter or Surgical Heart Valve business related to the issue..

And you're concerned about intermediate risk, I mean, it's not a concern..

Yeah, I think this even came up during the Town Hall discussion at the TCT, and I think even members of FDA agreed that this wasn't a key concern of theirs as they consider intermediate risk. And that would make some sense, Rick, because we're generating an awful lot of data.

Good hard core scientific data that supports the approval of these products..

Thanks again..

Thank you. Our next question is from David Lewis of Morgan Stanley. Please go ahead..

Hello, good afternoon. Mike, just on the low risk trial strategy, at TCT, Larry made a case for randomized trials at TCT. Can you just give us your sense of why you think randomized trials are better than objective criteria trials, and can we expect to get an update on that in December? And then I have a quick follow up..

Yeah. Thanks, David. Well, number one, we would expect to have a conservative FDA when it comes to expanding the indication for Transcatheter Heart Valves. They're going to want to feel that there's good solid data that supports it, and there's not much more scientific rigor than you can get in a randomized study.

I think some of the reasons that Larry feels, let's – we ought to pause some before we go to an OPC, is to wait to have our field mature some. If you were to lock in an OPC for example, today, let's say you would have locked that in back when the SAPIEN valve was approved.

Then all valves would have been compared to that valve and I'm not sure that would have served the public very well. As our technology matures and gets better, it probably starts moving to a place where it gets a closer to you say, it's at steady state and that's what you should expect from all heart valves.

That's why we – Larry, would have said what he did..

Okay. And then Mike, the other dynamic that came out of TCT, just wonder if you can give us a kind of two part answer here. One, how is S3 comparing in the U.S.

you think versus Evolut R and your chief competitor has sort of suggested that they are not going to add any new centers here probably for the next six months as they look to train around their new product launch.

So just quick dynamics of S3 versus Evolut R in the early days, and do you believe that that dynamic from your chief competitor impacts your next three months to four months and was it factored into the fourth quarter guide? Thank you..

Yes. Thanks, David. Well, it's tough for me to know exactly what our competitors doing and, since they are sort of off cycle, we're going to learn more about that when they report in another month or two months. But we can say that we're right on track with our SAPIEN 3 rollout. We've been really happy with it.

And actually the results for SAPIEN 3 in the U.S. have probably exceeded our expectations. So overall, we're feeling good about things and it hasn't been so much about competitors, it's been our ability to get out there and supply.

One thing that I will note that happens as we do a roll-out often what we'll watch our customers do is to do several cases in a row. So rather than if there might have been a customer that might have split their case load, instead they might, for example, do 10 cases in a row and pull it forward.

So those are, kind of experiences, and those experiences have been really positive..

Thank you. The next question is from Raj Denhoy of Jefferies. Please go ahead..

Hi. Good afternoon..

Hi, Raj..

Wonder if I could follow a bit on the mitral questioning. One of the things that's kind of intriguing is your commentary around the changes you look to make to the CardiAQ technology, the leaflet changes and the various sizes and things.

And I guess, the question is when you think about moving the valve into the clinic both in the United States as well as the U.S.

trial, do you expect to make those changes before you begin or you will take the current generation into the clinic?.

I think our view is, and obviously this needs to be carefully worked with our clinical investigators and the FDA, but I think our current view is that we would proceed forward immediately with what we have, and that as we're able to add sizes, as we're able to add the Edwards tissue, as we're able to improve the delivery systems that we would cut those in along the way..

Okay. That's helpful.

And then second on the Valve-in-Valve approval for XT that came out of TCT as well, maybe could you just frame your expectations around what that could mean in the quarters ahead for your performance?.

Yeah. It's hard to know exactly how many valve and how large that Valve-in-Valve opportunity is. It's relatively small, Raj. It's really important to these patients because they don't have great options, and they're at high-risk for surgery to go through it.

So I would very much call that a niche, and wouldn't count on that to be in itself a large driver of growth..

Okay. That's helpful. Thank you..

Thank you. The next question is from Glenn Novarro of RBC Capital Markets. Please go ahead..

Hi. Good afternoon. Mike, I was wondering....

Yeah..

...if you can give a little bit more color on U.S. SAPIEN sales. They did come in better than expected, and I remember a year ago, there was a lot of warehousing of patients waiting for SAPIEN XT. So my question is, with respect to SAPIEN 3, was the strength, was there any warehousing. That's question one.

And then, I do recall of asking on the last call if there was any like ACC bump, all the good data coming out of ACC in the spring, you didn't think it'd happen in 2Q. Was there any ACC bump? And I'm assuming part of the strength was market share taking. But just any more color, that would be helpful..

Yeah .I understand your question perfectly, Glenn, and we look at that very carefully. It's difficult for us to put our finger and say exactly what's happening. The data's been a big positive and it's definitely gotten people's attention and we think it's made this valve very popular.

And we even had Howie Herrmann from the stage say that this was a preferred option for high-risk patients. I don't know about warehousing patients, but we did see this phenomena that I just spoke about a minute ago, in which when accounts were starting on SAPIEN 3, they would try and do a number of patients in a row.

So might they try and do two patients or three patients or four patients within a couple of day period? Yes. Might they try and do 10 in a row to get the sort of their feel for the system and get really comfortable with it. Yes. Could that have had had some impact on our results? It might have, but it's difficult for us to say..

Okay. And then just as I think about 4Q and U.S. SAPIEN sales, the numbers should be higher. So you are assuming a sequential growth going into the fourth quarter, and a higher U.S.

absolute number, correct?.

Yeah, we would expect our Q4 sales in SAPIEN 3 to be larger than our Q3 sales, both for a couple reasons. One is, there is the natural seasonal differences. And the other is, we'll be continuing on our roll-out..

Okay. Great. Thanks, Mike..

Sure..

Thank you. The next question is from Matt Keeler of Credit Suisse. Please go ahead..

Hey, guys. Thanks for taking the call. I wondered if you could comment a little bit on the SAPIEN 3 launch, and you talked in the past about being able to expand capacity versus XT.

I was wondering, if you could put any metrics around that for maybe your busier centers in Europe, sort of how much were they able to increase capacity?.

Yeah, thanks, Matt. It's a good question. It's so center specific, it's tough for us to generalize. It is true, we consistently hear this message that their capacity increases. They're able to get more cases done in a day. To be able to give you a good, hard number or an easy modeling numbers is tough for us.

It is driven by shorter procedure times and so that just affects people differently. So I'm sorry, I can't give you a more specific answer..

Okay. Great. And just on the U.S.

TAVI number, was there anything different in the royalties that really inflated that or was it pretty consistent with the last quarter?.

Matt, it's Scott. It was pretty consistent. It might have been $1 million more than a year-ago quarter, but really you should think about $40 million, maybe a little bit higher on an annual run rate basis..

Okay. Great. Thanks, guys..

Thank you. The next question is from Matt Miksic of UBS. Please go ahead..

Thanks for taking the questions. I have one follow-up for Scott and then one for Mike as well.

On the margin question, and the impact of FX hedges next year that you talked about, is it fair or – I understand you're not giving a lot of detail yet about 2016, but is it sort of fair to expect, this year you had 200 basis points or so in this current quarter, plus the positive mix benefit of growth in TAVR, is it fair to think about next year as having this sort of 200 bp hit, then sort of offset by some continued mix benefit of a similar magnitude? Is that sort of the right way to think about the puts and takes for margins at this point? And then I had just one follow-up..

Yeah. That's a fair way to model it. A couple of hundred basis point difference in FX contract payouts offset by – partially offset by some mix improvement, which we will expect to continue..

Great. And then Mike, you mentioned tricuspid, and some of the recent survey work we've done and conversations we've had with docs continues to kind of come up a little bit, I don't want to say wishy-washy, but just sort of like, we see this interesting, very interesting opportunity and underserved population as you do.

However, maybe because it's underserved or under-diagnosed that clinicians at least the ones we talk to, many of them are sort of – they wouldn't put it on the list of bigger and more interesting, exciting opportunities.

And I just would love to get some more color as to what you see that's exciting or interesting or potentially attractive here about pursuing that tricuspid opportunity..

Sure. And Matt, the points that you raised and the questions or the comments by physicians are completely understandable. This valve is often called the forgotten valve and very rarely do people treat a tricuspid valve on an isolated basis even when it is treated, and I think it's around 8,000 times a year today.

It's usually accompanied by a treatment of the mitral valve.

The question here is, we know that these heart failure patients, lots of them, and I think by our estimate 1.6 million patients also have tricuspid regurgitation, and if you were able to address it, and able to do it in a relatively safe way, could you change the quality of these patients' lives, and that's what's exciting to us.

We have certainly physicians and internal folks that could tell you all the clinical reasons why that could and should be true, but the only way we're going to know it for sure is to have clinical experience.

What we are encouraged by is in these first few cases, we just so far have only talked about 13 of those, the clinicians are saying, hey, it looks like our patients are feeling better. And so that's what encourages us to keep going and try and learn more, but it is too soon to know how important this might be..

Thanks so much..

Sure..

Thank you. The next question is from Danielle Antalffy of Leerink Partners. Please go ahead..

Good afternoon, guys. Thanks so much for taking the question. Mike, I was hoping you could elaborate a little bit more in the U.S.

on the mix between inoperable and high-risk, how penetrated are we in those segments and how much incremental penetration is there to go in both of those?.

Yes. It's a good question. Frankly, there's not a lot of data on the answer to your question. We know a lot about the patients that get surgery. We don't know a lot about the patients that are on the sidelines.

Closest thing we're able to do is we're able to get patients that get echoed in hospitals, and see how often they're treated, those kind of things.

But we don't know how many people are out there that are just simply not being treated either because it's not diagnosed, or their primary care physician just doesn't feel like they should refer or even if they make it to a cardiologist, the cardiologist would say, I don't think I should treat this patient. And so it's a number that's not well-known.

We work pretty hard to try and get an estimate there. We'll try and talk about this more at the Investor Conference. There is some relation here that's probably pretty dramatic in the elderly, where, as you get older, the percentage goes up we think markedly and we'll try and bring that to life..

Okay. That's helpful. Thank you. And then just following up on that, as we think about intermediate risk potentially coming online here in the U.S.

and Europe, late 2016-ish timeframe, what about the center capacity issue, because you're obviously not really adding incremental centers at this point, so really it's existing centers doing more procedure, there is going to be an influx of patients.

How do we think about how the centers can manage that influx of patients? What can they do logistically to take on that incremental volume? Thanks so much..

Yeah, thanks Danielle. It's a good question. It's been handled different ways at different centers. Clearly, they're going to get more capacity. They're getting better at it. They do more procedures per day. They're able to get their patients out of the hospital faster. All of that definitely impacts their capacity.

But if they get a real step-up in volume, they have decisions to make on whether they're either going to repurpose some room that they feel is underutilized or whether they're going to build capacity.

What's encouraging is that the economics that are associated with transcatheter heart valves are pretty good at most centers and I think it makes it a reasonable investment for them to tackle the capacity expansion..

Thank you. The next question is from Josh Jennings of Cowen & Company. Please go ahead..

Hi. Good evening. Thanks a lot.

I just wanted to follow up on David Lewis' question earlier just on the low-risk opportunity and coming out of TCT and the FDA Town Hall meetings and maybe some discussions with the FDA, any sense in terms of when we can learn about the path forward for low-risk and what that trial design may be? Do we have to see intermediate data first? Could we hear it in December, or would we have to wait until ACC or beyond next year?.

Yeah. It's a good question, Josh. We will talk about it at the Investor Conference. It doesn't necessarily have to wait for intermediate risk patients. We're feeling pretty confident about intermediate risk patients. We'll have to wait and see what that data looks like.

But we're thinking about that now and engaged in dialogue on that very subject right now with physicians and FDA and to see how we might tackle it. But stay tuned. We'll let you know if we have anything more definitive to say in December..

Okay, great. And just one follow-up if I can. On the CAP program, I assume you're going to finish the 1,000 patients this year. That's going to be extended into next year.

I was just wondering, should we expect that to be another 1,000 patients added on in a CAP II like program or would it be more? And then also any other – should we be expecting, just in terms of building out our clinical revenues next year, any type of low-risk trial to be started? Thanks a lot..

Yeah, no, I think your first assumption is right, Josh. You should think about it in terms of being another extension. I think in fact it was a 1,000 patient extension. So our belief is that we will be asking for and get approved by FDA extension of the CAP program and that would continue until we have approval. That's our belief at this point in time..

Thank you. The next question is from Ben Andrew of William Blair. Please go ahead..

Hi, good afternoon, Mike. Just a couple quick questions for you.

Can you talk about the mitral repair opportunity and how you all view that? And is it on a similar timeframe or different timeframe than perhaps the replacement product?.

Yeah. Thanks, Ben. Yeah, we continue to think that for these mitral patients that it's likely that you'll need a toolkit, that there won't be a single product that will be the right technology for all patients. And so, we think repair has an important place in the future, and again, it's only clinical data is going to tell us that for sure.

The timeframe is a good question. We think that timeframes could be very similar to the replacement timeframes. It depends on how far you are on the development of that technology. But there's no reason to think that it's necessarily either faster or slower..

Okay. And then just looking at the development of the market, both in Europe and the U.S., what are you seeing in terms of age evolution of the patients.

Obviously, we all talk about high, intermediate low-risk et cetera, but are you seeing surgeons pushing into younger groups of patients or is that still sort of in the future with patient expansion? Thank you..

Yeah, thanks. Right now, we continue to see that patients are elderly. You saw our intermediate risk data. Here it was, intermediate risk patients, we would have estimated early on that those would have been patients in their 70s. When we get into low-risk patients, they're in their 60s.

And here it is our intermediate cohorts and patients are still in their low 80s. I think what we're seeing treated today are largely 80-year-olds and that there is a difference between age and risk, and this is part of what we're trying to understand and we're going to try and get a little different. So stay tuned for December..

Thank you. The next question is from Kristen Stewart of Deutsche Bank. Please go ahead..

Hi. Thanks for taking my question.

Mike, I just wanted to confirm, just with respect to the intermediate risk indication, you are going to be going to the FDA to get SAPIEN 3 approved for that, not XT, even though XT is the first, I guess, landmark trial, being that you're pulling XT off the market or phasing it out, I guess, I should say?.

Yeah. We just think – the way things have turned out, Kristen, is it looks like, coincidentally, we will have the results for SAPIEN XT in intermediate patients at two years and then also have the comparison of SAPIEN 3 to SAPIEN XT, and we'll also have those surgical patients and all that data becomes available at the same time.

And if it's true, and we expect it to be the case that SAPIEN 3 is as good as SAPIEN XT, then naturally rather than go to an intermediate step, I would think that both we and the regulators would agree that we will go right to SAPIEN 3.

So, all the data looks like it's going to come together at the ACC, and so it will be an opportunity to see the data in total, which includes the surgical control, the two-year XT in intermediate patients, and one year comparison of SAPIEN 3 in intermediate patients..

Are you confident that the FDA will allow you approval for SAPIEN 3 without two-year data on SAPIEN 3, or do you have two-year data somewhere in Europe on SAPIEN 3?.

I don't know about confident. I mean, overall, I feel good. I think it's very logical. I think SAPIEN 3 has a great track record. You've had a chance to see the data. I think FDA probably feels pretty good about it. I thought they press released it actually when we got our approval a little earlier this year.

So I would think that they would say that that would be the right thing to do from a public health perspective..

Yeah.

And last question I have, do you think a panel will be required as well? Is that included in your timeline when you say you'd expect approval at the tail end of 2015?.

Yeah, our belief is that the data is so strong, Kristen, that we don't expect to have a panel. If we had a panel, that would be an unexpected event that would take more time..

Okay. Thanks very much..

Sure..

Thank you. The next question is from Suraj Kalia of Northland Securities. Please go ahead..

Good afternoon, everyone. So, Mike, a quick question for you. We know the total number of sales in the U.S. and Europe and the trend lines. Let me ask the same question a little differently. Can you give us some directional color on average utilization per center in Europe, where it is, and I'm just trying to track where U.S.

is relative to Europe, the trend lines, and see how much more room on a per center – average utilization per center do we have to grow?.

Thanks, Suraj. I don't have that data available to share with you. I can tell you just based on my understanding of Europe, you have a great disparity in sizes of centers.

You have some just mega centers, for example, a number of centers in Germany that are really large, and then there will be other smaller towns and smaller countries that will have smaller centers. I want to say, the number of centers across Europe and Eastern Europe probably must be in the 400 range. But we don't end up using averages very much.

We try and find other ways of modeling, just because there's so much differences from center to center..

And, Mike, my apologies if I missed this, did you all give an update on Japan in terms of the status on TAVI? Thank you for taking my questions..

Thanks. No, we didn't give an update on that. In general, Japan has continued to grow. It's growing sequentially. Obviously, some big growth numbers year-over-year, but you would expect that at this early stage of the launch.

We have plans to bring SAPIEN 3 to Japan at some point, although we have not changed – we haven't shared any specifics on it, and we're still the only company approved in Japan. We expect to have our first competitor I think in the not too distant future..

Thank you. And that is all the time we have for questions. I would like to turn the conference back to management for any closing comments..

Okay. Thanks all 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 conference number 13620647. I'll repeat those numbers; 877-660-6853 or 201-612-7415, and the conference number is 13620647.

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

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