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

David Ryan Lewis - Morgan Stanley & Co. LLC Bob Hopkins - Bank of America Michael Weinstein - JPMorgan Securities LLC Larry Biegelsen - Wells Fargo Securities LLC Brooks E. West - Piper Jaffray & Co. Bruce M. Nudell - SunTrust Robinson Humphrey, Inc. Jason Richard Mills - Canaccord Genuity, Inc.

Matt Miksic - UBS Securities LLC Rick Wise - Stifel, Nicolaus & Co., Inc. Raj Denhoy - Jefferies LLC Ben C. Andrew - William Blair & Co. LLC Joshua Jennings - Cowen & Co. LLC Glenn John Novarro - RBC Capital Markets LLC Joanne Karen Wuensch - BMO Capital Markets (United States) Danielle J.

Antalffy - Leerink Partners LLC Chris Pasquale - Guggenheim Securities LLC.

Greetings, and welcome to the Edwards Lifesciences Fourth 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. I would now like to turn the conference over to David K.

Erickson, Vice President-Investor Relations. Thank you. Please begin..

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our fourth 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 new product approvals and clinical, regulatory, reimbursement and competitive matters, as well as trends in therapy adoption and foreign currency movements.

These statements speak only as of the date in 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're 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 fourth quarter results, which contributed to another successful year for Edwards, as we strengthened our financial performance and product leadership across our portfolio.

Robust demand for TAVR therapy continued through the end of the year and better than we forecasted at our December 2016 Investor Conference.

We ended the quarter with total sales of $768 million, an increase of 15% on an underlying basis, and finished the year strong with global sales of nearly $3 billion, representing an underlying annual growth rate of 19%. And I'm proud to report we invested aggressively to bring new medical technologies to more patients and drive future growth.

In Transcatheter Heart Valves, global sales were $432 million, up 32% on an underlying basis over the prior year. Growth was led by continued strong adoption across all geographies with notable strength in the U.S. and Japan. Globally, average selling prices were stable.

In the U.S., Transcatheter Heart Valves sales for the quarter were $267 million and grew 41% on an underlying basis versus the prior year. Once again, overall performance was strong with procedures growing broadly across more than 500 hospitals in both large and small TAVR programs.

The growth continues to be driven by the extraordinary patient outcomes with SAPIEN 3 reported from the PARTNER II trial earlier in 2016. Outside the U.S., underlying THV sales grew 19%. We continue to be encouraged by the strong global adoption of TAVR therapy, particularly outside of Europe, where overall therapy penetration is still very low.

In Europe, consistent with previous quarters, growth in countries with lower TAVR adoption continued to outpace countries where therapy is more established. We estimate total TAVR procedure growth in Europe was approximately 15% in the fourth quarter compared to last year.

Our growth rate was lower, as anticipated, due to the impact of lower sales in France. As a remainder, we significantly reduced shipments in the third and fourth quarter, while we were negotiating a resolution to the French policy that effectively limited the number of TAVR procedures in 2016.

Although the policy was adjusted and we resumed shipments, we estimate fourth quarter sales would have been about $10 million higher absent this interruption.

Turning to our near-term product pipeline, 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. And we remain on track to receive a CE Mark for our CENTERA system in the second half of 2017.

As we discussed at our Investor Conference in December, we continue to believe the global TAVR opportunity will exceed $5 billion by 2021 for patients with severe symptomatic aortic stenosis. We believe the prevalence of this disease is large, generating an even greater need for TAVR therapy.

Additionally, we believe TAVR will benefit the many patients suffering from severe AS, who have not yet been diagnosed with symptoms as well as moderate AS patient populations, representing an opportunity for continued growth beyond 2021.

We are continuing to enroll our PARTNER III low-risk trial with the goal to have this randomized trial fully enrolled this year. As we announced today, we received FDA approval for EARLY-TAVR, our groundbreaking trial that will study patients diagnosed with severe AS who have not yet developed symptoms.

Approximately 1,000 patients across 65 centers will be randomized to receive either transfemoral SAPIEN 3 or clinical surveillance. We're beginning the contracting process with hospitals and expect them to begin enrolling later this year.

In summary, while we exited 2016 higher than we forecasted in December, our 2017 THV sales guidance remains unchanged and we expect to achieve 15% to 20% underlying growth. As expected, this represents a slower THV growth rate compared to 2016 and is consistent with our estimate of more than $5 billion TAVR opportunity by 2021.

Turning to Surgical Heart Valve Therapy, sales for the fourth quarter were $189 million and were down about 4% compared to last year, driven by lower aortic valve sales in the U.S. and Europe. Surgical Heart Valve sales were lower primarily due to the impact of SAPIEN 3 and the continued constrained mitral supply.

Globally, our average selling prices were slightly higher due to the growth of our advanced EDWARDS INTUITY Elite valve system. Looking forward, we believe the launches of our new surgical therapies will offset the TAVR impact in 2017.

This includes our EDWARDS INTUITY Elite valve system which is launched in multiple geographies globally and is currently expanding to additional commercial centers in the U.S. with growing momentum. We also plan to launch our INSPIRIS RESILIA aortic valve in Europe and the U.S. later this year.

This is a first of a newly created class of resilient heart valves that incorporates the advanced RESILIA tissue. This valve leverages features of the trusted PERIMOUNT family and includes the proprietary VFit technology, which is designed for potential future valve-in-valve procedures.

We believe INSPIRIS addresses the specific needs of active patients and those who would have previously received a mechanical valve. In summary, Surgical Heart Valve results were below expectations in 2016. However, we believe the introduction of our next-generation platforms to lift overall underlying sales growth to 1% to 3% in 2017.

In the Critical Care product group, sales for the quarter were $146 million and grew 3% on an underlying basis. Our growth was driven by our Enhanced Surgical Recovery Program in the U.S. and developing markets.

As we announced at our Investor Conference, during the quarter, we received a CE Mark for our next-generation advanced monitoring platform, HemoSphere. This all-in-one system will provide greater clarity on a patient's hemodynamic status to enable clinicians to make timely, potentially lifesaving decisions. We anticipate a U.S.

regulatory clearance later this year, and a commercial rollout of the base platform. HemoSphere is modular in design and we will later add Enhanced Surgical Recovery capabilities in the future. And, we remain on track for a 2017 European launch of our Acumen HPI software suite with our new FloTrac IQ Smart Disposable.

This is a first of a kind hypotension or low blood pressure probability indicator during monitoring. In 2017, we continue to expect our Critical Care underlying sales growth to be between 5% and 7%. Now, for an update on several of our new transcatheter mitral and tricuspid therapies.

Last week, we were pleased to announce that we completed the acquisition of Valtech Cardio, the developer of the Cardioband System for transcatheter repair of mitral and tricuspid valves. We're in the process of welcoming and integrating this talented team to Edwards.

Our 2017 financial guidance provided at our Investor Conference in December included the expected financial impact of this transaction, which Scott will discuss in a few minutes.

As a reminder, the mitral application of Cardioband has received a CE Mark in Europe and we're building a European field organization to begin training heart teams to perform this therapy. Additionally, prior to close, Valtech received a conditional approval to begin an IDE trial of Cardioband in the U.S.

We're now assessing the trial design and expect enrollment to begin later this year. The Cardioband System for tricuspid regurgitation is in a CE Mark trial, which we expect to be fully enrolled in 2017. In the Edwards CardiAQ program for transcatheter mitral replacement, we are focused on transseptal delivery.

As we indicated during the Investor Conference, we're implementing key clinical learnings sequentially from our U.S. early feasibility study. Consistent with this approach, we recently paused enrollment in our clinical trials to perform further design validation testing on a feature of our valve.

If we see positive results from the test, we expect to resume clinical trial enrollment in the second quarter. This pause also postpones the start of our CE Mark trial. We continue to gain early clinical experience with our PASCAL transcatheter mitral repair system in compassionate cases.

We're also gaining experience with Edwards FORMA, our spacer for treatment of tricuspid regurgitation, and are developing a larger spacer that would enable treatment of a broader group of patients. You can expect further updates from clinicians on these new structural heart programs at upcoming major medical meetings.

And now, I'll turn the call over to Scott..

Thanks, Mike. As Mike mentioned, we're pleased to report that with our strong finish to the year, we exceeded our revenue and earnings targets for 2016. For the full year, adjusted earnings per share grew 25% to $2.89. Sales increased 18.5% on an underlying basis to nearly $3 billion.

In the fourth quarter, another strong sales performance in transcatheter valves drove significant top and bottom line growth versus the prior year. Underlying sales grew 15% and adjusted earnings per share grew 17% to $0.75.

GAAP earnings per share was $0.73, 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. On January 23, we closed the acquisition of Valtech Cardio.

Under the terms of the merger agreement, we delivered approximately $270 million in stock and $70 million in cash at closing. In addition, there is the potential for up to $350 million in pre-specified contingent payments over the next 10 years. Periodic accounting adjustments to these payments will be highlighted in future financial results.

The financial guidance we provided at our Investor Conference in December incorporated the expected impact of the transaction in 2017. And now, I'll cover the details of our results, and then share guidance for 2017. For the fourth quarter, our gross profit margin was 72.2% compared to 73.8% in the same period of 2015.

This expected decrease was driven by a reduced year-over-year benefit from our foreign exchange hedge contracts and manufacturing expenses associated with capacity expansion. These decreases were partially offset by a more profitable product mix.

We continue to expect our gross profit margin, excluding special items, to strengthen in 2017 to between 74% and 76%, driven by an improved product mix and the expected impact of foreign exchange.

Turning to selling, general and administrative expenses, fourth quarter expenses were $234 million or 30.4% of sales compared to $222 million in the prior year. This increase was driven by sales and personnel related expenses, primarily in transcatheter valves, partially offset by the suspension of the medical device excise tax.

We continue to expect SG&A, excluding special items, to be between 28% and 29% of sales for the full year 2017. Research and development investments in the quarter grew 17% to $115 million or 15% of sales.

This increase was primarily the result of continued investments in our transcatheter aortic and mitral valve programs, including spending on clinical trials. For the full year 2017, we continue to expect R&D as a percentage of sales to be between 16% and 17%.

Our reported tax rate for the fourth quarter was 20.9%, up from 15.7% in the prior year, which benefited from the renewal of the federal research and development tax credit. For the full year 2016, our tax rate was 22.8%.

Starting in 2017, our tax rate will reflect the new accounting standard for employee stock-based compensation and this forecasted impact is included in our guidance. This accounting benefit will fluctuate in each reporting period, making period comparisons less consistent. We intend to highlight the impact each period if material.

We continue to expect our full-year 2017 tax rate, including the estimated impact of this accounting change, to be between 23% and 24%. Foreign exchange rates positively impacted fourth quarter sales versus prior year by approximately $1 million. Compared to our October guidance, foreign exchange rates positively impacted earnings per share by $0.01.

Free cash flow for the fourth quarter was $138 million. We define this as cash flow from operating activities of $201 million, less capital expenses of $63 million. For the full year 2016, free cash flow was $528 million. We continue to expect full year 2017 free cash flow to be between $575 million and $650 million.

Turning to our balance sheet, during the fourth quarter, we repurchased approximately 2.7 million shares for $246 million to help offset dilution associated with our Valtech acquisition.

Average shares outstanding during the quarter were 218 million and we continue to expect our full year 2017 shares outstanding to be between 216 million and 218 million. At the end of the quarter, we had cash, cash equivalents and short-term investments of $1.3 billion.

Total debt was $822 million, an increase reflecting our fourth quarter share repurchases. And now turning to 2017 guidance, we are reiterating all of our 2017 ranges. For Transcatheter Heart Valve Therapy, we expect sales of $1.7 billion to $2 billion, including $10 million to $15 million of estimated Cardioband sales to be reported as part of THVT.

For Surgical Heart Valve Therapy, we expect sales of $750 million to $790 million. And for Critical Care, we expect sales of $560 million to $600 million. For total Edwards, we expect sales of $3 billion to $3.4 billion. For full year 2017 adjusted earnings per share, we expect to be between $3.30 and $3.45.

Turning to the first quarter of 2017, we project total sales to be between $760 million and $800 million, and adjusted earnings per share of $0.79 to $0.89. And with that, I'll hand it back to Mike..

Thanks, Scott. In conclusion, we're very pleased to achieve strong financial performance and significant progress on transformational new therapies across our businesses in 2016 and expect continued growth and progress in 2017.

We are enthusiastic about the continued expansion of catheter-based therapies for the many structural heart patients in need, which positions us well for the long-term. We believe our patient-focused innovation strategy can transform care and bring value to both healthcare systems and shareholders. And with that, I'll turn it back over to David..

Thank you, Mike. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions, please 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 David Lewis with Morgan Stanley. Please proceed..

Good afternoon. Mike, just a quick question for you on TAVR, and then maybe a follow-up on the clinical data. Just, I guess, investors are going to be very focused on sort of U.S. and ex-U.S. TAVR performance in this quarter.

So I wonder if you can give us a sense in the U.S., how you think you've fared on share relative to a competitors' launch of a larger valve size? And in the international market, if we sort of adjust for France, it sort of seems that your ex-U.S.

business has been pretty stable from a growth perspective in the back half of 2016, is that how you see it? So, two questions there, and a quick follow-up..

Okay. Thanks, David. Yeah, in the U.S., I think we would broadly say that share positions compared to the last couple of quarters have been pretty flat. I think we had a share gain versus the prior year, but they probably have been pretty comparable here over the recent past.

If you go to Europe, I think your assessment is correct that if you take the French situation out, market shares once again were pretty stable. Overall, sort of the new competitors are accounting for something in the mid-teens of market share, so not a lot moved other than France..

Okay. And then, Mike, just clinically, one of the big messages from the Analyst Day in December was the market development activities you have to engage in to get these younger less sick patients than intermediate risk.

You've given that commentary at the Analyst Day, can you talk to us about the EARLY-TAVR program and why you're confident that's going to be a big commercial success given these are sort of asymptomatic patients relative to the market development things you discussed at the Analyst Day in intermediate risk? Thanks. I'll join back in queue..

Well, yeah, thanks, David. They're both really important. So, market development is probably more near-term and more important. As we indicated at the Investor Conference, we're penetrated maybe at the – our estimate was the 18% level and that that needed a move to something like to 30% level by 2021.

So, for us to make sure that we're doing our work to properly make sure that physicians and patients have the best information is really important and we're focused on that. We're building that organization and we're building that capabilities.

But separate from that and you know we're long-run guys, we're engaged in wanting to study this group of patients that have not yet demonstrated symptoms. We're firm believers that people with severe aortic stenosis are really at risk and we're prepared to do the clinical study to test that.

We won't get our results for a while, of course, but we think it could be very meaningful once you get out into the future, probably beyond 2021..

Thank you very much..

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

Hi, thanks. So, two questions, first, just a follow-up on that last comment. Mike, I want to get your opinion on something on EARLY-TAVR.

Given these patients have to undergo a stress test, what percentage of the patients do you think might move from asymptomatic to symptomatic post this stress test as you enroll this trial? Trying to get a sense for could awareness in this trial actually help the symptomatic portion of the market well before the asymptomatics gets approved?.

Yeah. Thanks, Bob. Yeah, that's a really good point and a good question. Frankly, we don't know a lot about this group of patients. We're really looking forward to learning much more about it. So, the real answer to your question is unknown.

There are number of physicians we talked to that speculate that although the patients have previously been diagnosed with no symptoms that once they're on a treadmill, they might indeed have symptoms, which would mean that they would be candidates for the therapy in the near-term to either maybe if they're in intermediate risk to be treated commercially or if they're at low-risk to potentially go into the PARTNER III trial..

So, the follow-up, to stick to TAVR, maybe you could talk just a little bit more about the fourth quarter U.S. market dynamics.

I mean, I think your sequential revenue was only up $7 million, maybe just talk a little bit about, more about what you're seeing, any surprises in the quarter, just would like a little bit more color on what happened in Q4 in the U.S.?.

Yeah, thanks, Bob. I can't say there were any real surprises. It was pretty much as we expected. I will tell you the very end of the year finished stronger than we anticipated would.

We did an estimate at the time of the Investor Conference never being too sure how it's going to turn out around the holiday period, and it – that turned out stronger than we thought. But other than that, I thought it went very much as we anticipated..

Great. Thanks for taking the question..

Sure..

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

Thank you. Good afternoon, gentlemen. So, let me just follow-up on TAVR first and then I wanted to switch over to mitral, if I can. So, France cost you $10 million this quarter. If you didn't have that $10 million headwind, your TAVR franchise would have grown 32% year-over-year.

So, the questions there are, number one, do you recapture that $10 million in the first quarter, will that headwind go away? And then second, given the kind of global growth you're seeing, is 15% to 20% the right range for 2017?.

Yes. So, that share that we lost are those that $10 million probably went completely to Medtronic. Of course, our intention is to try and win those customers back, that's the goal of that, but hard for us to estimate if we can get that all back and how soon that might happen, that certainly will be our intention. But we – that's in front of us to do.

They actually switched over into some core valve cases during that period. So, we've got some work to do.

Second question, Michael, tell me again what your question was about our growth rate?.

Yeah. So, if you adjust for France, you grew 32%, even including France, you grew 29% and so is 15% to 20% the right range? And then while I have you here, Mike, I want to do this, give us a little bit more on CardiAQ.

Could you just kind of spell out for us a little bit better kind of what's going on and what the issue may or may not be?.

Sure. So, yeah, we think the 15% to 20% is right on. When we put that estimate in place at the time of Investor Conference, there wasn't a lot that we learned since that time, so we think that that is a good estimate and we would encourage you to think about that as you think about our growth rates.

In terms of CardiAQ, I'll just refer you back to what we said. We said that we are engaged in this and we've been going through this process where we tried to very thoughtfully make sure that we learned from all of our clinical experiences.

And we saw something that we decided we wanted to – and this is again totally voluntary, go back and take a look at. And so, we're running some internal tests associated with that to make sure that we feel comfortable moving forward. We're doing this in complete cooperation with our clinical investigators.

The teams continues to be very positive, but it's just a step that we're going to go through. It's a bit of a signal of just how early this therapy is.

We're still on our pretty steep learning curve across the board, we're seeing the learn in every case not only something about our device, we learn something about the procedure, something about imaging, and something about anticoagulation, and we're trying to apply all those learnings as we go..

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

Hey, good afternoon, guys. Just a few from me, all on Europe actually.

So Mike, is it safe to assume that the CE Mark for CardiAQ in 2018 will get pushed out? France, can you talk about why it was $10 million this quarter and $5 million last quarter, and the outlook for France in 2017? And just lastly, Mike, the Cardioband roll out in Europe, could you give us a little bit more color on how that's going, and how you're going to get to $10 million to $15 million in sales in 2017? Thanks for taking the questions..

Okay. Let me try and walk you through it, Larry, and if I miss something, we'll come back to it. We were not saying that the CE Mark is off for 2018, it's still possible for us to get that. We'll keep you informed of all the developments. We're just pausing enrollment. And that's not really unexpected for something at this early stage and transformative.

Your second question about how we're going to perform in France, we would hope that we would do well. France is a growing market and we would hope to regain some, if not all, of that share during 2017.

So, to your question of why was Q3 different than Q4, during Q3, people were still working off inventories and in Q4 they felt the full brunt of the effect. And so, I think it's just that simple. Finally, your question was about Cardioband, we're early in this process. This only closed – what, a week ago.

And so we're putting together a separate field organization in Europe, that's a combination of the team from Valtech and Edwards and we're getting ready to take the field. So, I don't have much more to report at this point, but we'll keep you posted, and each quarter we'll share with you our progress on sales..

Thanks for taking the questions, guys..

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

Hi. Thanks for taking the questions. I wanted to circle back to the Ultra launch and the CENTERA, I guess, CE Mark. I'm assuming that would also launch in the second half of 2017.

Should we look for those devices to have an impact on your revenue, or how should we think about that?.

Yeah. So, yeah, we're very proud of those products. We think they are both going to be very well received by our customers. They're mostly going to – the Ultra product is particularly going to help the physicians and those heart teams do even better procedures.

They're in our guidance, Brooks, so I wouldn't say that there is any upside beyond what's in our guidance. The CENTERA system, again, is in our guidance. We're excited about that. We think it has the opportunity to be best-in-class among self-expanding stents..

Okay. And then, Mike, I wanted to circle back to France and I apologize, I'm just confused on the – how this kind of happened. I thought you guys had talked about France as a potential headwind in Q2. It seems like you were a little bit surprised by the impact in Q3 and then we're seeing a more full impact in Q4.

So – and I thought I remembered that you had kind of renegotiated with the French government and you were able to get a little bit more volume in Q4. Am I thinking about that correctly or can you just give us a little bit more detail on kind of how that proceeded throughout the year? Thank you..

Sure. Let me try and we can talk about it. Yeah, I think we saw the potential there in Q2. In Q3, we realized that it was a serious situation and we discontinued our shipments at that time. And I think we told you at that time that it was going to have impacts in both Q3 and Q4.

I think the Q4 impact probably turned out to be a little larger than we thought. So even though we reached resolution during the fourth quarter, it turned out a little larger than we thought, but that's kind of the way that it played out.

Is that clear?.

I think so. I might follow back up with you offline..

Okay..

I appreciate the comments, Mike. Thank you..

Sure..

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

Good afternoon, Mike. Thanks for taking the question. My first question is, we, as you do, believe there's a large prevalent (33:20) pool of untreated mainly elderly patients, and you referred to your kind of business development efforts for building that referral chain, and you're building an organization to do that.

Could you speak to the details of that in any way?.

Yeah. At this point, I'm not sure that this is worth detailing. We're adding some senior leadership that will bring some more experience, Edwards people that have experience with therapy adoption in other fields. Beyond that, we're going to use actually a host of different, I will call it methods to be able to drive education and therapy adoption.

In the U.S., it will be largely web-based, there will be – there is a lot of actually telephone conversations, and direct contact, and seminars in Europe and Japan that seem to be effective. So, there is going to be a variety of tools that are applied, and we'll try and be a little bit more granular for you as time goes on..

Perfect.

And my follow-up is on EARLY-TAVR, could you share anything about the length of follow-up and the endpoints that might be used, and the length of enrollment?.

Yeah. So, it's designed to be a superiority study. It is randomized. We expect it to have a two-year composite endpoint, and the endpoint is likely to include death, stroke, and rehospitalization..

Thanks..

We're going to randomize it between SAPIEN 3 and clinical surveillance, and I think it's going to have about 1,000 patients in it..

Thanks so much, Mike..

Yeah..

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

Super. Great.

Mike, can you hear me okay?.

Yeah. I hear you well, Jason..

Great. So, first question on TAVR O-U.S., Mike, if we add back the $10 million, it looks like sort of mid-20s growth comparably over the last sort of eight quarters, it would sort of challenge the best growth you've seen. And your commentary in your prepared remarks about Japan jumped out at me.

Could you tease Japan out a little bit and give us some more color on the composition of that market and what you're projecting going forward?.

Sure. Without getting into specifics on Japan, I think there are just two companies approved in Japan and we're fortunate last year that we had SAPIEN 3 approved. And we've been really pleased at the way that the therapy is being adopted in Japan.

If you'll recall, we got off to kind of a slow start a couple of years ago and there were a number of structural elements that were obstacles. But at this point, we feel like much of those have been cleared.

I think, we're probably headed – maybe around 100 accounts in Japan and we continue to think that that has a total addressable opportunity of $300 million to $400 million..

Okay. So that seems to be gaining traction. You'll have some easier comps in France clearly in the European side of your TAVR business, and the U.S. business you've talked a lot about and given some granularity here.

And so, as you kind of look at the TAVR growth guidance for the year, 15% to 20%, and I think 30%-plus in the United States if I recall from your analyst meeting, it would imply that the O-U.S. assumption that you're making is at best 10%, maybe even high single digits.

But given those tailwinds, how should we look at that? It sounds a bit conservative?.

Well, we think, there's reasons to be conservative. We think, across Europe, it's been many years since this technology has been adopted. We expect the market's probably going to grow a little faster than Edwards that will lose a little bit of share, probably both in Europe and the U.S.

So, I ask you to keep that in mind when you think about how realistic the 15% to 20% is. We think that's a pretty good estimate and not that conservative..

Okay. Great. And one quick and I'll get back in queue. Regarding EARLY-TAVR, given the new patient population in several centers, Mike, what – talk to us about the bandwidth of these centers, is there any risk to – this trial taking up enough time to have an impact on normal TAVR volumes? Thanks for taking the questions. I'll get back in queue..

Yeah. Thanks. We don't think so. We give our centers that are involved, for example, with us on the PARTNER trials an opportunity to enroll in the EARLY-TAVR, and we think it's been probably in excess of 90% of those centers have said that, yeah, they're interested and they feel like they do have the bandwidth to do that.

The good news is they have infrastructure in place that they can leverage. So that's helpful. And this really is a new group of patients that they haven't addressed before. So we believe that they can handle it. We got a lot to learn, though, because this is a new field for us..

Understood. Thank you..

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

Thanks so much. So – and congrats on a nice job here in the fourth quarter. You know we've covered the TAVR performance and new centers a fair amount so far in the call, but I just wanted to clarify one thing, Mike, if I could, and then – and a couple of questions on some of the growth initiatives.

So, coming out of the Analyst Meeting, I think there was a lot of discussion and TCP in the Analyst Meeting about the need for market development, the need for education and awareness.

That still sounds like it's important and you're starting to put that in place, but if I read your comments correctly, it doesn't sound like, if we look at the performance of Q4, that that has been – those efforts have had a significant impact yet.

That would be something we'd expect to play out over the next, I don't know, several months or next year-and-a-half or so, is that a fair way to look at it?.

It is fair to look at it. We have some efforts in place and we're proud of those, but we think we're still relative novices at this and growing. So, we'd like to think we'd have – we'd be more effective in the future..

Terrific. And then on some of the growth in pipeline products and approvals you've talked about, I wanted to touch on a few if I could.

And starting with CENTERA and I did want to ask about your tricuspid and mitral for just a quick check, but the CENTERA product, could you tell us what we should expect to see and hope to see when we might see it that would tell us that it's going to achieve the kind of performance you're hoping it could in order to be an important add to your SAPIEN platform?.

Yeah. So, as we've indicated, we expect to get the CE Mark by the end of the year and we expect it to be based on data that probably is presented at EuroPCR meeting in May. So, I think that's going to be a good chance for you to get a look at that, Matt, and be able to judge what kind of a therapy that is..

Okay.

And I know we talked about Cardioband, the mitral, you'd mentioned at your meeting also that you're kicking off or beginning to initiate this study for Cardioband TR, any sense of when we'll see – start to see some tricuspid data or short track results out of that initiative?.

Yeah. Even though, the Valtech is new to Edwards, we also are excited about Cardioband for tricuspid regurgitation. And they tell us they've got some pretty good momentum, so we believe that that CE Mark trial could be enrolled by the end of 2017..

And then finally, if I could, on similar category of product here on PASCAL, you talked about kicking off the CE Mark study in this year, any update on timing or expectations for that would be helpful, for the mitral valve repair?.

Yeah. I don't have any update on that one. We'll keep you tuned in, Matt, and we'll need to let other people ask questions, thanks..

Thanks so much..

Thank you. Our next question comes from the line of Rick Wise with Stifel. Please proceed..

Good afternoon, Mike. Let me start with something that's coming up and I think it's certainly new since the Analyst Day, the SURTAVI data, intermediate risk data from Medtronic is coming up at ACC as the late breaker. I mean, I think that's certainly a faster date than I expected back in December.

If we can assume it's going to be positive, how do we think about this? Can we view this as a positive data there, as a positive class effect for intermediate risk adoptions sort of similar to other large positive data sets we've seen in the past, and could that, should that, would that potentially accelerate intermediate risk adoption for all?.

Yeah. We – I think, your point's a good one. We think if they have – if they show good results, that's only a positive for patients, not only it helps transcatheter aortic valve replacement therapy as a total class. And so, we actually hope that they're successful in treating these patients and we'll be anxiously awaiting the results like you..

Yeah. And maybe, Scott, one for you. First quarter guidance, I think I get the revenue range, but the EPS range seems unusually wide, maybe just help us understand some of the factors, is this more revenue, or margin, or currency that's creating this – the $0.10 range? Thank you..

Sure. It's not uncommon, and it's probably not FX, because most of our EPS volatility or unpredictability is addressed through our hedge programs.

So, it's really going to be more driven by revenue, and that's been the largest driver of our earnings so far, and our margins, and that's really, probably that's going to have it end up wherever it ends up in the range. But I'd point you to the middle of the range for modeling purposes..

Thank you..

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

Hi. Thanks for taking the questions. Maybe just two on mitral. First on the Cardioband. One of the pointed feedback on that product is that it is a relatively long procedure, it could be an hour and a half, two hours to put that device in.

And so, I guess I'm curious what your thoughts are around that, and as we've now taken it in, if you see the prospect to shorten the time to implant for that?.

Yeah. Thanks, Raj. Yeah, there are a number of things about the Cardioband that we find attractive, but there's also opportunities for improvement. And yeah, absolutely, one of them is to shorten procedure times. Those can be really very lengthily and tedious, and we have a number of ideas that the R&D team has to be able to shorten this procedure time.

And so that's going to be one of the key areas of focus for us as well as to try and put some engineering into the system to improve reliability and take out cost..

Fair enough. And then maybe just one on CardiAQ. I know it's probably premature to be thinking about what might come after that, assuming that maybe you can't fix what the problem is. But you've sort of shelved your own program and you chose not to buy or to take in Valtech's mitral valve initially.

But how do we think about what comes next in potential delays in timing now that this might represent?.

Yeah, I'm not going to speculate. There's really a broad range of things that could happen from where we are right now. Just to be clear, we just suspended clinical enrollments. We didn't really pause the whole program. And I don't know that pausing is that unusual for this sort of an early stage in transformative technology.

As I tried to relate earlier, we're on a steep learning curve and to place a valve in the mitral position is a tough task and to do it well. The valves are large. The pressures are high. The anatomy is very complex. There are very serious imaging challenges. There's coagulation challenges.

And so we're on a steep learning curve and we're very pleased at the pace that we're moving at. We just decided on this feature that we were going to pause this while we're going through our own internal tests. So we'll keep you tuned in. And we're hopeful that it's positive and that we'll be back rolling again in the second quarter..

Fair enough. Thank you..

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

Good afternoon. Thanks for taking the questions. Mike, talk about how you screen patients for EARLY-TAVR. Obviously, these are asymptomatic patients.

Are there some obvious signs and signals that people suggest they can find these patients easily or is that part of the learning process?.

So I'll tell you my understanding and then again I'm not an expert. And I think, collectively, the clinical community is going to learn something as well. These are patients again with severe aortic stenosis. So someone has done an echo or an ultrasound on this patient and found that their valve is closed. So typically, it starts out with a murmur.

They get a diagnostic echo. That echo says that they have severe aortic stenosis. But their physician does not diagnose symptoms. So I think the first step of the clinical trial actually is to put this patient on a treadmill in addition to a number of other diagnostic tests. And so this would be the first interesting test.

And then ultimately if they show no – demonstrate a lack of symptoms, they'd be randomized between getting a transcatheter aortic SAPIEN 3 by femoral delivery or just clinical surveillance..

Do you have any sense of how many patients are out there with a positive echo but no symptoms?.

We don't have a good sense. When we did our early estimates, we felt that there may be as many asymptomatic or patients without symptoms as patients with symptoms. Again, that's what the clinical community would estimate. And we believe that a lot of those patients are probably out of the system.

Now, there are also a number of hospitals that tell us that they actually have groups of patients that have no symptoms that they could name names on. So again, we're going into a bit of uncharted territory, Ben, and we'll keep you tuned in on what we learn..

Okay. And if I can sneak in one on the SAVR side, you talked about kind of the new products helping offset the impact of volume.

But what is the volume assumption for 2017 guidance in surgical valves?.

So if you're to say what we think is going to happen in Europe, in the U.S.; we think that the number of procedures would be down slightly, so down a few percent in terms of the total number of procedures done in Europe or done in the U.S. And that again is of surgical isolated aortic procedures, right.

We expect that we offset that decline through our new products. So through new products and share gain, that our sales would actually grow 1% to 3%..

And is any of that price or is that just share?.

Well, some of it, I suppose you would say, turns out in price. So for example, when a physician chooses to use an INTUITY Elite valve instead of a Magna Ease valve, the value that they would impart would be higher to Edwards. Obviously, you're getting a higher value. So you'd see that, I suppose, in the price relationship.

But the other part might just be share gain associated with our products that are best-in-class and we're the market share leader on..

Thank you..

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

Thanks, gentlemen. I was hoping – so I apologize, Scott, this first question is for you, a little bit granular. But with the focus and intense focus on the sequential growth in the U.S.

TAVR business, I was wondering if you'd be willing to just lay out any of the potential headwinds outside of just the core clinical utilization either on the royalty side or the clinical revenue side in the quarter?.

Sure. So clinical revenues did decline in the second half of 2016 as intermediate risk patients went from clinical to commercial after we got the approval. And we expect clinical revenues should increase again during 2017 in connection with PARTNER III. But the growth rates in the U.S.

have gone from – last year, they were at 64% in Q1 and then 66%, 55% in Q3 and 41% in Q4. And now it's expected. It's really the law of big numbers that's driving the decline in the growth rates. And ultimately, we don't expect that there are any new headwinds or considerations other than the ones we've been talking about..

And was there anything specific on the royalty? $2.5 million can account for about 100 basis points of sequential growth at these levels?.

So there's nothing really that we expect to change with the royalties. We've guided people to assume about $10 million per quarter. And that's about what we've been running with a couple of exceptions, where we might have a quarter where there is a true-up and it ends up being more than that.

But generally, $10 million a quarter or $40 million for the year is the right assumption for royalties..

Okay, great. And then, Mike, just one kind of longer-term question for you. Some of our clinical checks with surgeons and talking about holding on to patients that are either younger and lower STS scores in the intermediate category or maybe eventually even low-risk patients, and what they hang their hat on is durability.

And I was just hoping you could kind of give us your internal roadmap of how you see that question being answered. I know we're looking out a number of years. But what clinical trial dataset, do you think, gets us the answer? And what is the duration of data that we need to see? Is that 7, 8, 10 years? Appreciate it..

Yeah. Thanks, Matt. It's not unusual if you go out there to speak to surgeons to find some that have a lot of confidence in their own ability to do great surgery on intermediate-risk or low-risk patients. We really don't find that as a surprise.

The surgeons that are already on heart teams at TAVR centers seem to really understand the value of the therapy. And those referral processes seem to go much better.

When you're in hospital systems where there is no TAVR and only surgical valve replacement is available, probably those surgeons are less – probably understand less the value of TAVR and the importance of TAVR. So it's part of probably our system moving a little slow, probably not a big surprise to us. That's in our estimates.

We know that it's going to take some time and it'll be a cumulative sort of weight of the data that'll ultimately influence them. We're really pleased that we have powerful data in PARTNER I and PARTNER II. We've got PARTNER III right behind it and then EARLY-TAVR right behind that.

So we're going to bring big powerful studies that are highly scientific to bear and ultimately we think the weight of that data will carry the day..

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

Hi. Good afternoon, guys. My first question, Mike, just on the intermediate adoption curve.

As now we've had a full quarter of intermediate in terms of the label, have you gone out or your sales team has gone out and have you been able to assess how the TAVR centers are absorbing these new patients? Are they able to get extra lab time? Are they hiring new operators? I just want to make sure that there's no structural roadblocks to the market picking up with all these intermediates coming into the marketplace.

And then I had two quick follow-ups..

Yeah. Thanks, Glenn. As you know, no two sites are alike. But I would say broadly that we really have not seen structural roadblocks, that sites have had an amazing ability to add capacity and cases per day. And in some cases, it's been pretty significant that they're able to do even four cases a day with SAPIEN 3.

So they get a pretty good capacity bump out of it. And so, no, structurally, I really don't think that's the core issue..

Okay. And then two quick follow-ups. One, you said you're implanting at over 500 centers in 2016. So how many centers did you add in 2016 and how many you expect to add in 2017? And then on the CardiAQ, are you still developing that device for transapical? Thank you..

Yes. So, yeah, I don't remember the exact numbers. But I want to guess that it's around 50 centers that we added during 2016. Gives you a sense of what we've done.

And then your question about transapical was on which system?.

On the CardiAQ....

Yeah..

Are you still going forward with a transapical system? And then I also asked about how many centers you thought you'd add in 2017..

Yeah. So, yes, indeed, we are moving forward with the transapical system as well. When we adopted that CardiAQ, one of the things that we found attractive is that we could have one valve with two delivery systems. And so, yeah, that is an important element.

In terms of number of centers in 2017, is that TAVR centers that you're asking about?.

Yes, correct..

Yeah. So 2017, we're likely to get some growth. We expect that to probably slow some, not to be as big as the growth in 2016. There are still centers that are interested in joining, but we expect that to be at a reduced rate. It's hard for me to estimate just what that would be..

Okay, great. Thanks, Mike..

Sure..

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

Good evening and very nice quarter. A couple of things. Starting off with something boring like gross margins. You had 72.5% in the fourth quarter and yet your guidance for the year is 74% to 76%.

For modeling purposes, how should we think about that progression?.

Sure. It was actually 72.2% for Q4. It was about 73.1% for the full year 2016. And the best modeling assumption for 2017 is right in the middle of the 74% to 76% range. And the difference is take from 73% roughly for 2016 and add about 100 basis points for mix and about 100 basis points for FX..

Okay, that's helpful. And then and possibly more interesting, can you talk a little bit about the international market? You think that the $10 million from lost French sales went to Medtronic. But bigger picture, what's really going on in that market as it relates to market shares and shifts with some newer products coming in? Thank you..

Yeah. So, yeah, there have been some new products. But overall, there hasn't been a big change that we've observed over the past several quarters. The new competitors are still having some impact. I think, total, they're in the mid-teens sort of level of market share. And outside of what happened in France, we haven't seen a lot.

ASPs have been very stable across Europe. So again, you know that we're selling at a premium and sometimes that premium's quite large. It could be even larger than 20% in some places. But there's no significant changes in the market dynamics, Joanne..

That's very helpful. Thank you..

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

Hey, guys. Good afternoon. Thanks so much for taking the question. First of all, I was wondering if you could parse out a little bit more the impact, if any, of the competitor's large valve in the quarter. I believe they launched about a month into the quarter. It sounds like maybe you didn't see an impact at all.

And where did you make that up, if you did not? Because presumably they did gain some share in that 34 millimeter size..

Yeah. You know what, I think the quarter turned out pretty much the way that we expected to. It was maybe a little bit stronger than we thought based on how the year closed out. I don't know what to tell you about that. Our 29 millimeter valve serves most sizes of patients. And so we don't really feel like we lose patients in that regard.

And that a large-size valves is already factored into our guidance. So there was really nothing new there..

Okay, that's fair. And then, Mike, I'm just trying to get a handle on where we are in intermediate risk. So I appreciate all the market development efforts you guys are putting forth. And those have yet to really take hold and bear fruit. But do you have a sense now of, in the U.S.

market, what percentage of patients are intermediate risk or where we are in intermediate risk penetration? If you look at your own patient population, the patients that are getting SAPEIN 3; how many of those are intermediate risk versus high risk or inoperable?.

Yeah, thanks. I know it must be frustrating. But we really would like to steer you away from just isolating, looking at just the risk factors.

As we tried to talk about it at our investor conference, there are a number of factors the heart teams take into consideration, which include risk or – but certainly everything about their – the anatomy of these patients and the frailty of these patients. And so it is multi-factorial and it's done by these multi-disciplinary teams.

I'd encourage you to go broader. We feel like there's about 650,000 patients out there with severe aortic stenosis and the treatment rate right now is around 18%. And so our job is to see if we can improve that and improve the lives of these patients and our performance as well..

All right. Thanks so much..

Sure..

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

Thanks. Mike, Dr. Therani (01:01:28) had a presentation at SVS in which he highlighted the fact that a quarter of the patients in the surgical arm of PARTNER IIA also had some other surgical interventions while they were on the operating table. And that those patients then had a higher event rate than those that underwent isolated AVR.

One of the questions coming out of that presentation was whether that made it a bit of an apples to oranges comparison versus TAVR.

Could you just comment on that paper?.

Well, I'm not intimately familiar with it. It sounds like that's real world and that reflects what patients go through.

And so I would say typically when a surgeon opens a patient, they are going to consider from time to time are there other things that they should do because this is a pretty big procedure to take a patient through and they're not going to miss the opportunity to do more.

So I think that when it's all done, it probably is a realistic comparison of what goes on in the real world..

Okay, thanks. And then in a few weeks, Claret's going to go to an FDA panel. And there's another embolic protection system not that far behind them.

What are your latest thoughts about the need for embolic protection during TAVR and do you guys have any plans to revive your internal program?.

Yeah. Our thinking really hasn't changed dramatically on this, Chris. We continue to feel that with the stroke rate that's as low as it is – and you saw what the stroke rate looked like for a SAPIEN 3. They're in the neighborhood of 1% at 30 days. That adding another delivery system and another catheter potentially adds as much risk as it erases.

And so for the additional cost and risk associated with it, we have a tough time endorsing that therapy..

And do you think that the way you're measuring it in the trials is capturing the full scope of neurological complications? One of the pushbacks that those companies would say is that we are missing some stuff. When you look at their event rates in the trials, and they're quite a bit higher, although maybe some of those are sub-clinical..

Yeah. I couldn't be more proud of the way that we assess stroke risk in our trials. I don't know if you recall what happens. But we actually have a neurologist, not a cardiologist, but a neurologist do an assessment before the procedure. And then they do the follow-up assessment.

So you have a neurological assessment by somebody that's detached from this and they're highly qualified to be able to assess stroke risk. Now, if you would compare it to an MRI, we'd argue that that is sub-clinical often. So we think that our trial has probably some of the best and most robust data generated related to stroke..

Okay. Thanks, Mike..

Sure. Okay, well, thanks all for your continued interest in Edwards. Scott, David and I welcome additional questions by telephone. And with that, I'll turn it back over to 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 201-612-7415 and use conference number 13652092. Let me repeat those numbers. Dial 877-660-6853 or 201-612-7415 and use the conference number 13652092.

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. Thank you for your participation..