David K. Erickson - Edwards Lifesciences Corp. Michael A. Mussallem - Edwards Lifesciences Corp. Scott B. Ullem - Edwards Lifesciences Corp..

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

LLC Bob Hopkins - Bank of America Merrill lynch Glenn John Novarro - RBC Capital Markets LLC Danielle J. Antalffy - Leerink Partners LLC Ben C. Andrew - William Blair & Co. LLC Joanne Karen Wuensch - BMO Capital Markets (United States) Joshua Jennings - Cowen & Co. LLC Kristen Stewart - Deutsche Bank Securities, Inc.

Matthew Taylor - Barclays Capital, Inc. Chris Pasquale - Guggenheim Securities LLC.

Greetings, and welcome to the Edwards Lifesciences Third Quarter 2016 Earnings Conference 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.

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

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third 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 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, reimbursement and commercial matters, as well as trends in therapy adoption 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. And now, I'll turn the call over to Mike Mussallem.

Mike?.

Thank you, David. We're pleased to report strong third quarter underlying sales growth of 18%, which was consistent with our increased expectations. 2016 has been a remarkable year for our company with year-to-date sales growth rate of 20%, about double our original expected growth rate.

This reflects continued strong global adoption of our SAPIEN 3 platform, which remains on track to generate over $300 million more in sales than we originally expected for the year. During the quarter, we're also pleased to receive a number of important regulatory approvals in each of our business units to drive future growth.

Consistent with our strategy, we are aggressively investing to bring breakthrough therapies to an even broader group of patients around the world. In Transcatheter Heart Valves, global sales were $410 million, up 37% on an underlying basis over the prior year.

Growth was led by continued strong therapy adoption across all geographies with notable strength in the U.S. and Japan. Globally, average selling prices were stable in each geography. In the U.S., Transcatheter Heart Valve sales for the quarter were $260 million and grew 55% on an underlying basis versus the prior year.

Overall, growth was consistent with our expectations with robust performance driven by continued strong procedure growth in both large and small TAVR programs.

As expected, in mid-August, we received FDA approval to expand the use of SAPIEN 3 for intermediate risk patients, which is the first TAVR therapy to obtain this indication in the United States.

The high volume clinical sites already treating intermediate risk patients are under our Continued Access Protocol, and they have now transitioned to commercial sales. Enrollment continues in our PARTNER III low-risk trial, with more than 50 of our trial sites actively engaged.

We believe this randomized trial should be enrolled by mid 2017, and we'll provide an update at our December Investor Conference. Outside of the U.S., underlying THV sales grew 15%. We continue to be encouraged by the strong adoption of TAVR in Japan, with the rollout of SAPIEN 3 expected to be completed during the fourth quarter.

In Europe, we saw strong procedure growth across the majority of countries. We estimate total procedures grew around 20% in the third quarter compared to last year. However, Edwards' growth rate was lower primarily due to reduced selling in France.

We are pleased to be resolving the issue we described last quarter, related to the French policy that effectively limited the number of TAVR procedures in 2016. Very strong therapy adoption caused the CAP to be reached during the third quarter, earlier than expected.

As a result, we reduced shipments in the third quarter, which impacted our sales by about $5 million. Fourth quarter results will also be impacted as we have just now resumed shipments and expect to return to a near normal run rate by year-end.

Our 2016 sales guidance reflects the current situation, and we are working toward a long-term resolution for 2017 and beyond. Also during the quarter, we received an intermediate risk indication for SAPIEN 3 in Europe.

We continue to anticipate gradual expansion into these patients as clinical guidelines are revised and reimbursement policies are updated. We continue to expect that our new Ultra system, featuring an on-balloon delivery system and next-generation sheath technology, will be launched in Europe in the second half of 2017.

We anticipate routine clinical updates on our SAPIEN platform at the upcoming TCT meeting. These include long-term PARTNER I data and quality of life data from PARTNER II. Although we anticipate an update on the CENTERA system, we expect a more robust dataset at EuroPCR in 2017.

In summary, based on our strong year-to-date results, we are reiterating our 2016 THV sales guidance of between $1.5 billion to $1.7 billion. We continue to expect our 2016 underlying sales growth to exceed 30% as momentum of global therapy adoption remains strong.

Turning to the Surgical Heart Valves, sales for the third quarter were $191 million and were flat compared to last year's results as mitral valve sales recovered and grew slightly while aortic valve sales declined modestly. Globally, our ASP was slightly higher due to product and regional mix.

We have addressed the surgical mitral valve production matter that affected us last quarter. Globally, sales are recovering as inventories are being replenished. In the third quarter, global surgical aortic valve sales were soft, which we believe was due to the impact of TAVR including a possible pent-up demand among U.S.

intermediate risk patients and a slow over effect from the mitral shortage. This quarter, we received two approvals for our innovative surgical valve platforms designed for the future needs of patients requiring surgical interventions were not indicated for transcatheter therapy. Our INTUITY Elite system was approved in the U.S.

Clinician feedback from the initial implants has been positive, and we're positioning INTUITY Elite as a premium valve procedure and supporting it with the evidence of a strong value proposition. We also recently received the CE Mark for our INSPIRIS RESILIA aortic valve.

The first in a new class of resilient heart valve that we expect to become our leading surgical valve platform globally. We're planning an initial introduction of INSPIRIS in Europe during the fourth quarter with the full launch expected in 2017.

In summary, given our year-to-date results, we continue to expect 2016 underlying sales growth for the full year to be between 0% and 2%. Although, we believe we're beginning to see the impact of TAVR, we expect our new product launches will lift our growth in 2017.

In the Critical Care product group, sales for the quarter were $138 million and grew 3% on an underlying basis. Our results were driven primarily by double-digit growth of our Enhanced Surgical Recovery Program across most regions. As expected, growth was lower this quarter due to prior-year comparisons.

As we announced previously during the quarter, we received CE Mark for a key new technology. The Acumen HPI software suite with our new flow track IQ smart disposable. This system provides the first of its kind hypotension or low blood pressure probability indicator during hemodynamic monitoring.

Both are planned for targeted commercial release in Europe this year with a full launch in 2017. Based on our year-to-date results, we are maintaining our Critical Care underlying sales growth expectation to be between 5% and 7% for 2016.

In our 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 CardiAQ mitral valve replacement program, we are focused primarily on system enhancements and gaining clinical experience.

Our clinical investigators believe that a less invasive transseptal approach will be preferred for treating patients suffering from mitral regurgitation and heart failure. During the third quarter, our investigators began treating patients with our improved transseptal delivery systems in our U.S. early feasibility study.

Our CE Mark trial is expected to begin soon. This trial, called the RELIEF trial, has been delayed due to more challenging regulatory processes than were anticipated for our most recent submission.

As we indicated last quarter, the RELIEF trial is expected to include approximately 15 centers in Europe and Canada and will include transapical and transseptal delivery systems consistent with the desires of our clinicians.

This single arm study will include patients suffering from functional and degenerative mitral regurgitation, and we expect clinical program updates will be shared at scientific meetings in 2017.

In our FORMA program, we have begun our CE Mark trial, the SPACER trial to evaluate this technology in patients with clinically significant symptomatic tricuspid valve regurgitation who were at high risk for surgery. The former device is a spacer placed within the native tricuspid valve, designed to improve valve performance and patient symptoms.

The primary safety endpoint is 30 days with longer term follow-up. We are also engaged in a U.S. early feasibility study, and expect a presentation at TCT next week on our compassionate use experience. And now, I'll turn the call over to Scott..

Thanks, Mike. Another strong performance in transcatheter valve sales drove significant top line and bottom line growth this quarter versus the prior year. Our results were consistent with our guidance, which we raised three times this year as we delivered underlying sales growth of 18%.

Adjusted earnings per share grew 26%, reflecting significant leverage during the quarter. Adjusted earnings per share was $0.68 and GAAP earnings per share was $0.65, which includes our customary adjustments for intellectual property litigation expenses and amortization of intangibles.

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 72.8% compared to 76.2% in the same period last year.

This decrease, which we expected, was driven predominantly by the same foreign exchange factors that negatively impacted our gross margins in the first half of 2016. We expect this to continue through the fourth quarter, and our full-year 2016 gross profit margin guidance remains unchanged at 73% to 74%, excluding special items.

We expect gross margins to strengthen in 2017, as product mix improvement continues. And we'll discuss those expectations at our Investor Conference in December. Turning to selling, general and administrative expenses, third quarter expenses increased 8% over the prior year to $230 million or 31.1% of sales.

This increase was driven by sales and personnel related expenses, primarily in Transcatheter Heart Valves, 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.

We have increased investments in structural heart initiatives with the benefit of this year's medical device excise tax suspension. R&D investments in the quarter increased 12% over the prior year to $113 million or 15.3% of sales. This increase was primarily the result of continued investments in our aortic and mitral transcatheter valve programs.

We expect our R&D investments, excluding special items, to be between 15% and 16% of sales in the fourth quarter. Our reported tax rate for the quarter was 23.7%, up from 21.6% in the prior-year period. This increase was driven by improved results in the U.S., our region with the highest tax rate.

We continue to expect our full-year tax rate, excluding special items, to be between 22% and 23%. Starting in 2017, our tax rate will reflect the new accounting standard for employee stock option exercises. It is difficult to predict the impact given the uncertainty of these exercises and our stock price.

Rather than simply reflecting the expected benefit of this accounting change in 2017, our intention is to provide adjusted earnings per share guidance that excludes this impact, to facilitate transparent year-over-year comparisons. Foreign exchange rates increased third quarter sales by $8 million compared to the prior year.

Compared to our July guidance, FX rates favorably impacted EPS by $0.01 in the third quarter. Free cash flow generated during the quarter was $158 million. We define this as cash flow from operating activities of $206 million, less capital investments of $48 million.

Turning to the balance sheet, at the end of the quarter we had cash, cash equivalents and short-term investments of approximately $1.2 billion; total debt was approximately $600 million. Average shares outstanding during the quarter were 218 million, which is consistent with our assumption for the fourth quarter and full year.

Now, turning to our 2016 guidance. For 2016, we are reiterating all of our full year sales guidance ranges. For Transcatheter Heart Valves, we continue to expect sales of $1.5 billion to $1.7 billion. For Surgical Heart Valves, we expect sales of $780 million to $820 million; and for Critical Care, we expect sales of $540 million to $580 million.

For total Edwards, we continue to expect sales at the high-end of our $2.7 billion to $3 billion range. Given our strong performance in the third quarter, we are increasing our guidance for adjusted earnings per share to be between $2.82 and $2.92.

And we continue to expect free cash flow, excluding special items, to be between $500 million and $600 million. For the fourth quarter 2016, at current foreign exchange rates, we project sales to be between $750 million and $790 million and adjusted earnings per share to be between $0.67 and $0.77. And with that, I'll hand it back to Mike..

Thanks, Scott. We are very pleased with our strong year-to-date financial performance. As patients and clinicians increasingly prefer TAVR, we remain as optimistic as ever about the long-term growth opportunity.

We are committed to aggressively investing in our future, consistent with our focused innovation strategy, and we are confident that these investments will result in innovative therapies that will enable us to treat a broader group of patients and drive 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'd like to remind 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 coming weeks on our website.

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 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. And thank you. Our first question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed..

Hi. Good afternoon, guys. Thanks for taking the question. Let me start, Mike, with the U.S. and the intermediate risk indication. Can you talk a little bit more about what you're seeing since the approval in August, even though you had very strong growth this quarter, I think people will look at the deceleration in the U.S. TAVR growth in Q3 versus Q2.

We had heard at the Cleveland Clinic that maybe there was some confusion about the reimbursement, whether it was already in place for intermediate risk. So, any update you can give us there would be helpful. And I do have a follow-up..

Sure. Yeah. Happy to take the question, Larry. Yeah. We're pleased with the sales performance in the quarter, and 2016 in general. Pretty much the approval came as we expected in terms of the approval timing and in terms of what we thought our sales will be, actually the U.S. probably came in just slightly stronger than what we anticipated.

So, it's pretty consistent with our expectation. Remember, we have a growth rate that I think was 55% in the quarter compared to something that was in the 60%s last quarter. So, not a lot of difference there. And I don't know that you should read too much into that..

That's helpful. And then, you grew, again I think about 21% in the second quarter, 18% underlying in the third quarter. But I think the Q4 guidance is about 13% to 19% growth. So, what would get you to the high end versus the low end there? Thanks for taking the questions..

Yeah.

Are you talking about what fourth quarter might be globally for Edwards?.

Yeah. The guidance implies, I think, about 13% to 19%.

So, just trying to understand kind of what gets you to the low end versus the high end there?.

Yeah. I think our guidance tried to speak for itself. We had felt going into this quarter that we were going to end the year toward the high end of that range, that put us close to $3 billion and we continue to feel that way. So, and given that this quarter was pretty consistent with what we expected, we think the fourth quarter will also go that way.

I don't know what other color to offer, Larry, but we feel pretty good about the way things are going. The situation in France was one that was unexpected. We didn't expect it to hit us in the third quarter. So that was a little bit of a curve ball, but not much else is off track..

Thanks for taking the questions, guys..

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

Thanks for taking the questions. Mike, I know that it sounds like the OUS performance, maybe ex-France, was in line with your expectations, but you're the victim of your own success, unfortunately. The company has beaten your own expectations and Street expectations on revenues nine straight quarters and earnings 13 straight.

So that's why you've got some consternation on the phone tonight. So, Mike, when you look at the market and the dynamics in particularly with intermediate risk coming in the quarter here in the U.S.

and then later in the quarter in Europe, anything changed your thoughts on the trajectory of the business or any reason why you think there was some slowdown sequentially versus what we've seen in the prior few quarters?.

No. I really don't have a reason to talk about a sequential slowdown, Michael. I mean, as you know, the numbers are getting larger every quarter. So, there's something to consider there. But when we go to the big picture, we continue to think we're early on in the TAVR adoption cycle.

We expect this to be more than $5 billion in 2021 and to grow quite a bit beyond that. I wouldn't read too much into any particular quarter, we're very pleased to get this intermediate risk; it came pretty consistent with what we thought.

The labeling is quite consistent with what we thought, and it's just going to take a little time for people to change their practice. I don't think anybody – if they are anticipating a step function then they must not be following exactly the way this has grown. Generally, it's been more of a gradual ramp for us..

Understood. Let me ask you just one question on the CardiAQ program if I can. It sounds like you are expecting to be proud (23:33). If we look forward to 2017, do you think that you'll be in a position given you just started the U.S.

feasibility and a release study is just about to get underway that you would have some 30-day data at PCR, or do you think we're probably waiting until TCT to see that?.

Yeah. I hate to project when we're going to have results, Michael. I mean, you know this is a high priority program. We're very pleased to be enrolling patients with a transseptal delivery system in the U.S. and actually our clinicians and candidates in Europe are looking forward to that as well.

But we'll try and give you a little bit more guidance at the Investor Conference in terms of what to expect in 2017..

That would be great. Thanks, Mike, for taking the question..

Sure..

Thank you. Our next question comes from the line of Matt Miksic with UBS. Please proceed..

Hi. Thanks for taking our questions. So, one question. Just looking at the, call it, deceleration, but, I guess, lower year-over-year growth in the third quarter versus the second quarter. That does not all that dissimilar to what we saw last summer, and in the third quarter compared to the second quarter.

And then I'm just wondering if you could speak to any color on – is there a seasonal pattern here we should pay attention to that to play? Is there a transition to centers that are ramping up in advanced and intermediate indication that that is a factor here we should be mindful of putting aside how great this opportunity is over the long term? And then I have one follow-up..

Sure, Matt. Yeah, a couple of things. One is that yes, we always see a seasonal impact. So, it's not unusual for us to be slow in July and August and for that to strengthen in September, and that's indeed the way the third quarter went. If we start looking around the country, we saw both large and small hospitals grow.

Remember what we said about the continued access, switching off so you had the 50 – which in many cases were the largest centers that flipped over from doing clinical cases to doing commercial cases. So you should keep that in mind. And so that's probably the bigger picture.

I don't know, if you're looking at global numbers, I think it's worth noting that France impacted us negatively. We've entered around $5 million in the quarter so that may help with some of that as well..

Sure. Thanks. And then just a follow-up on CENTERA, you mentioned some data year at TCT, but then more meaningful data next year.

You can maybe given how successful, how well the clinical data has progressed for SAPIEN 3, maybe flesh out what's the role remind us again of where this fits in, in the arm inventory and how you see it playing a role in your product line up as we get closer to that time in the market?.

Yeah. Thanks. Yeah. I wouldn't be surprised if there's some kind of data that gets presented at TCT, but I'm not sure the nature of it. What we thought is that actually the CE Mark trial is likely to be presented at PCR. So that was what we were referring to about 2017.

Over the long-term, our commercial strategy will be more clearly defined as we actually see that data ourselves. But the way we've looked at it going into it, there's been a number of users, it's in the minority, but a number of users that have preferred a self-expanding system and we think CENTERA is a pretty outstanding self-expanding system.

So that's been our rationale up to now, but what will be most important to us is to see what that clinical data looks like..

Got it. Thank you, Mike..

Yeah..

Thank you. Our next question comes from the line of Bruce Nudell with SunTrust Robinson Humphrey. Please proceed..

Good afternoon. Thanks for taking the question. Mike, as we called around in Europe, we heard of a large price differential with you guys maintaining price in a very disciplined manner. How much of a market share impact this is playing, and do you feel that you too play along with it given the excellence of your data? And I have a follow-up..

Yeah. Okay, I'm sorry. I don't know if (28:20). All right. There seems like there is a little bit noise on the line, hopefully you could hear me okay. Yeah, indeed, we do operate with a price premium. In many cases, it might be as much as 20%. And it's possible that we lose some market share result of that.

You're right, we have every intention of maintaining our discipline, it's difficult to quantify exactly how that works. We're convinced that we could maintain a strong leadership position by doing that because of the high level of differentiation there is with the SAPIEN 3 valve. It just performs at an extremely high level.

And so we expect to continue to do that. And again, when you're thinking about market shares, we noted that Europe grew at 20% this quarter and we grew less than that. Remember the impact of the situation in France as part of that, a big part of it..

Yeah. And my follow-up pertains to mitral.

How is it feeling to you? Do you see commercialization on the not-too-distant horizon or do you really feel that there's a lot of fundamental work left to be done?.

Thanks, Bruce. We've got just a lot to learn at this point. We're very pleased to be engaged in doing cases, it's the single most important thing we can do. We're glad to be engaged with the U.S. right now, and we're going to be ramping up here pretty good in Canada, in Europe as well. That's going to be very meaningful to us.

We've cautioned you please not to include any kind of revenue expectation in 2017. And I hesitate to say much more than that, Bruce. You can tell we're enthusiastic. We wouldn't be beginning a CE Mark trial if we weren't enthusiastic about this, but there is a lot to be proven.

And the only way for us to really know the answer is to have some good experience..

Thanks so much, Mike..

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

Hi, Mike.

Can you hear me okay?.

Yeah, I hear you great.

Are we coming through okay, Jason?.

You are. Just occasionally you hear some echo, but I'll just go ahead and let me know if you need me to repeat it. Just wanted to stay on the topic of international transcatheter valves. You highlighted Japan, Mike. And that's been burgeoning market for a while.

I'm wondering if you could segment it a bit for us, since the price you're willing to give to quantify. Just how bigger market Japan is and how much is the growth that you saw in the market, saw 20%.

How much of that is coming from Japan? And structurally, if there's anything in Japan that's changed over the last several months to make it a more to sort of tappable market, if you will?.

Yeah. Thanks, Jason. Yeah. Early on, I think, we projected that Japan was likely to be a market in the $300 million to $400 million range. We'll have to refine that. As we noted it got started a little slower than we thought. They created some structural barriers including a different approval process for a site to start. And we thought the slowed us down.

But like many things in Japan, although they might start slowly as they start adopting the therapy, it starts catching on. We think it's likely to be, maybe just under $100 million opportunity in 2016, but the SAPIEN 3 launch is probably one of the stimulus to growth in Japan and we're experiencing that right now..

Got it.

So, did your European business ex-France, did it have growth in the quarter in TAVI?.

Oh, yeah. No, it probably grew at low double digits, but it grew. It just didn't grow as fast as the market. And the biggest impact was, what happened in France..

That's helpful. As a follow-up in the United States, I think it was asked earlier, I didn't hear a response. Just to the reimbursement landscape for TAVR and specifically intermediate risk, obviously, the guidelines accommodate reimbursement for evidence, development and intermediate risk obviously has that evidence now.

Is there any indication to you that anybody anywhere in the country is having an issue with respect to reimbursement for intermediate risk patients or categorizing the intermediate risk patients? Is that at all having any impact on the penetration of that segment? Thanks, Mike..

Yeah. Thanks, Jason. We're going to need to let others ask some questions too. I can't tell you that I'm aware of anybody that is having a particular reimbursement problem.

I mean, we have situations around the country where customers will push back on price if that happens, but we have a lot of confidence in the fact that TAVR delivers great value to all the stakeholders. And so, I wouldn't call it an obstacle..

Thanks, Mike..

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

Hi. Thanks.

Can you hear me?.

Yes, Brooks..

Okay, great. Mike, I just want to make sure I have the mechanics of the intermediate U.S. risk launch correct. I know you got the indication mid-August, and you brought the guys in out of the field for some training. So, I'm assuming by kind of early September you were out detailing accounts.

Can you talk about – did I hear you correctly in saying that it was just the IDE sites that were doing intermediate risk patients in September? And how has that progressed or was it literally like a light switch going on, and everybody was doing intermediate cases right out of the gates?.

No, it was – it's closer to being the light switch if you will, Brooks. So, yeah, we got the approval. We had our team already trained. Remember, this was just a label change. So, people already had the valves on their shelf.

When I was talking about the IDE sites what I was trying to indicate is, they were already treating their intermediate risk patients through the Continued Access Protocol. And so those sites flipped over from treating them within this clinical protocol into commercial sales, so not a big change in practice for them.

And for the others, there was some that our team helped them out with some coding. But again, you need to think about what broadly happens in medicine. This is a referral process, and it takes a while for the referral process to really get rewired.

So, I don't think anybody should expect that there's sort of a step function that went along with this approval..

Okay. Great. That's all I had. Thanks, Mike..

Sure..

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

Good afternoon. So, Scott and Mike, I wanted to come back to your guidance for TAVR of $1.5 billion to $1.7 billion. I guess, I think, we're all familiar with tonight – the debate is that the business didn't grow. There – the U.S.

TAVR business double digits, but the $1.5 billion to $1.7 billion guidance doesn't really answer that that debate for shareholders. So, Scott, I was sort of wondering, maybe you can help us understand the construction of guidance because the debate really centers on whether you do sort of $1.65 billion to $1.7 billion.

So, is it a safe assumption if you felt that $1.7 billion, the top on your guidance, was not achievable by the fourth quarter, you would have revised that guidance? Help us understand how you were thinking about the construction of not changing the $1.5 billion to $1.7 billion?.

Yeah. So, keep in mind, our philosophy on guidance is to aim for the midpoint. And that's what we do for our business units and for the company in total. I think that we achieved our guidance this quarter for the first time in quite a while, and it reflects the fact that we've got three guidance increases during the course of the year.

We intentionally have not increased guidance for any of the business units or consolidated going into Q4. It's still growing very rapidly. I mean, the company grew 20% in the first quarter, 21% in the second quarter, 18% in the third quarter. We've got TAVR growing in the U.S. at 55% compared to 60-some percent in Q2 and Q1.

So, we still feel really good about the growth. We still feel good about the market expansion opportunity, but, no, we're not expecting any different range than what we've already talked about for TAVR or for the company..

Okay. Scott, obviously at $1.6 billion – sorry to push you here – $1.6 billion obviously is a deceleration frankly in the U.S. market. And $1.7 billion in – and we're all realizing that we're spending too much time thinking about the growth deceleration because obviously the business is back on track and that's why I'm pushing you here.

So, your view that $1.6 billion is still sort of the right way of thinking about it, still holds even though we're really heading into the fourth quarter of the year?.

Yeah. If you just do the year-to-date results and extrapolate a reasonable growth rate assumption, then sure, the midpoint of that range is a good assumption going into the fourth quarter and probably a little bit above that. It's tough to get a perfect bead on, because we've got a business in the U.S.

that's growing 55%, 60% range year-to-date, it's tough to have a lot of precision, but I think aiming for the mid-part of the range is a much better assumption than aiming for $1.7 billion..

Okay. And then, Mike, just real quickly a clinical question for you. On TCT, embolic protection, something you've talked about several years ago, but in the last couple of years you have talked less about as, frankly, clinical endpoints have gotten dramatically better for TAVR procedures.

If we see successful embolic protection data next week at TCT, does that matter to you or your business and change your strategic direction, or you still just focused on making the TAVR procedure better without embolic protection? Thanks so much..

Yeah. Thanks, David. You know what, we've got such robust data – you got to think of what we've been through. We've been through the PARTNER I, and now the PARTNER II data. And the PARTNER II data with SAPIEN 3 suggested there was a 1% stroke rate. And this was heavily adjudicated, and remember, a neurological assessment before during and after TAVR.

So, hard to imagine that this isn't really high quality evidence. So, it's going to be tough for us to anticipate that anything that could be presented that's going to suggest – we would have to argue that, we're going to take it less than 1%.

So, if that – if there was some argument, and there was that sound of data that would be interesting, but it's a pretty high hurdle for us to believe that that's an important part of future therapy..

Okay. Thank you very much..

Sure..

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

Thanks, and good afternoon..

Hey, Bob..

So, hey. So, just a couple of really quick ones. A lot of the key questions have been asked. Scott, maybe a quick question for you.

Looking forward to the Analyst Day here in a little bit, and I know you're not going to give any thoughts on 2017 any sort of concrete way today, but consensus is at about 12% revenue growth for 2017 and about 19% earnings growth for 2017.

Maybe at a minimum, could you just to help us think through some of the important puts and takes that we should be considering and if you think people aren't considering things, please point that out? Just sort of any preliminary thoughts on major puts and takes as we think about modeling for next year?.

Sure. So, you're right. It's pretty mature to give you a specific underlying growth rate expectations for the top line, but maybe I can take you through the P&L. For gross profit margin, this year's guidance was 73% to 74%. I think we'll get a little bit of a lift from that in 2017.

Keep in mind, we're still going to be investing in growing capacity and investing in our operations, but we should get a little bit of lift in our gross margin. For SG&A, we continue to drive expenses down. Our guidance for the year was 30% to 32%, this quarter we came in at 31%. I think it's reasonable that we can continue to improve on SG&A.

Again, it's going to be a slower improvement curve than what we achieved over the last 18 months from the high 30%s to the low 30%s, but we're going to keep working on trying to drive efficiency in the back office and overhead expenses.

On R&D, this year's R&D as a percentage of sales rate is probably a good assumption because if you think about ramping up the low risk trial for TAVR and the investments we're making in our transcatheter mitral valve and other programs that's probably a good indicator of where the spend should come in, in 2017. The other big one is just the tax rate.

And we're still puzzling what the tax rate forecast should look like. There's been upward pressure to the tune of 200 basis points this quarter. We're doing a lot of things internally to try to mitigate that upward pressure, but as we continue to grow in the U.S., that's something we're going to continue to fight.

So, I hope that gives you some of the pushes and takes, and we'll get more into the details in December..

Okay. That's very helpful. And then one really quick follow-up. So, first, Scott, do you think people are missing anything significantly that's worth calling out on the top line? And then just real quickly on mitral. Mike, do we still expect that the CE Mark trial to start this year or could that pushing to early next? Thank you very much..

No. We think we're pretty close here. We think it's going to start very soon..

And on the top line, I think this is pretty reflective of the strength of the business. And so, yeah, we may be victims of our own success in terms of coming in almost exactly where we had expected, but we're still really pleased with our top line performance.

At the beginning of the year, we thought consolidated top line underlying growth was going to be something like 7% to 11%, now we're running at 18% this quarter, 20% range in Q2 and Q1. We originally thought TAVR was going to be 10% to 18%, now we're running 37% in the third quarter.

So, there is a lot of tailwind to our growth rates, and especially after increasing our guidance $300 million on the year, we're feeling really good about executing on pretty high bar..

Great. Thank you very much..

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

Thanks. Mike, I just had a question on Europe and the competitive landscape. I think on past calls, you said that beyond you and Medtronic, the smaller players had about 10% to 15% European market share. Is that the case? Has anything changed, because when I look at Europe, when I take out France, Europe still came in a little bit light.

So I was wondering if some of that could be just the competitive dynamics. Thanks..

Yeah. Thanks, Glenn. Yeah. I think there was a little bit of share loss beyond France. So that's fair in Europe. But it doesn't look like it came much from the smaller competitors. I think in the last quarter we said the smaller competitors were around 15%, and it still seems that they're pretty close to that.

There may be a little bit of movement amongst them, but if anything, we might have lost a little bit of share to Medtronic this quarter..

Okay. And then just as a follow-up to surgical valves now. You made the comments in your prepared remarks that you thought intermediate was starting to slow down the U.S. surgical market.

So, how should we think about this market going forward? Should we start modeling, this is kind of a flat to down market overall and I think you said that you thought you could actually grow your surgical valves next year.

So, a flat to down market with average may be taking shares, and how we should be thinking about it over the next couple of years? Thanks..

Yeah. We're looking at that very carefully. And the big SAPEIN 3 data that was presented at the ACC probably caused us and everybody else to think about this a little bit differently. So, we're watching it very closely.

I think it's logical to assume what you said, which is that the conversion to TAVR is likely to slow that down and maybe to be a zero something in that range in the U.S., a zero growth rate.

What we're pleased that we've got a number of innovations in the surgical valve space that are going to be exciting that we think is going to drive our own growth and help us with that headwind..

Okay. Thanks, Mike..

Sure..

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

Good afternoon, guys. Thank you so much for taking the question. Mike, you mentioned as we think about the intermediate risk indication, it's not necessarily a light switch, part of that's the referral network.

The sense I get from talking to folks as well as centers having to build capacity, and so I'm wondering how much of either of those are you seeing as the gating factor in the intermediate risk indication? And if there is a point at which we do see an inflection point, once the capacity comes on line and once the referral network starts really moving?.

Thanks, Danielle. You can imagine it's difficult to know in any exact sense on those points that you measure. But if you were to ask our team, they would say that they don't believe that hospital capacity is a big issue.

They would say that they've been impressed with the site's ability to add cases and add capacity, particularly with SAPIEN 3 than more what they'll refer to is the referral network has to change. And so minds have to change. The minds of surgeons and remember, you've got many hospitals out there that are not TAVR centers right now.

So, you've got a fair amount of that change that needs to be implemented and that's part of what drives the curve..

Okay, great. And just one quick question about France. Have you provided us with what the annual run rate last year was for France, just to get a sense of.

I know you said it was $5 million to this quarter, but just as we think about going forward, what's the...?.

Yeah. We have not done that. I don't have that handy. It is our second largest country in Europe and it has been growing quite fast. It's actually more recently been growing faster than rest of Europe. So, it's significant. And so, we're glad to be working toward a solution in France because that's important to patients there..

And I assume you are a market share leader in France as well, so you're disproportionately affected..

Yeah. A matter of fact, in 2016, there are only two companies that are approved in France, Edwards and Medtronic. And we're a clear leader..

Okay. Thank you so much..

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

Good afternoon. Scott, maybe just talk a little bit about the 2017 gross margin. I think we've talked in the past about a new manufacturing facility coming online in Costa Rica over the first part of the year.

So, might we think of that cadence of gross margin improvement being more back half weighted just for modeling purposes?.

Probably not a whole lot of benefit from Costa Rica coming online in 2017. Our plan is that we're going to start production on a limited basis towards the back half of the year, but it's really not going to start moving the needle on gross profit margin. In fact, we're going to continue to be investing to help support that development.

We are going to get mixed improvement though in 2017. This quarter we got probably 200 basis points of mixed improvement in our gross profit margin.

I'm not sure we're going to be able to accomplish that much in 2017, but I think you're going to have this lift that I mentioned earlier coming from some mixed improvement offset by that continuing investment in operations..

Okay. And then a totally unrelated follow-up, I apologize. But might we see any valve durability data coming up at your TCT or near-term or are there kind of discussion of next steps on that front? Thank you..

Yeah. This is Mike. Thanks, Ben. I don't know what's going to be out there. I'm not aware of any substantial valve data. We haven't heard it be a big issue in the marketplace. I think there're some late breaking data that's echo-related from PARTNER I. And so, there may be something there that's helpful.

When you actually see the five-year data from PARTNER I, I think that could be helpful, but I don't know that there's going to be much incremental beyond that..

Thank you..

Thank you. Our next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed..

Hi.

Can you hear me okay?.

Yeah. I can hear you fine, Joanne..

Wonderful. Thank you for taking the question. It's approximately two-parts and completely unrelated. The first part is, use of cash with $1.1 billion sitting on the balance sheet.

How should we think about you deploying this one? And then, my second question has to do with when we would talk with physicians, we hear about adding rooms, adding days, adding lots of capacity. Are we anywhere near worrying about capacity constraints in the U.S. yet? Thank you..

Sure. Why don't I take the cash piece, Mike, and you take the second piece? On use of cash, our priorities have not changed at all. Our first priority is still to make sure we're investing in high return important long-term growth therapies. And in terms of free cash flow, we fund episodic acquisitions.

They're going to continue to be likely not great big acquisitions. Historically, they're smaller investments, minority investments, options to buy companies, funding, start up, joint venture types of companies, but we will continue to be investing in external growth.

During the course, we've been active repurchaser of our shares and we're going to continue to do that on an opportunistic basis to at least offset the dilutive effects of incentive compensation, and we'd like to continue to reduce the share count as well, which we've done here over the last several years.

One of the big issues we're dealing with is, we got $1.2 billion in cash, but a lot of it is stranded outside of the U.S. And so that's cash that's not available for share repurchase and that something that we're going to continue to work on in terms of how we structure our assets and where we realize profits and cash around the world..

And, Joanne, your question about capacity then, are we concerned. We're not concerned about it. What we have primarily seen is people adding cases to the day that they already do TAVR, just because the SAPIEN 3 cases go faster, they're so much more efficient, they're so much more a problem free.

People find that they can do more cases in the same day without making a significant investment. There are, of course, people that are adding days, there're some people that are adding capacity, but we think those are secondary to people adding cases in a day..

Thank you..

Thank you. Our next question comes from the line of Josh Jennings with Cowen & Company. Please proceed..

Hi. Good evening. Thanks, gentlemen.

I was hoping that just ask in post and intermediate approval, we've gotten some feedback from clinicians about kind of segmenting the intermediate risk population between the PARTNER IIA and STS scores that are in the higher end and in older patients 75 and above versus lower STS scores in the 3% to 4% range in a 70 or younger age range.

I know it's still very early days, but are you seeing any differential penetration rates in those two segments within the intermediate risk and how do you see that evolving in terms of your ability to penetrate that, I guess, lower end of the intermediate risk range?.

Yeah. Thanks, Josh. Yeah. It's a little tough. I know, when you go out there and talk to customers, sometime you can find people with their own points of view. And so, they'll always be subject to that. We fall back on the PARTNER II trial. It was a big trial. It was robust, and I think it told heart teams a lot about the practice.

I think more or less it has not differentiated and said that you should split this group of patients. It was very clear. It said that intermediate patients did better with SAPIEN 3 than they did with surgery, and we certainly know what the patient preference would be. So, we think it's clear.

It's just going to take some people time to work through their own thoughts and biases. You remember that surgeons broadly feel that they do a great job with these patients. And so, they don't believe that the procedures are very dangerous and so forth. And so, this is just part of the process of medicine going through change..

Thanks for that. And just a follow-up on low-risk trial enrollment. We've just gotten some feedback from a couple of centers that it's a little bit slower than they anticipated as low-risk patients are trying to circumnavigate randomization of surgery. I don't know if that's broad based, but if you had any thoughts on that.

And just lastly, good luck with the Cubs tonight..

Well, thanks very much, Josh. Yeah, we got off to a little bit of a slow start, because contracting in this startup phase of the trial did go a little longer than we thought. These were new contracts with each of these sites. Enrollments underway. We've got about 50 sites that are engaged.

And although it maybe started a little slow, it seems like it's picked up. We have not changed our guidance. We're continuing to believe that it's mid next year. But again, we're watching that closely and we'll update you at the Investor Conference as we get a chance to get a little bit more experience. And thank you about the comments for Cubs..

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

Good evening, everybody. Thanks for taking the question..

Hi, Kristen..

Hi, Mike. Just wanted to go back to the question that Glenn had asked. In the beginning, I thought you had said the aortic valves were down globally. And I think Glenn had it said in the U.S. I just wanted to see what the difference was with aortic valves in the U.S. versus globally.

And just clarify your thoughts, I guess, on that measure after you answer..

Yeah.

So, you were talking about surgical aortic valves, not transcatheter valves, right, Kristen?.

Correct..

Okay. Yeah. They were slightly negative in the U.S. They also were a little negative globally..

Okay. And then, I guess, I'm just a little surprised given that this quarter you'd just got the intermediate risk. How do you think that that suggests, I guess, that they're now negative in the U.S.

so soon? Does that then suggest that there might have been some penetration into the intermediate already, or do you think that this is just more of a digesting process or how should we interpret that so soon?.

Yeah. We're trying to sort it out right now. I tried to address this in our comments, and maybe it wasn't really clear, Kristen. We believe that there is a TAVR effect of some sort. There also – or at least some sites where they inferred that there may have been some pent-up demand amongst intermediate risk patients.

In addition to that, we thought that there may have been some spillover effect from the mitrals. And so, you can picture a patient that would need a double valve replacement – an aortic and a mitral valve. Often a surgeon will choose to make those be the same valve type.

So, those things all may have added influence and we only have about a month's worth of experience.

So tough for us to deduce anything big picture; tough for us to deduce anything big picture; we'll keep you filled in as we learn a little bit more, but there does seem to be something that happened in this quarter compared to what we've seen in the past, and we'll watch it closely and keep you tuned in..

I guess, was it consistent across the quarter?.

No. No, it really wasn't, but then again the quarter is always a little bit odd, Kristen, because we always have sort of a softer July and August in both our surgical business and our TAVR business, and it picks up in September. So, it's tough to tell is this normal seasonality or is it somehow related to the approval; it's just too soon to tell..

And just from a reimbursement standpoint, in talking with hospitals, I know you said that it wasn't really an issue, but have you talked to hospitals just about the reimbursement for surgical valves versus TAVR, just because surgical valves, I know, are very, very profitable from a hospital perspective?.

I think that's right, Kristen. Broadly, I think, if you were to generalize, you'd say that surgical valve replacement is a very profitable procedure. In many cases, it's more profitable than TAVR. But having said that, heart teams are tending to do what they think is right for the patient.

Plus at this point, an efficient TAVR program does make money, and when it's a growth program on top of it, it's one that hospitals are incentivized to build..

Okay. Thanks very much..

Sure..

And go Cubs..

Yeah. Thank you..

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

Hi. Thanks for taking the question.

I had a clarification question; when you talked about (58:52) a longer term resolution, can you characterize what that might be, and I guess, what it would mean for your opportunity there? And are there any other OUS (59:02) limitations?.

Sure. One of (59:09) these new innovations is, reimbursement does end up stimulating demand, because without reimbursement it's just not as robust. So the French has a particular system in which they provide reimbursement before DRG goes in place, and they've employed that on TAVR.

And they sort of anticipate the number of procedures each year and have designed their system around that. What happened is, TAVR grew so fast in 2016, it grew beyond their number. And that's what created the situation. We're in pretty deep conversations with them trying to help them understand the situation and the need of their patients.

And so, I think we're hopeful that we have a resolution for 2016 that's pretty robust and we've engaged in conversations about 2017 and beyond. So, it's productive. We're hopeful, but again, we'll keep you tuned in if there's new developments. But, we're hopeful that we're going to be heading back toward normal..

Okay. Thanks.

Any other places where there might be limitations like that or where you have to get in front of regulators about the quotas?.

Okay. Yeah. And we're going to have to end questions here pretty soon guys. But, yeah so, it's not unusual for us to have these situations. You know that countries that have really good reimbursement tend to have heavier penetration rate.

And I think we've shown you some of the countries in Europe in the past where reimbursement is in place and well known, there is a higher penetration rate. Maybe that's something that we can highlight it on our Investor Conference and to sort of lay that out for you in terms of where reimbursement exists and where it doesn't.

But generally that's evolving as the therapy becomes prudent proven. So, generally our dossiers are so strong on TAVR and its value proposition that that situation is improving over time..

Okay. Thank you..

Sure..

Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Please proceed..

Thanks. And thanks for squeezing me in here. Mike, you guys have highlighted a number of times how strong the first half year was, and how much full year expectations rose as a result compared to what you're originally expecting.

Now we had 3Q results that were very good on an absolute basis, but really didn't reflect a big new indication coming online the way investors may have been expecting.

So, how confident are you that the unexpected first half strength didn't include some pulling forward of demand within that intermediate risk cohort and that's why the inflection wasn't as sharp this quarter..

Yeah. I suppose anything is possible, Chris. I like to think that one of the big inflection points was the PARTNER II data that was presented in April. And so, we didn't really see a big difference between Q1 and Q2, so it's difficult to tell. We never expect that a step function. We always expected a gradual increase.

And although we've done, I think, a reasonably good job of projecting the TAVR opportunity in the long-term. It has been a challenge for us to predict actual quarters. Actually, we probably have done a better job predicting this quarter than we have over the recent past, but I don't have much more explanation than that..

All right. Thanks, Mike..

Okay. Well, thanks everybody 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 sales and growth rates, 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 area 201-612-7415 and use the conference number 13646430. I'll repeat those numbers. 877-660-6853 or 201-612-7415 and the conference number is 13646430.

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

Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation..