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

David Harrison Roman - Goldman Sachs & Co. Brooks E. West - Piper Jaffray & Co (Broker) Larry Biegelsen - Wells Fargo Securities LLC Michael Weinstein - JPMorgan Securities LLC Jason R. Mills - Canaccord Genuity, Inc. Rick Wise - Stifel, Nicolaus & Co., Inc. David Ryan Lewis - Morgan Stanley & Co. LLC Ben C. Andrew - William Blair & Co.

LLC Raj Denhoy - Jefferies LLC Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker) Danielle J. Antalffy - Leerink Partners LLC Glenn John Novarro - RBC Capital Markets LLC Joanne Karen Wuensch - BMO Capital Markets (United States) Matt Miksic - UBS Securities LLC Joshua Jennings - Cowen & Co. LLC Bruce M. Nudell - SunTrust Robinson Humphrey.

Greetings, and welcome to the Edwards Lifesciences Corporation Fourth 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 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 fourth 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 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 therapy trends. These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today.

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

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

Also, as a quick reminder, that when we use the terms underlying, adjusted, 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 very pleased to report strong fourth quarter results, which exceeded our expectations and contributed to another successful year both in financial performance and progress on important new therapies.

We exited the year with total global sales of $2.5 billion, representing an underlying growth rate of 17%, which is higher than we predicted a year ago.

And just recently, we were pleased to receive FDA approval of our PARTNER 3 Trial to study patients determined to be at low surgical risk, which may eventually enable heart teams to offer choice of therapies to a broader group of patients. For the quarter, total underlying sales grew to $267 million, an increase of 15%.

Results were driven by robust demand for TAVR therapy and the strong performance of all product lines this quarter. In Transcatheter Heart Valves, full-year global sales were $1.2 billion, up 38% over the prior year on an underlying basis.

We exceeded our original estimate of 15% to 25% provided a year ago, primarily due to the early approval of SAPIEN 3 in the U.S. and the more rapid than expected therapy adoption in Europe. For the fourth quarter, underlying global sales were up 32% over last year, led by the impact of SAPIEN 3 in the U.S.

and double-digit underlying sales growth across all regions. Globally, average selling prices remain stable. In the U.S., underlying THV sales for the quarter grew 50% versus the prior year to $189 million. Our performance was driven by procedure growth, which was unexpectedly strong during the holiday season, and has not been our typical experience.

We estimate that Edwards' growth was similar to the overall procedure growth. Nearly, all of our existing accounts are now using our SAPIEN 3 valve. Growth was primarily driven by large hospitals and new site training continued during the fourth quarter, finishing the year with approximately 400 active centers.

Our recently introduced 20 millimeter SAPIEN 3 valve was also a contributor. We believe the strong growth and adoption of TAVR in the U.S. was driven by the growing body of clinical evidence, increased physician experience, and high procedural success.

Many hospitals are responding to the increased demand by modifying their schedules to perform more procedures each week. We see this trend continuing as TAVR provides an attractive therapy option for a large number of untreated elderly patients.

We expect these patients will be encouraged to seek treatment as indications expand, which is the primary driver behind our belief that the global TAVR opportunity will exceed $5 billion in 2021. Outside the U.S., underlying THV sales grew double-digits in all regions aided by the continued rollout of SAPIEN XT in Japan.

We estimate our OUS growth was roughly in line with overall therapy adoption. In Europe, we estimate that therapy adoption grew more than 20% and our sales growth was somewhat lower. Our sales growth was primarily lifted by the continued adoption of SAPIEN 3.

We estimate that more recent competitors continue to account for approximately 15% of total procedures. We saw strong growth across most countries and total procedures are becoming more dispersed throughout the region, with other countries growing faster than Germany for the past couple of quarters.

Generally, reimbursement trends remain stable allowing for continued growth and adoption. In 2016, expanding the indication to treat intermediate risk patients remains a key focus.

We expect data from the intermediate risk cohorts in two studies to be presented at the American College of Cardiology Meeting in April, a randomized study of SAPIEN XT versus surgery and a study of SAPIEN 3. As we indicated at our Investor Conference, assuming positive results and an expedited FDA review, we're planning for a late 2016 U.S.

approval and a minimal contribution to sales this year. We expect our Continued Access Program for intermediate risk patients in the U.S. to continue until commercial approval. We plan to use the U.S data in a CE Mark submission in Europe. And as I mentioned earlier, we received FDA approval to study an expanded indication for the SAPIEN 3 valve.

The IDE study will enroll elderly patients at least 65 years of age with severe symptomatic aortic stenosis who've been determined by a heart team to be at low risk for mortality if they were to undergo surgical aortic valve replacement.

The PARTNER 3 Trial will enroll approximately 1,300 patients at up to 50 sites and we're working now to secure IRB and contract approvals at those hospitals. Enrollment is expected to continue into 2017, and while we believe this procedure will be attractive to low risk patients, randomized trials typically take longer to enroll.

The SAPIEN 3 trial will also include a 400 patient sub study using advanced imaging to evaluate leaflet motion in surgical and transcatheter tissue valves. We're looking forward to introducing our SAPIEN 3 Ultra System, which is on track for CE Mark in the fourth quarter of this year.

This new system, featuring an on-balloon delivery system and next-generation sheath technology, is expected to enhance ease of use, further reduce possible complications, and shorten procedure time. We also remain on track with our efforts to add the Pulmonic indication to our SAPIEN family of valves.

During the first quarter, we expect to receive approval and launch SAPIEN XT for this indication and then begin enrolling patients in a clinical trial for the SAPIEN 3 in Q2.

In summary, based on our momentum, and the expectation of continued therapy adoption, we are increasing our 2016 THV global sales estimate by $100 million to $1.3 billion to $1.5 billion. We now expect our underlying sales growth in 2016 to be in the range of 15% to 25%.

Turning to the Surgical Heart Valve Therapy product group, full-year 2015 global sales were $785 million, up 2.5% on an underlying basis over the prior year and consistent with our original guidance of 1% to 3%. Total sales for the fourth quarter were $196 million, up slightly over last year on an underlying basis.

Globally, sales growth was lifted by higher surgical heart valve units, but was lowered by the planned exit of non-strategic products. Sales of our premium products contributed to solid heart valve performance across all major regions led by procedural volume and share gains.

Surgical Heart Valve units grew approximately 5% and global average selling pricing declined slightly due to country mix. During the fourth quarter, we submitted the PMA in support of the FDA approval of our rapid deployment INTUITY Elite valve. We still expect to launch in the U.S. mid-2016.

In Germany, adopters (10:16) of our INTUITY Elite valve will now benefit from a new higher DRG for combined procedures. We believe this will support greater adoption of our rapid deployment valve for patients who suffer from the combination of aortic stenosis and coronary disease, a common occurrence.

Notably, a recent paper published in The Annals of Thoracic Surgery concluded that our PERIMOUNT Magna Ease family of valves demonstrated excellent long-term durability and hydrodynamic performance after accelerated in vitro testing equivalent to 25 years of heart beats.

All valve studies successfully endured 1 billion cycles, which is five times longer than the standard testing requirement for a tissue valve. In summary, we're pleased with the continued strength of our premium surgical valve products and are preparing for new product launches in 2016.

We continue to focus on improving therapy options for younger patients, streamlining complex surgeries, and enabling minimally invasive procedures. We are reiterating our 2016 underlying sales growth expectation for the total product group of 3% to 6%.

In the Critical Care product group, total sales for the quarter were $141 million and grew 4% on an underlying basis. Total sales for 2015 were $528 million, up 3% over the prior year on an underlying basis consistent with our original guidance of 2% to 4%.

Global growth for the quarter was driven primarily by core hemodynamic monitoring products in the U.S. and our Enhanced Surgical Recovery Program, which recorded double-digits underlying growth across most regions. We are focused on strengthening our core offerings by strengthening our gold standard products including a next-generation monitor.

We are expanding our sales force in the U.S. to broaden the adoption of our market-leading products. And, in Japan, we're expecting a contribution to growth from the launch of ClearSight, our non-invasive monitoring technology. Overall, we're pleased with the continuing adoption of Enhanced Surgical Recovery and the strengthening of our core products.

We continue to expect Critical Care underlying sales growth of 2% to 4% in 2016. As we highlighted at our Investor Conference, we're investing in a number of structural heart initiatives. We continue to make progress on our CardiAQ-Edwards, transcatheter mitral valve program, or TMVR, and our FORMA system for reducing tricuspid regurgitation.

Early U.S. feasibility studies with both of these technologies are currently underway. Additionally, we're continuing to closely follow our investments in the Harpoon chordal repair and the CardioKinetix heart failure therapies as they gain clinical experience.

While all of these technologies are substantial opportunities, they do involve significant challenges and are in their early stages. Providing some more detail on our TMVR program, we've begun treating patients in our U.S. early feasibility study planned for seven sites.

Our learnings from these cases will inform our CE Mark trial, which is expected to begin in mid-2016. Our mitral team is currently working on enhancements to the CardiAQ-Edwards valve platform, including additional sizes, delivery system refinements, and the addition of Edwards' clinically proven bovine pericardial tissue.

We're also currently developing additional next-generation TMVR products that leverage our experience. We're optimistic about the future of TMVR technology. And although commercialization timelines are still unclear, we continue to believe that TMVR will ultimately benefit patients with mitral valve disease who aren't well-served today.

And, finally, in regards to the recently implemented two year suspension of the U.S. medical device excise tax, we're evaluating a number of meaningful opportunities to accelerate existing growth programs or initiate new ones. And, as such, we expect a minimal positive impact to 2016 earnings. And now, I'll turn the call over to Scott..

Thanks, Mike. I'm pleased to report that with our strong finish to the year, we achieved our 2015 key financial targets. For the full-year, we reported non-GAAP earnings per share of $2.29. Sales increased nearly 17% on an underlying basis to $2.5 billion. Our gross profit margin was 75.2% and free cash flow was $447 million.

In the fourth quarter, another strong sales performance in transcatheter valves drove our top line to an overall 15% underlying sales growth rate, unusually strong U.S. THV sales during the holiday season lifted performance above our expectations. The strong U.S. dollar continued to have a significant negative impact on reported sales, which grew 9%.

Non-GAAP earnings per share was $0.63, representing 19% growth over the prior-year. Total underlying sales in the fourth quarter were $667 million. This excludes the $4 million benefit of the THV sales return reserve, as we substantially completed the SAPIEN 3 product exchange in the United States.

I'll now cover the details behind our results and then share guidance for 2016. For the fourth quarter, our gross profit margin was 73.8%, compared to 74.0% in the same period of 2014. We expected fourth quarter gross profit to be approximately 75%, based on a more profitable product mix and a positive impact from foreign exchange hedge contracts.

Our actual result was below our expectation, because we elected to realign some critical care manufacturing operations to improve our cost structure. We continue to expect our gross profit margin, excluding special items, to be between 74% and 75% in 2016.

Turning to SG&A, fourth quarter expenses were $222 million or 33.1% of sales, compared to $223 million in the prior year. The modest decrease was driven by the favorable foreign exchange impact on our expenses outside the United States, largely offsetting higher sales and marketing expenses related to transcatheter valves.

Given our increased THV sales estimate, we now expect SG&A, excluding special items, to be between 30% and 32% of sales for the full year 2016, which is an improvement over our Investor Conference guidance. Research and development expenses in the quarter grew 17% to $98 million or 14.6% of sales.

This increase was primarily the result of continued investments in our transcatheter mitral valve and aortic valve programs, including spending on clinical trials. For the full-year 2016, we continue to expect research and development as a percentage of sales to be approximately 16%.

We are evaluating the opportunities to reinvest the savings from the two-year suspension of the U.S. medical device excise tax. We're deploying a disciplined process to explore value-creating opportunities to accelerate existing programs or initiate new ones.

Our reported tax rate for the fourth quarter was approximately 16%, which benefited from the renewal of the federal research and development tax credit. Given the expected stronger sales of THV in the U.S., we now expect our full year 2016 tax rate to be between 23% and 24%.

And in light of recent legislation making the R&D tax credit permanent, we expect our rate to be relatively consistent across quarters. Foreign exchange rates negatively impacted fourth quarter sales by $35 million compared to the prior year, driven by the weakening of the euro and yen.

Compared to our October guidance, foreign exchange rates positively impacted earnings per share by $0.01. At current rates, we continue to estimate a $55 million negative impact to full year 2016 sales.

Cash flow from operating activities for the fourth quarter was $104 million and included a $33 million tax payment related to a previously reported litigation settlement. After capital spending of $37.5 million, free cash flow was $66.3 million.

Turning to our balance sheet, at the end of the quarter, we had cash, cash equivalents and short-term investments of $1.2 billion. Total debt was $600 million. During the full year 2015, we repurchased approximately 3.9 million split-adjusted shares for $280 million.

Now, turning to our 2016 guidance, all of which assumes current foreign exchange rates. For Transcatheter Heart Valve Therapy, due to our strong momentum and expectation of continued therapy adoption, we are raising our 2016 guidance provided at our December Investor Conference to be between $1.3 billion to $1.5 billion.

We continue to expect sales for Surgical Heart Valve Therapy of $780 million to $820 million, for Critical Care of $510 million to $550 million, and now expect total sales of $2.6 billion to $2.85 billion.

Primarily as the result of increased expectations for sales, we are raising adjusted earnings per share guidance to be between $2.57 and $2.67, free cash flow to $475 million to $525 million. The suspension of the medical device tax is expected to have minimal impact on 2016 earnings per share.

We continue to expect shares outstanding in the range of 216 million to 220 million, which reflects our plan to repurchase shares during 2016. As we explained at our Investor Conference, adjusted earnings per share now excludes intangible amortization expense and prior period comparisons are available on our website.

For the first quarter 2016, at current FX rates, we project total sales to be between $640 million and $680 million and adjusted earnings per share of $0.64 to $0.70. And with that, I'll hand it back to Mike..

Thanks, Scott. In conclusion, we're pleased to achieve healthy financial performance and substantial progress on important new therapies in 2015. Our focused innovation strategy can transform patient care and drive value to the healthcare system and to shareholders.

We're enthusiastic about the continued expansion of transcatheter based therapies for the many structural heart patients still in need, which positions us for a bright future. And with that, I'll turn it back over to David..

Thank you, Mike. At the upcoming American College of Cardiology Conference in April, we are planning to host an Investor Meeting to discuss the latest presentations. Additional details will be provided once the late breaker schedule becomes available.

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 David Roman of Goldman Sachs. Please go ahead..

Thank you and good afternoon, everybody. I want to just start with your disclosure around the transcatheter valve centers and specifically the 400 number that you referenced.

I think, at the time of the NCD when that was originally issued, there were some concerns that that specifications and qualifications that actually limit that number to being somewhat lower.

Can you maybe just sort of talk about what you're seeing in the landscape? Are centers doing things to make themselves more TAVR already? Are you seeing an expansion of the addressable market relative to your initial expectations?.

Yeah, thanks, David. You're right. When we originally talked about this, I think we estimated that this might take us to the 350 to 400 range and here we are right at about 400 active centers today. And there are more centers that are interested in getting within the NCD qualification.

So, they are doing the things that they need to do to have the staff and capabilities in place, so that they can be added. And that's an encouraging sight (23:58) from our perspective. So, we're continuing to add.

Having said that, David, most of the growth that we're seeing is really coming from large centers, and that continues to be a big driver of what's going on right now..

And maybe just a follow-up on that. Can you maybe help us just piece together the following moving parts. I think in your commentary, you had said that some of the upside in the quarter came from unexpected strength at the end of the year, but you're raising your 2016 guidance for transcatheter valves and maintaining the over $5 billion by 2021.

Can you maybe just help us understand why we're not sort of pulling forward from future patients here, and what gives you the confidence at this point of the year to raise the expectations?.

Yeah. Thanks, David. Yeah, typically we see a real slowdown in the last two weeks of December, just the way the holidays fall, it's not common for people to have the kind of procedures that Edwards is involved in during that time. We just didn't see that slowdown this year, so that surprised us to see the strength of those procedures.

Now when you couple it with the fact that we're now in the beginning of February, we've had a chance to see our January numbers, and it appears that this wasn't stealing procedures from January, but rather we continued at a strong pace. And so, that's really more of a commentary about the strength of the therapy adoption.

And so, given the strength of that momentum and what we see, that really what encouraged us to raise our estimates for full-year 2016..

Thank you. Our next question....

Thanks, David..

The next question is from Brooks West of Piper Jaffray. Please go ahead..

Hi. Thanks.

Can you hear me?.

Yes. Hear you, Brooks..

Great. Thanks, Mike, and congratulations on a great end of the year. I had, I guess, a two-part question just around expectations for data and ultimate FDA reaction coming out of ACC.

I wonder if you could just walk us through again the logic path of walking the label to SAPIEN 3, obviously, that's the commercial bet you're making but you're going to be mixing data from both the XT valve and also the SAPIEN 3 valve. That's question number one.

Question number two is, as we've been talking to physicians, there's an expectation for non-inferiority versus surgery but some hope that maybe you're able to show superiority, I wonder if you would just comment on that thought in general..

Okay. Thanks, Brooks. Yeah. Let me try and take it apart. There are going to be two datasets that are substantial that are presented at the ACC. The original PARTNER II Trial is a randomization of SAPIEN XT versus open heart valve replacement. You'll see the results of that, that's a substantial study and again high quality science.

Within the contemporary timeframe, we were able to introduce SAPIEN 3 and so, literally added to the PARTNER II was this separate arm of 1,000 SAPIEN 3 patients that were also enrolled in intermediate patients.

And the thought here is, it's a comparison of SAPIEN 3 that you'll be able to compare to both the SAPIEN XT data and also the surgical data, because it was all done in a contemporary timeframe.

And since the SAPIEN 3 valve is the valve that's broadly in use today, I think the logic will hold together and we're expecting that physicians and FDA will see it that way. So, that sort of point number one. Point number two, the way the trial was constructed, it was a non-inferiority trial, and we really powered it for non-inferiority.

But it's still a very large trial to power a trial for superiority. We will assume that the time would have taken a lot of patients. So, we're still assuming that we are favorable on non-inferiority.

It's always possible that somebody can do a post-hoc analysis of the data and try and analyze whether it's superior, but it will be trying to do it with a number of patients that was really intended to demonstrate non-inferiority..

Perfect. Thanks, Mike. Appreciate the color..

Thank you..

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

Good afternoon. Thanks for taking the question, and I also reiterate my congratulations on a strong quarter. So, I guess what stands out to me is that you raise sales by about $100 million – sales guidance for 2016 by $100 million, but you raised EPS by about $0.27.

It suggests about an 80% to 90% operating margin and the incremental $100 million in sales which sounds high – it just sounds like you're letting more of the upside fall to the bottom line than you have in past.

So, first, is that fair, and it sounds like – and if so, why? And, second, you're guiding to 30% to 32%, I think, SG&A in 2016, I think at the Analyst Meeting, your long-term SG&A guidance was low-30%. So, how should we think about SG&A going forward? And I did have a follow up. Thanks..

Larry, it's Scott. Good question, the answer to your first question is, yes, most of that incremental sales generated from THV will fall through to the bottom line earnings per share. We're also battling a little bit higher tax rate because of some of those incremental sales will be coming out of the U.S.

In terms of SG&A as a percentage of sales, I think our guidance for longer term is unchanged, it's still going to be in that low-30% of sales range, longer term..

Okay. That's very helpful. And, I guess, I'm just curious, Mike, if you receive approval for intermediate risk later this year, do you think SAPIEN 3 will disproportionately benefit until your competitor also receives that indication? Thanks for taking the questions..

Yeah. Thanks. We feel like we're the market share leader today. And because of the way the National Coverage Determination is written, the coverage is really linked to an FDA approval and it's product-specific. So, clinicians that were to use a valve that wasn't approved for intermediate risk, would run the risk of running afoul of the NCD.

So, we think physicians will be somewhat disciplined. And so, I think we do end up with some kind of an advantage if we were to have an intermediate risk approval before our competitor..

Thanks for taking the questions, guys..

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

Thanks for taking the question. So, let me just follow up on Larry's kind of question about the guidance, and obviously everybody is looking at the fourth quarter and saying fantastic performance and loves to see the numbers moving higher. But the drop-through is obviously much more dramatic than what we've seen in the past.

In fact, Scott, if you do the back envelope numbers and just took the midpoint of the prior sales range, the midpoint of the prior SG&A guidance and the midpoint of the new sales range, the new SG&A guidance, it actually implies with the incremental $100 million in sales that SG&A is actually down slightly despite the incremental sales numbers.

So, is there something else you guys are doing just in terms of your planning for 2016, or was it just, hey, that that we went into it initially being conservative on what we thought we'd spend and it's just going to come in lower than what we're initially planning?.

Yeah. It's a good question, Mike. I think we give ranges because there are a lot of moving pieces really the sales estimate does fall through to the bottom line. And it's just it's a lot of positive momentum going into earnings per share growth. But, there is really nothing else to speak of that's changed in the overall model..

And let me just ask, Mike. So, if you think about the incremental opportunity from here, because we're obviously only partway through the play out of the TAVR market. And we're talking about a $5 billion plus market as we go out.

If we think about the earnings drop-through from here from your incremental TAVR sales, not talking 2016, but really over the next three years to four years, how do you want us to think about that incremental drop-through given what you're saying today about 2016?.

Yeah. Thanks for that Mike. As you can imagine, there is a limited number of TAVR centers, and given the fact that this expansion is probably likely to occur within their existing centers, we are going to get a fair amount of leverage, and there will be a lot of drop-through.

Now having said that, we are aggressive investors in our future, and as you know we have a number of initiatives going in the area of structural heart.

Those investments, we think, are great investments and they have an opportunity to yield a lot of future success, but they don't have any sales associated with them, so those aren't particularly accretive to earnings. And so, I would encourage you to be moderate in terms of what you would expect all that drop-through to be as we go forward..

Thank you. The next question is from Jason Mills of Canaccord Genuity. Please go ahead..

Thanks, Mike, for taking the question. Congrats on the good quarter. I wanted to go back to David's question on number of centers. I was also surprised with the expansion in the number of centers in United States.

And I'm wondering if you could, just looking at the landscape, and you're – to your funnel, what you expect sort of from a long-term perspective in the United States, specifically in terms of the number of TAVI centers there might be, with the puts and takes of the regulations, et cetera? And I'm also wondering if, based on your commentary, that you didn't see the slowdown during the Christmas months or the holidays that you normally see in other businesses.

If you're not seeing dramatic improvements in length of stay, so patients are getting out of the hospital in one day or two days so they're not spending that time in the hospital during the holiday.

So, I'm wondering if that's have an impact also on the number of centers that could be TAVI centers over the longer term?.

Yeah. Good question, Jason. And it's fair to say that we're learning as we go. These are tough to anticipate in advance just exactly how many centers are going to be into it.

And what we find here is with the success of TAVR, and actually it appears to be a really learnable procedure, that centers are sincerely interested in having this option to offer to their patient. Just think if you're a center that only offers a surgical option, you're not quite as attractive as you might be if you had a full range of options.

So, this is encouraging centers to come into it. In terms of how many, we do have somewhat of a backlog. It would be a real guess at this point, but maybe an additional 40 sites in 2016 might be added. We know some of these sites, if we're successful in getting a Pulmonic indication might be pediatric sites that come in and learn TAVR as well.

So it's an estimate, Jason, but hopefully that helps you a little bit. In terms of what's going on over the holiday season, I suspect you're right, the shorter length of stays probably encouraged people to maybe take something on over the holidays that they might not have taken on if it had a long recovery period.

We didn't anticipate it, so I can't tell you that we had this all figured out in advance. This is more we watched the story and now we're applying our own explanations to why, but we probably have to dig a little deeper to understand it. But, again, I'll just remind you on the bigger picture in terms of number of centers.

We continue to see the large bulk of the growth come from these big hospitals that already have strong programs..

That's helpful commentary, Mike. Thanks. My follow-up is, in relation to the $100 million incremental guidance on the THV side, I understand that you have refrained from giving us thoughts on growth U.S. versus outside the U.S.

but could you frame the incremental guidance increase in terms of where you expect the bulk of that to come and whether or not perhaps if it is the U.S.

that's really what's driving the incremental operating margin that folks have been asking about on the call?.

Yeah, I think, it's fair to say, Jason, that we believe the majority of that $100 million increase is going to come from the U.S..

Okay. Thanks, Mike..

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

Good afternoon, everybody. Mike, one question for you, and then one for Scott. To you, just can you talk about the Pulmonic trial starting in the second quarter – first quarter and second quarter with XT and then S3. Can you frame the opportunity for us at all? Docs are telling us that having one device with multiple indications is helpful.

Has the lack of an indication been a hindrance and now you have a bigger opportunity? And then I have a follow-up for Scott..

Okay. Yeah, the Pulmonic indication is still by comparison a smaller opportunity, although it's really important for these patients in need. These are often children. We estimate that the opportunity in terms of overall size is in the, maybe the, $50 million to $100 million range, if that helps for your estimate..

Okay. And, Scott, just quickly on gross margin, you reviewed it very clearly, you expected 75%, you got what you got because of the Critical Care reorganization. Was the entirety of the variance related to that? And just as I think about the margin guidance for 2016, maybe you'd review some of the puts and takes.

Hedging is a negative, but volume is better, I would think that would be an offset. Thanks..

Sure. The – so I'll tell you some of the other inputs to the 73.8% margin in fourth quarter. About 1.2% of that was from better mix, but it was more than offset by investments that we continue to make in our operations part of which was that 1% of gross margin that we invested in realigning some Critical Care operations.

In terms of margins going forward, I guess for 2016, we're still in that 74% to 75% range. Again it's a range. Yes, we probably moved up higher in that range as a result of the higher THV sales, but that's still the right range to model. I think longer-term, the margin profile is probably going to be similar.

There was an earlier question about, is SG&A as a percentage of sales low-30% still the right number? Yes it is. We're going to continue to invest in the business, as Mike said, so 16% R&D is still the right level to be thinking about longer-term..

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

Good afternoon. Just two quick questions. Mike, just first for you, thinking about the low risk trial and the criteria for that trial for patients to be included over 65, what impact do you think that has on trial enrollment or eventual low risk commercialization, if any? And then I have a quick follow-up..

Thanks, David. Maybe, what I'll refer you back, those that recall, Larry Wood used a graph that sort of was a bell-shaped curve that showed the patients with AS that we believe exist by age. And if you were to look at that, the bulk of the patients we believe are over 65.

So actually capping or having an age cutoff at 65, we don't think is a major deterrent to enrollment. We think there's plenty of patients over 65 that have low surgical risk that'll make that a popular trial. So if that gets at your question..

Okay.

And then no impact, Mike, I would imagine on eventual commercialization in terms of the low risk population you identified relative to that criteria?.

No, we still think it's attractive. And again, I'll refer you back to that graph. The patients that are under 65 with severe symptomatic AS, there's actually a pretty high percentage of those patients that are already treated today because they're great surgical candidates.

It's those older patients that are deemed probably not great surgical candidates or the ones that are left on the sidelines that now it becomes an attractive opportunity for them to have this opportunity at a higher quality life..

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

Good afternoon, Mike, and thank you for taking the question. Two things from me. First, talk a little bit about the European dynamic and the competitive situation with pricing et cetera. You talked about maybe 15% of volume as well as Germany being perhaps slower, but maybe just some more color there..

Yeah. Thanks, Ben. So, yeah, Europe again was a strong performer. We think that market growth was probably in excess of 20%. That was pretty impressive, especially when you consider it's been now like eight years since we introduced in Europe. We grew a little slower than that. I want to say we're in the high-teens range.

So, we probably gave up a little bit of market share in Europe that was not unexpected on our part. But the good news here is, I think in 2015 the overall growth for Edwards in Europe was something in the 25% range.

So, there has been so much therapy adoption that we've been able to have strong growth here, even in the face of this increased competition, which we had signaled right along..

And do you think, Mike, as a follow up, that with the new indications and as we go into later 2016 and to 2017, that you can actually start to retake share as you expand the market, whereas others maybe won't have that opportunity?.

We're fortunate that we have a very strong share position already. And as we probably indicate, we sell at a price premium and so we're going to continue to exhibit pricing discipline on our part and we like to think that the strength of our products will continue to differentiate us.

As I mentioned there, you got a number of new competitors and they seem to be around 15% of the overall procedures today. So, that gives you some kind of a picture of how things look today, and we feel pretty confident about the future..

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

Hi. Good afternoon. First of all, great quarter. But I wonder if I could ask a bit about the timing of the mitral CE Mark trial.

You're still talking about mid-2016, but if you – is there anything more you can provide about what that trial will look like, types of patients, how long of a follow up you'll have?.

Yeah. Thanks, Raj. Yeah, our intention, we signal this to – is to begin mid-year. As we indicated, we began our early feasibility studies in the U.S. right now. And we expect to learn a lot from those studies. And we're going to try and take advantage of that learning as we go through and design our CE Mark trial.

So, that design is not fixed at this point, so I don't have anything to share. But, again, as long as we – if we can have a good success with our EFS experience then we'd like to think that we stay on track and are able to get that.

And we'll let you know what the trial looks like, and it'll certainly be posted on clintrials.gov (sic) [clinicaltrials.gov] (44:42)..

Okay. And then just one on the PARTNER 3 Trial as well. The FDA is asking you to have this mobility, this leaflet mobility study.

Is there anything more you can provide about what they're looking for in that other than just looking at leaflet mobility? Is there a clinical component to that as well that they might be considering over time?.

Yeah. I probably don't have a deep, deep intimacy, but I think I can give you an overview of what's intended there. Recall, that the early observations were not conducted in a highly scientific trial with adjudication and follow up, et cetera.

And so, the idea here is to actually have randomized patients, 400 in our case, and we wouldn't be surprised to see other companies following a similar standardized imaging protocol and that this would actually be analyzed, so this would be covered in the short-term under our study, and so it would be regular follow up as part of this study with all of the bells and whistles that go along with a PARTNER 3 Trial, and then these patients to be followed on a longer-term basis using the registry.

So, there'd be a lot of science around this, and we'd have probably better data than we've ever had in the past.

And what we've been able to do is not just know whether there was some leaflet thickening that was viewed by imaging, but we get to find out is there a clinical consequence, were there any strokes, is there any mortality, is there any kind of clinical consequence to those kind of things, are they temporary and do they go away, et cetera.

We'll get more data than we've ever had on this, so it should be informative..

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

Hey, guys. Thanks for taking the questions. I guess, just first, getting back to your comment on U.S. hospitals seeing some TAVI capacity additions. I was wondering if you could quantify that in any way.

Are these sort of 5% to 10% capacity increases something larger than that, is that broad-based or in a few large centers? And I'm just asking in the context of sort of in the context of indication expansion, how do you see the 400-plus centers today stacking up against this potentially large population?.

Yeah. Thanks, Matt. Well, unfortunately, there is not a single theme here. We've seen a variety of behaviors across hospitals. Because of these procedures turn out to be shorter and more predictable, what it's done is it's encouraged hospitals. So within the same cath lab or within the same OR, they can get more cases per day.

And also, some hospitals are looking at this, I think, relative to the demand out there and also their own economics and they are just adding extra days. So maybe in the past they used to do these cases only on Tuesday and now they might happen on multiple days per week in that same hospital.

So for the most part, it's not, if you will, bricks and mortar that's driving the capacity increase, I think it's more of a redistribution of their own internal capacity combined with just the improving efficiency of these procedures..

Great. Thanks. And just my follow-up on the mitral feasibility.

Can you give us any color around how many patients are expected to treat there and what you need to see before you decide to move forward?.

Yeah. By its nature, the early feasibility studies are a low number of patients. And so, that's not going to be big. We expect there to be a lot of learning. As we said, it was going to be across seven centers.

And so, it's good about that, we'll get a chance to see, is it reproducible, can it be done in the hands of multiple talented physicians? And so, that will be the learning for us. It won't be big data like you see in a big pivotal trial, it will more be learning for us. I don't know the specifics.

I think the details will be posted on clintrials.gov (sic) [clinicaltrials.gov] (48:45), if it's not up there already..

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

Hey. Good afternoon, guys. Thanks so much for taking the question and congrats on an awesome quarter. Just a follow-up on the low-risk trial. Mike, I was wondering if you could give color on what FDA had in hand at the time of making the decision to move forward.

At that point in time, did they have the intermediate risk data? I mean I would assume that they would not move forward without knowing what that data is or at least having a very good sense. So, I was wondering if you could clarify..

Yeah. Thanks very much for the compliment. And to our knowledge (49:27), they do not have the intermediate risk, they do not know the results of the randomized intermediate risk trial, even at this point they don't know that.

They did have the benefit of the SAPIEN 3 30-day data and I think mostly what they were encouraged by was the fact that here was going to be a very rigorous randomized study that was going to be done. So, they didn't have to count on exactly how things have played out on the intermediate front.

They've obviously watched the data that was available closely. But I think this is more in the spirit of what we offered up was a highly rigorous study that's good science. So, I think they're highly interested and having that – to stay in front of clinical practice rather than let this slip away from them..

Great. Okay. That's helpful.

And then my next question is, as we do move into – intermediate risk coming online hopefully by year-end and then eventually low risk, at what point does cost effectiveness matter a lot more? And how do we think about that in the context of, number one, the clinical data that you collect, and number two, the potential impact to ASPs longer term? Because obviously you're talking about a significant increase in the addressable patient population and cost to the system..

Yeah. I think there are multiple factors that are going to influence the practice, and I think economics will certainly be a factor. They're going to – they'll look at how good is this clinical data.

So, they'll look at things like mortality and stroke, they'll look at the economics, they'll look at the quality of life for these patients and the heart team assessments. So, that will all get baked into the ultimate decision-making. We know from our past here when procedures were unprofitable that was deterrent for hospitals.

We think, under the current DRG, that the reimbursement is fair, and that most hospitals do pretty well on that. So, we don't think if it's a penalty like it might have been in the very early days of TAVR..

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

Hi, good afternoon. Mike, I think in your remarks you said that the intermediate data from the U.S. will be submitted in Europe. I think you said it, sometime this summer.

What's the timeline in terms of getting an expanded label in Europe for intermediate?.

Yeah. It's a good question. Yeah, that's exactly our strategy. We would take the data that becomes available right at the time of ACC and think about us packaging it right then and try and get it into our notified bodies. Our best guess is that it takes the most of 2016 to digest that, evaluate it, and fully probe it.

So, hard to predict, but we would think that a 2017 approval would be likely in Europe..

And just as a follow-up to that. Do you think this accelerates the European market? Is there any way you can quantify the number of patients that maybe on the sidelines in Europe that would benefit from this? Thanks..

Yeah. Thanks, Glenn. Yeah, I don't know if we have insight that's much deeper than yours. It's – we think it's common in Europe that their patients are on the sideline and that many people with AS don't get treated.

And just because of the kind of world that we live in, this information is going to travel, it's going to travel fast, and European clinicians are going to become well aware of what was presented at the ACC. So, do I expect there to be some influence? Yes, I do. I think the movement of the label will be meaningful.

The actual movement of any European guidelines will be meaningful. So those things will take some time. But I expect it to have impact, it's tough for us to assess exactly how fast..

Thank you. The next question is from Joanne Wuensch of BMO Capital Markets. Please go ahead..

Good evening. And very nice quarter. To continue that thought process, my impression is that intermediate risk patients are already receiving SAPIEN 3 procedures now.

So I guess, it's a two part question, how do you think this is really going to change the patients that are already being – have procedures on? But the second part of this is sort of what percentage of the patients in Europe do you think are intermediate risk already?.

Yeah. We think that the bulk of the patients that are being treated in Europe are high risk. If you track the average age of these patients it's consistently been over 80 years of age. And they go through a heart team assessment. And we sit here with our own definitions, but I think the heart teams have decided that these are high risk patients.

They take a look at the opportunity for them to go through surgery, and they have assessed it as high risk in their own way of looking at it, and that's what the guidelines say. So, it's difficult for us to say exactly what's going on right now, just because they have their way of assessing it, that's driven by their own heart teams.

And I think those heart teams are doing the very best that they can..

And then as a follow-up, what does it take for either in Europe or United States for them to change some of the guidelines, like a heart team assessment, at this stage, including a surgeon and an interventionist in the room seems a little silly, how deep we are in the clinical data and in the rollout of the product?.

I'm sorry, could you say it again? I want to make sure I get your question right..

The question really is what does it take to change some of the operating room and patient identification guidelines, either in Europe or in the United States?.

Yeah, I think the group is going to be highly data driven. They're going to take a hard look at this data, because they're going to have the highest quality data, probably more data on heart valve patients than ever has been available before, and that's going to influence them writing the guidelines.

And I think you're specifically talking about guidelines not the NCD I assume, right?.

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

Hi, thanks for taking our questions. Covered a lot of these issues, but I had just a couple of follow-ups, one on the gross margin for Scott, and you talked about this 1%, roughly hit to Q4 gross margins around this Critical Care changes that you made in manufacturing, that flows through to this year.

Is the right way to thinking, since you're kind of holding gross margins for this year, is the right way to think of the offsets to that, because you do have, as was mentioned, sort of more favorable mix, slightly higher TAVR, is the right offset to that just FX? How should we think about that sort of staying the same then?.

Yeah. Well, there's a lot going on in operations, generally, Critical Care and the rest of the company, as we continue to grow. And so the 74% to 75% guidance for 2016 reflects what we're investing in the business.

And you're right, the 1% for Critical Care was part of the operations investments we made in Q4 that brought it down from our original 75% expectation..

Okay. So, all right. So, there are just a lot of moving parts there, I guess, is the right way to think about it. The second was on the subject of intermediate, and to what degree we're already seeing some of that happening here in the U.S. and certainly in Europe. And I'd love to get your thoughts, Mike, on how far along do you think the U.S.

clinicians are in terms of their comfort, and taking a risk classification of four or five or something below the high risk level and together with the heart team deciding, okay, this is really ought to be a transcatheter valve based on frailty or the other things you talked about in the past.

Is that sort of pervasive? Is it a wave that's moving across the community over time? And then, also importantly, how do think that gets affected by the data, assuming it's favorable presented here at ACC?.

Yeah. It's a great question. We've tried to talk about it before. Remember, risk scores were established based on the risk to go through open heart procedures. Right? And so, again, that was the context. For example, age was not even part of a risk score. You can be over 90 and considered low risk.

Many clinicians look at that today and say, boy, I have a tough time believing that this 95-year-old is low risk, but that is the way that the STS score can characterize it today. What's good news for patients is, every one of those patients go through a heart team assessment.

That's part of what the FDA label calls for and also what the CMS, NCD calls for. And so risk scores are helpful, but they're not the only indicators that are used by clinicians. They'll include frailty, other factors like a hostile chest, et cetera, when they go through their assessment.

So we think people are being very diligent in terms of the way that they treat patients today. And I think you'd be misled to believe that there is some kind of broad use already by intermediate risk patients..

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

Hi. Good evening. Thanks a lot for taking the question.

I just wanted to ask about PARTNER 3 Trial design about the follow-up period, if you guys could delineate that and if it is 24 months, will there be an interim analysis at the 12-month follow-up period?.

So you're talking about – I want to make sure I'm clear.

Were you asking about PARTNER II or PARTNER 3?.

PARTNER 3..

Okay. So, yeah, it is a one-year follow-up, right..

Great..

So is that your question?.

That clears it up. Thanks. And do you have any – just on your comments earlier about the FDA not seeing intermediate risk data before moving forward with the approval of the IDE for PARTNER 3.

Do you have any sense in terms of your discussion with the Agency on what that means for your competition in terms of what are the criteria, what type of data they need in terms of which risk class in order to move forward with the low risk trial?.

I don't know what the implications are for competition in terms of low risk trial. Obviously, we reached agreement with FDA by proposing this very robust trial, 1,300 patients with – over age 65 with all of the adjudication that's associated with it. So very high quality research. And I would imagine that others would also follow that pathway, so..

Thank you. And our final question comes from Bruce Nudell of SunTrust Robinson. Please go ahead..

Thanks for squeezing me in. Mike, two questions. One, we certainly agree with you that most of this growth is going to be coming from, like, three-quarters from patients who are 75 and older who would otherwise not be treated.

Firstly, in the U.S., is there anything you need to do to proactively kind of recruit those patients or do you think just diffusion of the idea of TAVR will be enough to get them in the door over time? And secondly, ex-U.S., will there be a different sensitivity with regards to treating untreated 80-year-olds or can we view the ex-U.S.

markets as roughly equivalent to the United States in that regard?.

Yeah. Good questions, Bruce, and thanks for those. Yeah, in terms of recruitment, you can imagine, if you're a low risk patient and today your only option is an open heart valve replacement, if you had an option to enter a clinical trial where you could get a transcatheter procedure, that might be attractive to you.

So we don't expect to do anything unusual in terms of that. We continually try and support organizations like the ACC and the American Heart Association and individual hospitals as they raise awareness, but you shouldn't expect anything unusual beyond that.

In terms of OUS and what's going to be their policies, it's probably going to be driven primarily by how they approach it from a reimbursement perspective.

And so, what we're going to be prepared to do as part of our low risk trial is to also gather information on economics, gather information on the quality of life for these patients so that we can have a meaningful conversation with these payers around the world.

And what we're encouraged by is, we think you get a pretty good bang for the buck in terms of the quality of life and the extension of life with this kind of technology compared to many other kinds of healthcare. And we'd like to think that we can back it up with data..

Thanks so much..

All right, well, thanks, all of you for your continued interest in Edwards. Scott, David, and I welcome any additional questions by telephone. And with that, back to you, David..

Thank you for joining us on today's call.

Reconciliations between GAAP and non-GAAP numbers mentioned during this call which include underlying 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 13627506. I'll repeat those numbers, dial 877-660-6853 or 201-612-7415, and the conference number is 13627506.

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..