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

Brooks E. West - Piper Jaffray & Co. (Broker) Jason R. Mills - Canaccord Genuity, Inc. Michael Weinstein - JPMorgan Securities LLC Larry Biegelsen - Wells Fargo Securities LLC David Ryan Lewis - Morgan Stanley & Co. LLC Matt Miksic - UBS Securities LLC Bruce M. Nudell - SunTrust Robinson Humphrey, Inc. Raj Denhoy - Jefferies LLC Danielle J.

Antalffy - Leerink Partners LLC John T. Gillings - JMP Securities LLC Matt J. Keeler - Credit Suisse Securities (USA) LLC (Broker) Glenn John Novarro - RBC Capital Markets LLC Ben C. Andrew - William Blair & Co. LLC Joshua Jennings - Cowen & Co. LLC.

Greetings, and welcome to the Edwards Lifesciences Corporation's Second Quarter 2016 Earnings Call. At this time, all participants are in a listen-only mode. A brief 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 your host, Mr.

David Erickson, Vice President-Investor Relations. Thank you. You may begin..

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our second quarter 2016 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 this 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, reimbursement and commercial matters, as well as therapy trends and foreign currency movements. 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 2015 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 adjusted, 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 second quarter performance, which reflected significant growth in the number of patients and physicians choosing Transcatheter Heart Valve Therapy. Our results this quarter were better than expected driving strong top and bottom line growth.

Global sales grew 21% on an underlying basis, reflecting significant Transcatheter Heart Valve sales that once again drove the majority of this quarter's growth, with a solid contribution from Critical Care. In transcatheter heart valves, global sales were $419 million, up 45% on an underlying basis over prior year.

Growth was led by continued strong therapy adoption across all geographies, with notable strength in the U.S. Globally, average selling prices remained stable. In the U.S., Transcatheter Heart Valve sales for the quarter were $246 million and grew 66% on an underlying basis versus the prior year.

Overall procedure growth exceeded our expectations, and strong sales were widespread in both large and small hospitals. Positive clinical results continue to drive adoption, and clinician feedback on the intermediate risk trial data presented at the ACC conference has been consistently positive.

During the quarter, the final intermediate risk data sets were submitted to the FDA and we're awaiting for approval of the expanded indication. Although it's always difficult to predict regulatory timelines, based on the strength of these data, we anticipate that approval will be received during the third quarter.

As a reminder, intermediate risk patients continue to be treated through our Continuous Access Protocol of the PARTNER II trial, which has been tracking at close to $10 million in sales per quarter. This would end as commercial sales begin.

Enrollment in our PARTNER III low-risk trial is underway, and approximately half of our expected trial sites are active. As a reminder, this is a randomized trial and although difficult to estimate, we believe this trial should be enrolled by mid-2017.

And, at the request of clinicians, who want to offer this therapy to a broader group of patients, we're revising the trial protocol by removing the 65 years or older age qualification. Outside the U.S., underlying THV sales grew 23%, driven by the ongoing therapy adoption primarily in Europe, and a contribution from Japan.

We are pleased with the adoption seen in Japan following the launch of SAPIEN 3 earlier this year and we expect Japan to be a strong contributor to long-term growth. In Europe, we estimate total procedures grew around 25% in the second quarter, compared to last year or approximately 20% when adjusted for additional selling days this year.

Edwards procedures grew at about the same rates. While the PARTNER II data published in April was widely acknowledged, we do not believe it provided a significant lift in the quarter. We saw strong procedure growth across nearly all countries and particularly strong growth in countries outside of Germany.

While difficult to estimate, we believe more recent competitive entrants continue to account for about 15% of total European procedures. As we mentioned, we are using our U.S. intermediate risk data to request an expansion of our CE Mark indication.

These data were submitted to European regulators during the quarter and we continue to expect approval of an expanded label in late 2016 or early 2017. We expect gradual expansion into intermediate risk patients when the label is broadened and clinical guidelines are revised.

Our updated guidance anticipates that OUS sales may reflect a negative impact in the fourth quarter. The country of France has a policy that limits annual TAVR procedures. Strong therapy adoption there is outpacing this year's rate. We are working with the Ministry of Health in an effort to increase the procedure limit.

In the absence of resolution, we expect to discontinue sales in France for the remainder of 2016 when the cap is reached, and this assumption is reflected in our guidance. Given the strong performance of SAPIEN 3, we have decided to incorporate additional benefits into our new Ultra system before its introduction.

This will move the expected European launch to the second half of 2017. 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.

Questions about transcatheter valve durability, which were first discussed during a EuroPCR presentation, were subsequently more thoroughly addressed at the TVT meeting last month. Physician presentations suggested there is a lack of evidence that TAVR valve durability differs from surgical valves.

Edwards has always distinguished itself on the best-in-class performance in heart valves, and we remain confident in our SAPIEN platform and are generating long-term follow-up data in our PARTNER trials. In summary, based on our strong first half results and anticipated third quarter approval of intermediate risk in the U.S.

and momentum of global therapy adoption, we are increasing our 2016 sales guidance by $100 million to between $1.5 billion and $1.7 billion. We now expect our underlying sales growth to exceed 30%.

Turning to Surgical Heart Valve Therapy product group, sales for the second quarter were $199 million, a decrease of 3% over last year on an underlying basis. Sales of surgical mitral valves declined, which was partially offset by solid growth in surgical aortic valves.

Globally, sales of our surgical mitral valves were impacted during the quarter due to our identification of a production matter related to the holder that assists surgeons during implantation of the valve, which caused us to temporarily suspend production.

We have recently resumed shipping and expect a smaller impact in the third quarter as we replenish inventories. Worldwide surgical aortic valve units grew approximately 5% and global average selling price saw a slight decline due to regional mix.

INTUITY Elite drove sales growth in Europe, and in Japan, growth was driven by aortic valves and the adoption of the recently launched tricuspid valve repair system. During the quarter, we announced positive clinical data from our COMMENCE, TRANSFORM and FOUNDATION studies at the American Association of Thoracic Surgeons Meeting.

These compelling new data on more than 2,000 patients provide important clinical evidence on the benefits of new surgical treatments, including our RESILIA tissue and INTUITY Elite valve system. We anticipate approval in the near future of our rapid deployment INTUITY Elite valve in the U.S.

This system is built upon our proven pericardial valve technology and is designed to facilitate small incision aortic valve replacement surgery and streamline combination procedures. The U.S. launch will be deliberate and focused on adoption and ensuring excellent patient outcomes.

The valve system underscores our ongoing commitment to developing innovative surgical technologies to address patient needs. We continue to invest in multiple surgical platforms, as we believe that surgery will remain an important option for patients even as TAVR expands.

In summary, given our first half results, we're reducing our 2016 underlying sales growth expectation for the full year to between 0% and 2%, and we expect a meaningful contribution to growth from the INTUITY Elite launch in the U.S. In the Critical Care product group, sales for the quarter were $142 million and grew 7% on an underlying basis.

Overall growth for the quarter was strong in our core products and, once again, we recorded double-digit underlying growth in our Enhanced Surgical Recovery program. Our expansion of the U.S. sales team also stimulated stronger adoption of our market-leading products.

Based upon the strong first half momentum, we are increasing our Critical Care underlying sales growth expectation to between 5% and 7% in 2016. In structural heart initiatives, we continue to make progress on our FORMA system for reducing tricuspid regurgitation and our CardiAQ-Edwards transcatheter mitral valve platform.

In our early-generation CardiAQ-Edwards platform, we're in the process of implementing several enhancements, including new delivery systems and utilizing Edwards' advanced tissue. We Plan to incorporate these enhancements as part of our first CE Mark trial, and we expect to begin treating patients soon.

This trial, called the RELIEF trial, includes approximately 15 centers in Europe and Canada and will include Transapical and Transseptal delivery systems. This single arm study will include patients suffering from functional and degenerative mitral regurgitation.

You will hear more specific updates about this and other programs at future clinical meetings. In the legal matter that CardiAQ brought against Neovasc, a federal jury returned a $70 million verdict in our favor.

The jury found that Neovasc, a former service provider, breached the non-disclosure agreement, misappropriated trade secrets and breached its duty of honest performance. During the quarter, we completed two small acquisitions that add future-generation technologies to our transcatheter valve portfolio.

We remain committed to developing innovative structural heart therapies and, although it's still early, we continue to believe that these therapies will ultimately benefit patients who are not well-served today. And with that, let me turn it over to Scott..

Thank you, Mike. This quarter, the number of transcatheter procedures exceeded our estimates and drove total sales of $759 million, representing 21% growth over last year, excluding the effects of foreign exchange and the prior year sales return reserve.

Adjusted earnings per share in the quarter grew 33% versus prior year to $0.76, reflecting solid leverage. Our GAAP earnings per share of $0.58 includes $34 million of acquired intellectual property related to early-stage transcatheter technologies, as Mike mentioned earlier.

A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. For the quarter, our gross profit margin was 73.3%, compared to 74.3% in the same period last year.

This decrease, which we expected, was driven primarily by the foreign exchange impact from inventories sold internationally and a reduced benefit from our FX hedge contracts. These were partially offset by a more profitable product mix, reflecting strong growth in THV and the impact of the THV return reserve in the prior year.

As we mentioned last quarter, to accommodate our increased sales demand going forward, we are making significant investments in manufacturing capacity inside and outside the United States, including our new facility in Costa Rica.

These capacity investments moderately reduced our gross profit margin in the second quarter and are likely to continue to have a negative impact into 2017. These impacts are reflected in our full year gross profit margin guidance, which remains unchanged at 73% to 74%, excluding special items.

Sector quarter selling, general and administrative expenses increased 7% over the prior year to $229 million or 30.1% of sales. This increase was driven primarily by sales and personnel related expenses, partially offset by the suspension of the medical device excise tax.

We continue to expect SG&A, excluding special items, to be between 30% and 32% of sales for the full year. Research and development investments in the quarter increased 16% over the prior year to $113 million or 14.9% of sales. This increase was primarily the result of continued investments in our transcatheter mitral and aortic valve programs.

We expect our R&D investments, excluding special items, to be approximately 16% of sales in the second half. During the second quarter, we recorded $9 million in intellectual property litigation expenses, which have been excluded from adjusted earnings per share.

The expenses include litigation against Neovasc in the United States and with Boston Scientific, where we now have multiple litigation matters in the United States and Europe. Our reported tax rate for the quarter was 25.1%, up from 20.7% in the prior year period.

This increase was driven largely by the impact of our early-stage intellectual property acquisitions and our increased sales in the United States, our highest tax rate region. We continue to expect our full year tax rate, excluding special items such as this quarter's intellectual property acquisitions, to be between 22% and 23%.

Foreign exchange rates increased second quarter sales by $5 million compared to the prior year. Compared to our April guidance, foreign exchange rates boosted sales and favorably impacted earnings per share by $0.01 in the second quarter.

At current rates, which have been volatile, we now estimate an approximate $10 million favorable impact to full year 2016 sales compared to the prior year.

Brexit has obviously contributed to rate volatility, but the impact to our bottom line this year will likely be insignificant as most of the foreign exchange rate changes are expected to be offset by our hedging program. As a point of reference, UK sales represented less than 3%, of our global sales last year.

Free cash flow generated during the quarter was $153 million. We define this as cash flow from operating activities of $190 million, less capital spending of $37 million. Turning to the balance sheet, at the end of the quarter, we had cash, cash equivalents and short-term investments of approximately $1 billion.

Total debt was approximately $600 million. Average shares outstanding during the quarter were $217 million. We continue to expect average diluted shares outstanding for full year 2016 of $216 million to $220 million.

Turning to our 2016 guidance, given our strong THV momentum and expectation of continuing growth, we are raising guidance for full year 2016 THV sales to be $100 million higher than we forecasted last quarter. We now expect THV sales of $1.5 billion to $1.7 billion and total Edwards sales to be at the high end of our $2.7 billion to $3 billion range.

We continue to expect sales for Surgical Heart Valves within the range of $780 million to $820 million. And given the strong first half performance of Critical Care, we now expect sales within the range of $540 million to $580 million.

With today's increase in sales guidance, we now expect our adjusted earnings per share to be between $2.78 and $2.88 and we continue to expect free cash flow, excluding special items, to be between $500 million and $600 million.

For the third quarter of 2016, at current foreign exchange rates, we project sales to be between $720 million and $760 million, and adjusted earnings per share to be between $0.62 and $0.68. And with that, I'll hand it back to Mike..

Thanks, Scott. We are very pleased with our strong performance achieved through the first half of the year. As patients and clinicians increasingly prefer TAVR and based on the substantial body of compelling evidence, we remain as optimistic as ever about the long-term growth opportunity represented by transcatheter therapies.

Overall, we remain committed to aggressively investing in structural heart disease and critical care technologies. We are confident that this will result in more patients being treated with our innovative therapies and continued strong organic growth. 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 encourage you to mark your calendars for Thursday, December 8 when we will be hosting our 2016 Investor Conference in New York. This event will include updates on our latest technologies as well as our outlook for 2017. More information will be available in the next couple of months.

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

Thank you. Our first question comes from the line of Brooks West with Piper Jaffray. Please proceed with your question..

Hi. Thanks for taking the questions.

Can you hear me?.

We can hear you fine Brooks.

Can you hear us?.

Great. Mike, actually, you were fading in and out quite a bit in the first part of your prepared remarks. I was actually going to ask if it would be possible maybe for you guys to email out your script or post it to the website, because I felt like I did miss a lot of what you said. I'm sure we'll be useful....

Yeah..

...to try to piece it together..

Yeah. If it's helpful, I suppose if it's coming in clear now, we could maybe even read it again I suppose if it's helpful to you..

I don't know. I guess I'll defer to David Erickson on that, but I thought like I missed a lot of what was said in the first half of your remarks..

Okay. Well, we apologize for that and we'll make sure that the transcript is available..

Perfect. I guess let me ask just two questions. First of all, congratulations on another great quarter. If in terms of raising the guidance, the Transcatheter Heart Valve guidance by $100 million, it sounds like intermediate risk may be coming a little bit earlier, U.S. is doing a little bit better, Japan doing a little bit better.

Can you just kind of parse for us where you see that incremental Transcatheter Heart Valve volume coming from that constitutes that $100 million?.

Yeah. Thanks, Brooks. Some of it already happened in Q2, right? So you've got a – chunk of it was the Q2 beat. You're right. There is an element of it that comes from what might be a little bit earlier approval that might provide a little bit of a sales boost in the third quarter.

But some of it is just a reflection of the momentum that we have coming out of the second quarter. We've had two quarters of strong growth in the U.S. and Europe is growing nicely as well and Japan for that matter. So, you put those together, it's really more of a momentum issue..

Okay. And then I guess as a follow-up to that, Mike, where do you feel like the incremental patient is coming from? And I guess, specifically, if you look at the U.S. market, do you feel like – it feels like now you're truly starting to cannibalize the surgical business, is that where the majority of patients are coming from.

Do you still feel like patients are kind of coming out of the woodwork that wouldn't have been treated? Can you speak to that at all? I know it's a guesstimate, but would be helpful as well..

Yeah, I think as we mentioned, you may not have picked that up in our earlier remarks, but we saw growth in both large and small hospitals this quarter. So it was widespread and it was geographically dispersed across the United States. And I think the U.S. was probably the largest source of growth.

We don't think there was a significant number of patients that came from surgery. We think, by far, there was more patients that just plain came into the system. We continue to believe that there is an under treatment of patients, particularly with high risk and those flow into the system..

Perfect. Thank you so much..

Sure..

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

Thank you very much.

Mike, can you hear me okay?.

I hear you great, thanks..

Good. Congrats on a great quarter..

Thank you..

Let me follow-up on the question on the Transcatheter Valve business for a second. I'm wondering – we all have, Mike, our guesstimates with respect to how the market is bifurcated from extremely high risk, intermediate risk, down to low risk.

Some of the physicians that have published on it seem to think 60% or so in the low risk, intermediate maybe a third, and high and extreme risk maybe 10%. I'm wondering if you could maybe speak to that at this point. Given the volumes, it would imply that we are seeing some risk creep. I know you get the question a lot, but it would imply that you are.

I guess the underlying question is, what sort of impact do you expect in the intermediate risk approval to actually have, whether it be in terms of patient acquisition, new center development or anything else? Thanks..

Sure. Thanks for the question, Jason. Yeah, I realize that it must be confusing for people that are following it. And part of it is that risk ratification happened by STS score, and it's traditionally been done that way. And over time here, we've seen that risk scoring has changed, and it's changed in two ways.

One, just the way that STS evaluates the patients and their scoring system themselves, and the other is that heart teams themselves are playing a significant role in that and you know that they're bringing in play factors like frailty and anatomy that aren't captured in risk score, so age certainly being a key component of that.

So, I think what you're seeing right now is just a different view of patients. They look at somebody today and say, well, I consider them high risk for surgery, knowing the kind of results that they get with transcatheter heart valves.

I believe they're largely staying on indication as the NCD reinforces that, but we just have less precise estimates of what high risk, intermediate risk and low risk means compared to what we've had in the past. We continue to believe that the overall TAVR opportunity is more than $5 billion by 2021 and we're seeing that adoption.

In terms of what's going to happen when intermediate is approved, I think a couple of things. We try to remind you that we're treating patients under the CAP today, the continued access program. And so that would stop when this began.

And also, we tend to think that we'll see more or a ramp, if you will, a gradual ramp, rather than a step function when that approval takes place, so that's our expectation..

That's helpful, Mike. I appreciate that. Scott, one for you with respect to the guidance.

It looks like the TAVI upside that you generated, at least relative to consensus, on the top line gave you somewhere between 40% and 50% incremental margin to the operating income line just given the beat there relative to consensus, whereas the guidance that you've given, a $100 million increase in TAVI relevant to the increase on the bottom line, would imply a much lower incremental margin for the balance of the year.

Is that the spending – incremental spending – the surge in spending that you talked about last quarter and should we see a little bit better incremental margins as you roll off that surge, I guess, maybe in 2017? Thank you very much for taking the questions..

It is related to the capacity expansion activities we talked about. Just recall, for the $100 million guidance raise, part of that was already experienced in the second quarter along with the incremental profitability. So, about a third of that $100 million sales guidance increase will drop through to the operating income line across Q2, Q3 and Q4.

There is less benefit to gross profit and SG&A, primarily due to these investments we're making in manufacturing and the infrastructure that we need to sustain our growth and, also, we've got some incentive performance-driven compensation running through the P&L..

Okay. Thanks a lot. I'll get back in queue..

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

Thank you. And Mike, just two cents on the quality of the opening remarks. I would just email this around to people just because you were going in and out, and I think it's probably worthwhile for people just to catch everything that you said. I did want to get your commentary on a couple of items, Mike.

I heard your update on the mitral program and I was just hoping you could give us, number one, what are the gating factors, if any, at this point to starting the CE Mark trial? And then, I wanted to follow-up on the TAVR business. Thanks..

Thanks, Mike. First, thanks for the comment on the reception. What we'll do is we'll get that script up on the website just as soon as we can, if it's not up already, so that people can view it. In terms of the question, right now, we're teed up to start the CE Mark trial.

We really don't have obstacles in front of us other than just getting the sites up. So, we're ready to go to begin the trial. There are no internal hurdles or regulatory hurdles..

And then, Mike, you made some comments that when in and out on Ultra. I was hoping you could just explain exactly what you're doing. You said that you were incorporating some of the Ultra features into the product earlier.

Can you just go through that?.

Yes, thanks. Yeah, we said, given the strong performance of SAPIEN 3, we've decided to incorporate additional benefits into our new Ultra System before its introduction. This is going to move the expected European launch into the second half of 2017.

So then, remember that new system features an on-balloon delivery system and a next-generation sheath technology, and we expect it to make it easier to use, reduce possible complications and shorten procedure times..

Got it. Okay. And then, just circling back on the TAVR guidance increase, so if I look at what you reported this quarter versus the Street expectations, you exceeded the Street by about 10%, or call it like $36 million, $38 million.

So versus that $36 million or $38 million, you raised your guidance by $100 million, obviously suggesting that there is a fair amount of momentum in the business.

Can you just talk about what you're seeing in the business today versus maybe what you were seeing earlier in the year? Because we all remember January and you guys commenting on how strong the market was in December into January and that continued, obviously, (31:43)..

Yeah, we tried to reflect that in our remarks. Recall that we felt that the U.S. market grew more than 60% in the first quarter, and here we are even though coming off a larger base, it's growing again, in our view, more than 60%. So, this is pretty terrific market growth, and we would've expected it to begin to slow.

So that's one element that's stronger; and just the strength of the SAPIEN 3 data is putting us in a very favorable position as well and giving clinicians a lot of confidence. We were pleased with what's going on in Europe. We were glad to see the growth rate of Europe be 20%, and our growth tracked that.

And we have had continued discussions with FDA that cause us to believe that we'll get the intermediate risk indication in the third quarter. So just a strong momentum; looking at what's ahead, we feel pretty confident about our guidance..

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

Hey, guys. Thanks for taking the question and congrats on a great quarter. Hopefully, you can hear me okay.

Mike, you can hear me okay?.

Yeah, Larry, we hear you great. Thank you..

Good. All right. So, just one on international TAVR business, and then one on the – I'll be the bad guy – on the durability question.

So, in Europe, Mike, what drove the improvement in Europe from Q1 to Q2? And second, on Japan, it looks likes sales in the first quarter were about $15 million, increased to about $20 million, $25 million in the second quarter. I assume SAPIEN 3 drove that.

Can you just provide a little bit more color on what's going on in both of those markets? Thanks. And then, I have my follow-up..

Sure. Primarily in Europe, we're seeing market growth. We saw it, really, in all countries. We saw it step up in Germany, but we saw it step up even more in the countries that are less penetrated than Germany; and those had some pretty terrific growth rates during the quarter.

And then, the other thing that happened is we probably saw the share position stabilize in Europe in this last quarter, so that all contributed to that.

Did that get at your question?.

Yeah. And Japan, Mike, it seems like a pretty nice acceleration there.

It's $20 million, $23 million, $25 million in the quarter; closed at about $15 million in the first quarter, which is obviously a pretty nice pick up?.

Yeah, I'm not sure we broke out Japan. Japan is growing at a very high rate, but remember that's a small base and still a small contributor to OUS. And we have the launch of SAPIEN 3 that's going on right now in Japan, so that's helping drive growth..

All right. Fair enough. Then, Mike, on the durability question, obviously, there was some pretty un-rigorous data at PCR and some better data at TVT last month, I think you alluded to earlier.

I guess, what do you think is needed to kind of address the durability question? Are you seeing any impact in the market? Obviously, the results were stellar, so the answer is probably no, but what – and lastly, are there any long-term datasets from European registries like SOURCE that you think can help address this and when could we see more data? So, thanks for taking the questions..

Yeah. Thanks, Larry. Yeah, absolutely, there were some pretty sensational headlines and, certainly, those prompted questions. But to us, it really hasn't appeared that it's been a significant issue with clinicians. They remain enthusiastic about the impact that TAVR can have on their patients.

I'll remind you that EuroPCR that original – those headlines hit around mid-Q2 and they didn't appear to have near-term impact on overall therapy adoption in the quarter. We are committed to studying this. So when you talk about long-term data, we can't imagine there being better long-term data than what we can generate out of our PARTNER trials.

We have great datasets there, they're well controlled, and so we plan to pursue those patients on a long-term basis and follow those. And we think that will be the best way to really shine a light on the issue..

Thanks for taking the questions..

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

Good afternoon. Mike, just a quick review and then maybe couple of follow-ups for Scott, quick ones. So, Mike, we're sort of in this weird position, right, where we have very good data from intermediate risks, we don't yet have the approval I guess, and talking to your large centers sort of intra quarter, they see a lot of demand coming.

They're actually, if anything, worried about infrastructure at their center. So, it feels like they're hiring, they're training, they're making budget request for traditional infrastructure.

Can you comment on what behavior you've seen out of your largest centers or, frankly, large and small centers, given the impact of this quarter kind of prior to the approval? Have you seen a change in relative activity?.

Yeah, it really felt like more of a continuation of their efforts.

They're enthusiastic and they continue to optimize their own programs, continue to find ways to add capacity, so this is an ongoing dialog that's going on with all the centers, large and small, and we thought one of the things that was noteworthy this quarter is the growth that we've seen out of the medium-size and small-size centers.

In the past, it felt like there was an awful lot that came out of the largest centers, and it feels broader based at this point..

Okay, very helpful. And then, Scott, just a couple of quick financial questions. The first is just my favorite question on margins.

Your back half guidance basically implies that margins head higher as a percent of sales than sort of the first half of the year, but I think we're all expecting a sales inflection in the back of the year, so it seems hard for sales to inflect and margins to get incrementally worse.

So maybe you can give us some more specifics besides compensation or specific performance awards? And the second question is, and kind of related, on the new FASB stock-based comp guidelines, you're one of the companies that sees potentially a material benefit this year heading into next year, maybe your thoughts around that would be helpful? Thanks so much..

Sure, David. In terms of profitability, we are seeing pressure on just in terms of capacity expansion and we felt that a little bit, it's probably less than 0.5 points of gross margin in the second quarter, but we believe it would be higher than that as we look out to the second half of the year.

So, yes, we got incentive compensation, but what's really unusual in terms of this gearing from sales down to the bottom line is the investments that we're continuing to make to grow our capacity. In terms of the accounting change, we do plan to implement it in January 2017 as required by the accounting pronouncement.

If we would've done it last year, our earnings per share would've been something like $0.17 higher than they were, but given the potential for all the variability and how this is calculated, because it's based on our stock price and the option values that employee awards come with and how many of those options are exercised, it's risky to start making assumptions about what that's going to look like.

We're also thinking through how we're going to present this in terms of presenting our adjusted EPS and we'll get back to you on that as we look towards providing 2017 guidance at our investor meeting in December..

Okay. Thank you very much..

Our next question comes from the line of Matt Miksic with UBS. Please proceed with your question. Matt, your line is open, so if you would like to ask a question..

Hi.

Can you – sorry about that, can you hear me okay?.

We can hear you now, Matt..

Great. Thank you. So, just a follow-up on capacity and how the U.S. centers are adjusting to volumes.

Can you talk at all about some of the procedure optimization best practices in some of these larger centers that and how, as we think about how you're positioned to sort of address those and optimize procedure times, hospital stays and that sort of thing as these folks look to get more efficient today and going forward? And I have one follow up..

Yeah. It's a mix of things. Probably the single biggest one is that they're able to do more cases per day with SAPIEN 3 than they have in the past. And so that's adding capacity, and just adding a little bit of case per day adds an awful lot of capacity when you aggregate that.

That's also integrated with what's going on today with the minimalist approach, which includes conscious sedation, shorter ICU stays, you don't have to coordinate with an anesthesiologist the way you used to and so forth. And those are truly adding capacity to the system.

I think you broadly are watching people share best practices and improve their efforts across the board..

Okay. That's helpful. And just in terms of the speed of getting a procedure done.

If we think about the kinds of patients that (41:25) intermediate risk, you talked a lot about over the past year or so as difference between what's a low risk, what's an intermediate risk, what's a high risk patient look like, obviously, not just an STS score, but can you frame for us anything about how far we're tipping into sort of intermediate risk today on an STS basis and understanding there's co-morbidities and other elements that make a patient high risk and then how that might change as we get post approval just to give it sense of how these assessments may change in the back half of the year into next year?.

Yeah. I guess I know we try and talk about it a lot and this must be difficult if you're a couple of steps away from this. But the STS score is not becoming as relevant as it was in the past. The heart teams have really taken ownership of these issues of which patients and they're utilizing their judgment.

We think that broadly hospitals are saying on indication and that's been very clear, because remember you have an NCD in place that drives discipline in that regard. Having said that, if you are on the borderline of high risk and intermediate risk, might those patients be judged as somebody that should be treated today, yes, that's very possible..

Great. Thanks, Mike..

Our next question comes from the line of Bruce Nudell with SunTrust. Please proceed with your question..

Good afternoon. Wonderful quarter, of course. Mike, could you just – I have two questions.

Mike, could you just repeat what you said about France? And if things do go well and you get relief, what would that do to the $100 million raise in TAVR guidance?.

Sure. So, what we've said is that our updated guidance anticipates that OUS sales may reflect a negative impact in the fourth quarter, that the country of France has a policy that limits annual TAVR procedures and a strong therapy adoption is outpacing this year's rate.

We're working with the Ministry of Health in an effort to increase the procedure limit, but in the absence of a resolution, we expect to discontinue sales in France for the remainder of 2016 when the cap is reached, and that assumption is indeed in our guidance. So, we're not reflecting exactly how much, but that is a factor that's in there..

Okay, terrific. And then, on a day like today, you obviously don't need it. But I was wondering, could you just speak generally about the indication expansion trials beyond PARTNER III? UNLOAD was one of them.

I know you're probably going to tackle some of the asymptomatic patients as well as bicuspid patients who tend to be younger; like, when might we start to see results from that and how important is that – those trials and indication expansions to the ultimate size of the market, assuming you get to $5 billion, pretty easily with what you've got indicated now and including PARTNER III?.

Okay, yeah, on UNLOAD, I don't know precise timing, and although that's going to be a contributor, it's relatively small. Probably the biggest one that's not in our estimates, that when we say it's going to be larger than $5 billion in 2021 is asymptomatic patients.

And although that's not supported by current guidelines, we believe that patients with severe AF that have not yet presented with symptoms could benefit from earlier therapy. And it's an area that we have high interest. We've not yet established a timetable to begin studying the effect. It would be a groundbreaking trial.

And we'd expect that there would be significant debate among the clinical community and regulators on the trial's specifics and merits. So, that's one that we'll have to stay tuned on..

Thanks so much..

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

Hi, good afternoon.

I wonder if I could ask, after a quarter like you just posted in terms of the capacity in the United States, in terms of the number of centers, do you start rethinking the numbers of centers that could do that when you post a quarter like you just did?.

Yeah. We're estimating that the number of centers that we're serving in the U.S. now is around 450. And there are centers that are finding ways to add the capability to be able to get within the NCD; generally, that's happening slowly, but it's happening steadily and it is a contributor to growth..

So do you – I think at one point you talked about maybe 400 or plus or minus kind of centers being your view on how many there should be.

Can you give an updated thought on how many centers you think we could ultimately get to in the United States?.

It's a tough one. I mean the fact that we're 450 now and probably approaching 500 is probably a newer estimate based on what we've actually experienced. It is difficult for us to project in the future and it gets affected by the level of consolidation that's going on in the U.S. hospital industry.

So, difficult for us to decide exactly where that comes out at this point, Raj..

Okay. And then just one quick on mitral. I appreciate your moving forward with CardiAQ valve.

What are your current thoughts on repair products for functional disease? Do you feel the necessity to have sort of a complete portfolio and to move forward with those types of products as well?.

Yeah, it's a great question, Raj. We think about it a lot at Edwards. We have been believers for some time that it will take a tool kit to address mitral regurgitation and heart failure, and that its unlikely that any single product is going to be a silver bullet that's going to take care of all patients.

So, we continue to have a high level of interest in repair as well as replacements and it's one that we pay a lot of attention to..

So, will we hear more soon I guess or?.

If we have something to share, we'll of course do that, Raj..

Fair enough. Nice quarter. Thanks..

Thank you..

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

Good afternoon, guys. Thanks so much for taking the question and congrats on an excellent quarter. Mike, I'm just going to ask the intermediate risk question maybe another way, any updated thoughts on potential ultimate penetration of that market, and how quickly you can get there? Number one.

And number two, what that does to the outlook for the surgical valve business and how we should be thinking about that business growing over the medium- to long-term?.

Yeah, thanks. We feel really good about intermediate risk, and we felt like we had some pretty spectacular results, obviously, that suggests that the treatment with SAPIEN 3 is even better than surgery. And so, that part is very encouraging for us.

But we know the practice of medicine has traditionally been slow to change and that that's going to take some time. So, we more think in our mind that it's going to be a gradual, but steady, increase. We're yet to see if that really changes the total addressable market.

We've always believed that we would have intermediate risk approval and that was in our more than $5 billion estimate that we put out there when we did our Investor Conference last time. When it comes to the impact on surgical valve, you recall that we continue to have growth in aortic valves. They grew about 5% just this last quarter.

So, we have not changed our view that surgical valve business is going to grow in the face of TAVR expansion. And there are several factors there.

You've got the ageing global demographics working in your favor; generally, under-treatment of patients; there's more innovations of high value, like INTUITY; you got tissue to mechanical conversion; and, the emerging markets are getting wealthier and able to treat their patients.

So, all those factors, we think, are going to be ones that drive growth in surgery for a while..

And if I could follow up on intermediate risk, if you use the high-risk indication as a proxy, it looks like market growth has exceeded expectations on two fronts. Number one, it sounds like the aortic stenosis market, patients getting diagnosed and referred, is much larger, and then, of course, just the penetration of TAVR into the high-risk market.

And I guess I'm wondering if the intermediate risk patient population is different in a way that we would not see – we could not use high risk as a proxy for intermediate risk.

Does that make sense?.

Yeah, I think I understand. We've struggled with this, Danielle. I think we've mentioned this in the past. We probably have a greater sense of vision for the long-term than we do in the short-term. It's very difficult for us to estimate what's going to happen quarter-by-quarter or even year-by-year.

We believe that this is very successful therapy and that the data has demonstrated that it's excellent for these patients and they should get treated; in the absence, a patient – they've got a pretty poor prognosis.

So we think that, ultimately, they're going to be treated, and much of this is going to depend on basically the message being out there and the referral system working. So, it's a judgment call, but we believe that this technology will continue to improve; and as it improves, more and more patients will be treated..

All right. Thanks so much..

Our next question comes from the line of John Gillings with JMP Securities. Please proceed with your question..

Hey, guys. Thanks for taking the question.

Can you hear me okay?.

Yeah. It's a little bit weak, John, but we hear you..

Okay. Thanks. I'll try to talk a little louder. So, just quickly on the mitral side, you mentioned the positive jury verdict in the trade secret case against Neovasc, but there are still a number of issues that are being resolved in the post-trial motions, including whether or not there will be an injunction.

And given that there are a limited number of KOLs and centers with the qualifications to run these kind of trials and that a lot of them don't want to do – trial two devices at the same time, if an injunction comes through, could we potentially see faster enrollment rates for the CardiAQ-Edwards valve and potentially shorter time lines to commercialization?.

Thanks for the question. As you know, we are waiting for the judge to render a decision on several outstanding matters, and that includes an injunction and patent ownership. So, there is the potential for multiple trials to be ongoing. We don't think that Neovasc is so advanced that they have the whole mitral clinical community tied up.

So, I'm not sure that that's going to be a major factor. We think we do have access to some of the best centers in the world and we look forward to being able to get that without limitation..

Okay. Thanks.

And then, maybe just quickly to follow-up on Raj's question earlier on the repair side in mitral, any color you'd be willing to offer on your investment and option on Harpoon?.

Yeah, well, we continue to like that investment. I think we talked about it a few quarters ago when we put it in place. And it's indicative of that feeling that we have that mitral repair might actually have an important place in the future.

We like that particular investment because it allowed us to make a reasonable and nominal one on what we think is very promising therapy, but wait to see how the data turns out; and if it looks good, we have an option to actually acquire the company. So, we're pleased with that as a strategy and would do more like that..

All right. Thanks a lot guys and congrats on the quarter..

Thank you..

Our next question comes from the line of Matt Keeler with Credit Suisse. Please proceed with your question..

Thanks for taking the questions, guys.

Just one – first, a clarification, I think the color around Europe and the accelerating TAVI growth, did you say the impact of selling days added 5% to the quarter? Did I hear that correctly?.

Yeah, essentially we think about 5% – isn't it, Scott, 63 days versus 60 days a year ago?.

Yeah, which translated into about 5% benefit to underlying growth. And on a consolidated basis, it contributed to about 1.5% additional growth in the quarter for all of Edwards..

Okay, so no benefit in the U.S.?.

Yeah, you know, just broadly in Europe, our team feels that that patient population keeps percolating into TAVI and that there is an increase, but without a surge..

Okay, that's helpful. And then, just on gross margin, you mentioned added expenses that will continue into 2017, and I would think that some of that, including hiring, training, overtime, would be more frontloaded or temporary.

So, is that a reasonable way to think about it? And do you think that some of the spend will come off as we get into next year?.

Yeah, I'd group it into a couple of different categories. One is, just near-term, as you can see just through our gross margin line, we're pursuing multiple avenues to increasing capacity, and those costs are coming through in the form of overtime and hiring and training at our existing facilities.

We're expediting logistics to move product around the world. We're adding production equipment. We're rebalancing capacity between our facilities. So, as you look out to 2017 and beyond, we're expanding our existing facilities and we're going to open new facilities, including our new plant in Costa Rica.

We will get leverage as we increase that capacity, but for the short-term, for those two reasons I just mentioned, we're going to have some continued pressure on the gross margin line..

Great. Thanks for taking the questions..

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

All right. Hi, good afternoon. I think, Mike, I think you talked about the mitral trial in Europe, 15 centers starting soon.

Could you give us the number of patients and the length of follow-up for that trial?.

Yeah, thanks for the question, Glenn. No, we didn't lay that out. And some of that is somewhat variable still. So, it's not clear, it's going to depend much on how we do..

Okay.

When you put out the press release announcing the first implant, will we get that level of detail?.

I don't know that we'd put a press release out on the first implant. Well, I would say that would be unlikely. You are more likely to see updates at the clinical meetings. Our clinicians, they love to talk about their clinical results. So, that's where I'd expect an update.

If we have something meaningful, we will certainly talk about it on our quarterly calls..

Okay. And then one last question, did I hear you correctly that you've started litigation against Boston Scientific and their Lotus valve? And if so, are you enforcing – are those the Anderson patents that you're enforcing? Thank you..

Yeah, thanks. A matter of fact, there are cases. The litigation actually was initiated by Boston Scientific, which disappointed us. But in response, we have also filed litigation against them. So, there are going to be some European cases there that come to trial early next year..

Okay. Great. Thank you..

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

Hi. Good afternoon, Mike and thanks for taking the questions.

Is there an opportunity, kind of as revenues have grown so quickly, to see sort of more leverage on SG&A? And what I'm getting at it is, as the centers improve their productivity, you're not adding as many centers, is it kind of more efficient case coverage and therefore more leverage as you go over the next several quarters on the operating side?.

Yeah, thanks for that, Ben. Yeah, I think your assumption overall is a good one; if all of the growth were to come in transcatheter aortic valves, that certainly should be a source of leverage, because as you correctly note, there is a limited number of centers engaged.

But remember, we're also pursuing a number of other growth opportunities that might require investments in SG&A. So, we hesitate to make long-term projections about the SG&A rate, because we don't have clarity on those other investments..

Okay. And then, Mike, you've mentioned a couple of small acquisitions in the quarter, maybe talk a little bit about what those are related to? And is there a particular area of technology innovation that's you're interested in for transcatheter specifically..

Yeah, these are transcatheter technologies that probably provide opportunities for us that are more long-term in nature.

They include intellectual property and some know-how that we're very happy to get, and it's too early for us to share the particulars that are associated with that, but I think it's indicative of what you should expect from Edwards, which is we're going to continue to invest in next-generation systems, and even though we're enjoying a lot of success with SAPIEN 3 right now, we think we have the opportunity to make the next-generation technologies much better..

Okay. And then, one last quick one. Bruce tried to get you to give us a number for France if they raise the quota. Is there any kind of an estimate there? Is that a $5 million, $10 million, $20 million opportunity? Thank you.

It's Scott. We haven't given the number. It's mixed into the overall guidance range they we're talking about. So, bringing up guidance to $100 million including the second quarter results and we're just not going to get into how the model works, but it is in our guidance for the second half..

Yeah. And the other thing I will add is, we're still hopeful it doesn't come to that, our primary goal is to get the cap increase so that we can address patients that need the therapy..

Of course. Thank you..

Our final question comes from the line of Josh Jennings with Cowen. Please proceed with your question..

Hi, good evening, gentlemen. Thanks a lot. I just wanted to ask about, I believe that MedStar is enrolling a low risk trial, single arm.

Do you guys – I hate to ask you about it, a trial that you're not sponsoring, but do we know anything about enrollment and whether or not we'll see any data out of that trial in 2017 prior to entering enrollment of PARTNER III..

Yeah, thanks for the question. But no, we're not a sponsor of that trial, so we really don't have insight much as to what they're doing. We're obviously focused on our PARTNER III Trial, that's what we think of greatest importance and has the opportunity to change the indication in the future..

Great. And just a follow-up question. I just wanted to ask about European guidelines. And my understanding is the timing for guideline update is next year for an intermediate risk.

Is there any path for accelerated guideline update? And then just to follow-up on some of the questions about pre-intermediate risk approval utilization in those borderline cases in the U.S., any color on what's going on and what you expected to happen prior to the guideline update would be helpful? Thanks a lot..

Yeah. Thanks, Josh. In Europe, it's our expectation that that's going to be a pretty deliberate process. As we indicated, we submitted our data that came from PARTNER II and that we would expect a CE Mark to occur somewhere around the first of the year. But we think guidelines probably don't get changed till possibly the third quarter of next year.

They have a pretty standard process they go through. Having said that, guideline changes are helpful in Europe, but they're also – it's going to be somewhat dependent on what their decisions are on a country-by-country base related to their reimbursement. In the U.S., probably the best guidance we have right now is what we just did for the quarter.

As we try and project ahead and know exactly what clinicians would do, it's difficult for us to say. We hear a lot of positive messages, but we also believe that people are going to stay disciplined on indication and that our teams are the ones that are really driving the therapy adoption at this point.

So, it's probably all the help that I can provide at this point..

Thank you very much..

Okay. Well..

There are no questions at this time....

All right. Thank you very much for your continued interest in Edwards. Scott and David and I welcome any additional questions by telephone. So, let me turn it 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 13639912. I'll repeat those numbers, 877-660-6853 or 201-612-7415 and the conference number is 13639912.

Additionally, an audio replay will be available on the Investor Relations section of our website. And I will also add that the transcript will be post at the website as soon as we can get to it here this afternoon. Thank you very much..