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

Robert Hopkins - Bank of America Merrill Lynch Larry Biegelsen - Wells Fargo Securities LLC Michael Weinstein - JPMorgan Securities LLC David Ryan Lewis - Morgan Stanley & Co. LLC Jason Richard Mills - Canaccord Genuity, Inc. Matt Miksic - UBS Securities LLC Isaac Ro - Goldman Sachs & Co. LLC Bruce M. Nudell - SunTrust Robinson Humphrey, Inc.

Chris Pasquale - Guggenheim Securities LLC Vijay Kumar - Evercore ISI Joshua Jennings - Cowen & Co. LLC Glenn John Novarro - RBC Capital Markets LLC Joanne Karen Wuensch - BMO Capital Markets (United States) John T. Gillings - JMP Securities LLC Suraj Kalia - Northland Securities, Inc..

Greetings, and welcome to the Edwards Lifesciences Second Quarter 2017 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Erickson, VP of Investor Relations. Thank you. Please begin..

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our second quarter 2017 financial results. During today's call, we'll discuss the results included in the press release and the 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 are limited to, financial guidance and current expectations for new product launches, clinical and regulatory timelines, reimbursement and competitive matters, trends in therapy adoption and foreign currency fluctuations.

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 2016 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 our website. Now, I'd like to turn the call over to Mike Mussallem.

Mike?.

Thanks, David. We're pleased to report another quarter of strong performance with a remarkable growth for Edwards at both the top and bottom lines. In the quarter, we continued to be rewarded for our innovative therapies as we execute our patient-focused strategy benefiting even more patients and healthcare systems worldwide.

Strong demand for TAVR therapy resulted in total Edwards sales growth of 15% on an underlying basis. We delivered results above our expectations, which reflected strength in all three of our product lines across all regions.

In transcatheter heart valves, adjusted global sales were $510 million, up 23% on an underlying basis over prior year including an upward adjustment for the consumption of stocking inventory in Germany. Growth was led by continued strong therapy adoption across all geographies. Globally, our average selling price remained stable.

In the U.S., transcatheter heart valve therapy sales for the quarter were $316 million, representing 28% growth versus the prior year. We believe overall U.S. procedure growth this quarter was consistent with our growth.

Therapy adoption continued to be strong, and our SAPIEN 3 valve has sustained its excellent clinical performance across large and small valve centers. Our growth was broadly distributed across our network, now approaching 550 hospitals with notably strong contributions from recently added centers.

We continue to be encouraged by the strong international adoption of TAVR particularly where overall therapy penetration is still very low. Outside the U.S., our underlying growth rate was 16%, which includes the consumption of $22 million of stocking inventory in Germany.

As a reminder, in the first quarter, customers in Germany purchased $62 million of additional SAPIEN 3 inventory in anticipation of a potential supply interruption resulting from IP litigation in that country. We included these stocking sales in our reported results, but excluded them from the adjusted results in the first quarter.

We will add them back to the adjusted results in subsequent quarters as this inventory has consumed to better reflect actual hospital usage. We estimate procedure growth in Europe was in the mid-teens compared to last year. In the quarter, Edwards underlying unit growth was lower than this, reflecting a reduced share position versus a year ago.

During 2017, we estimated our share position has remained stable. Growth in European countries with lower TAVR adoption rates continued to outpace countries where the therapy is more established. Consistent with historical trends, average selling prices declined slightly, which was in line with our expectations.

In Japan, our highest growth region, we continue to see strong TAVR therapy adoption with new centers being added. We believe Edwards underlying growth in the second quarter was in line with overall procedural growth in that geography.

Turning to our near-term product pipeline, we continue to expect our new Ultra system including an on-balloon delivery system and next-generation sheath technology will be launched in Europe later this year. In addition, we're also pleased with the excellent early clinical trial results presented at EuroPCR on our CENTERA system.

We continue to plan a limited launch of this premium self-expanding valve system in Europe late this year, and we'll use that experience to inform our U.S. strategy. Enrollment continue to increase in our PARTNER III low risk trial, and our goal remains to have this randomized trial fully enrolled around the year-end.

We're pleased that enrollment has begun in our EARLY-TAVR Trial. This groundbreaking trial is the first of its kind to study severe aortic stenosis patients without diagnosed symptoms.

In summary, as a result of the unexpectedly strong start in 2017, we are raising our full year THV underlying sales growth guidance to 20% to 25%, even as we expect competition to intensify. As a reminder, in the second half of the year, we typically experienced a seasonal slowdown. Turning to Surgical Heart Valve Therapy.

Sales for the second quarter of $207 million were up 6% on an underlying basis. This growth benefited from the recovery of a 2016 mitral valve supply interruption that lowered last year's sales. We also experienced continued strong sales growth in the U.S.

for our EDWARDS INTUITY Elite valve system, which more than offset the impact of the shift of surgical aortic valve procedures to TAVR. Globally, our average selling price was higher due to the contribution of our premium INTUITY valve system. Clinician feedback on INTUITY has been very positive in our more than 200 U.S.

hospitals currently offering this therapy. We're optimistic about this higher value platform and its ability to help improve the patient experience. As recently announced, we received FDA approval for our INSPIRIS RESILIA aortic valve and are planning a 2018 launch in the U.S. and Japan.

We began launching in Europe earlier this year and have received an enthusiastic response for the use of this valve in the treatment of active patients who are seeking alternatives to mechanical valves.

In summary, as a result of the strong first half results in surgical heart valves, we now expect a higher full year underlying sales growth rate of 3% to 4%. In the clinical care product group, sales for the quarter were $147 million and grew 5% on an underlying basis.

Strong performance was driven by double-digit growth in our Enhanced Surgical Recovery Program, particularly in the U.S. and Asia Pacific. Our next-generation advanced monitoring platform, HemoSphere, just recently received U.S. regulatory clearance. We are initiating the global launch of this platform, which will ramp during the remainder of the year.

HemoSphere is designed to provide greater clarity on a patient's hemodynamic status to enable clinicians to make timely potentially lifesaving decisions. HemoSphere is modular in design, and we plan to add enhanced surgical recovery capabilities to this all-in-one platform in the future.

In addition, we're introducing our new FloTrac IQ smart disposables to select clinical sites in Europe. This is a low blood pressure or hypotension probability indicator to alert physicians in advance of this dangerous condition occurring. Pending regulatory approval, we plan a full launch in the U.S. and Europe in 2018.

In summary, bolstered by a strong first half performance, we continue to expect full-year underlying sales growth in clinical care to be at the high end of the 5% to 7% range.

Shifting gears to our structural heart initiative, this quarter, we continue to see positive momentum in our transcatheter therapies to treat patients suffering from mitral and tricuspid disease. We're pleased to announce that we recently completed enrollment of our CE Mark trial for Cardioband in the tricuspid position.

Additionally, we've been rapidly incorporating learnings across our tricuspid portfolio. We have now treated nearly 100 patients suffering from tricuspid regurgitation with the Cardioband and FORMA systems and are encouraged by our clinical experience.

These learnings are affording us valuable information as we evaluate our tricuspid launch strategy in Europe in 2018. We plan to provide more details on that at our investor conference in December. And while we remain encouraged by Cardioband's mitral clinical results and are on track to initiate the U.S.

IDE trial, the commercial ramp in Europe is progressing slower than expected as it's taken longer to build a new dedicated clinical support team. Commercial sales this quarter were minimal, and we now expect sales to grow to $2 million to $3 million in the fourth quarter.

We continue to believe that annular reduction provided by Cardioband can be an important first-line repair therapy for many mitral patients. We also have updates to report in our PASCAL transcatheter mitral valve program. We have begun enrollment in the CE Mark trial and expect to expand this trial into multiple centers over the remainder of the year.

Additionally, we've just received approval to begin an early feasibility study in the U.S. We've resumed treating patients with our Edwards CardiAQ mitral valve replacement system delivered transseptally.

As we gain clinical experience with this important therapy for patients who have few options, in parallel, we're applying our learnings to a more refined system and clinical protocol.

Overall, while still early, we believe our aggressive investments in research and development are well placed in the emerging transcatheter, tricuspid and mitral fields and offer the potential to help more patients and drive future growth.

We're pleased with the experience we're gaining, which is providing us valuable learnings, as we continue to refine our strategy. You can expect updates on our structural heart and TAVR programs from clinicians in the upcoming fall scientific meetings.

Before we get into our financial results, I'd like to provide an update on two of our external investments. During the quarter, there was an interim review of the clinical data on the CardioKinetix Parachute device.

While it showed promise in some heart failure patients, unfortunately, the trial was not likely to meet its primary endpoint and the company chose to stop the trial. As a result, we wrote off our investment this quarter. Separately, clinical enrollment remains on track in our Harpoon Medical minimally invasive chordal repair system.

Edwards has an option to acquire this technology for $100 million, plus $150 million in potential future milestone payments, and we'll likely make a decision later this year. And now, I'll turn the call over to Scott..

Hey thanks, Mike. We continued this year's strong performance with sales in the quarter of $842 million, or $864 million including $22 million of net Germany destocking, which represents an underlying growth rate of 15%. Consistent with last quarter, our underlying sales and growth rates will continue to adjust for this impact.

Our sales performance benefited from broad-based strong sales in each of our product lines and regions. We also benefited from meaningful FX rate changes since our April guidance. Adjusted earnings per share in the quarter grew 42% versus the prior year to $1.08.

This earnings growth was driven by our sales performance and favorable income tax rate resulting from a larger than expected tax benefit from employee stock compensation. GAAP earnings per share of $0.86 includes a $31 million write-off of our investment in CardioKinetix.

A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. I'll now cover the details behind our results, including guidance for the remainder of the year. For the quarter, our gross profit margin was 74.9% compared to 73.3% in the same period last year.

This increase was driven primarily by a more profitable product mix led by growing sales of TAVR. We continue to expect our full year gross profit rate, excluding special items, to be between 74% and 76%. Second quarter selling, general and administrative expenses increased 7% over the prior year to $244 million or 29% of sales.

The increase was driven primarily by sales and marketing expenses related to transcatheter valves. The ratio of SG&A as a percentage of sales would have been 80 basis points lower, adjusting for the impact of Germany destocking sales.

We continue to expect full year SG&A, excluding special items, to be between 28% and 29% of sales, as we increase SG&A spending in the second half of the year. Research and development investments in the quarter increased 19% over the prior year period to $134 million or 16% of sales.

This increase was primarily the result of continued investments in our transcatheter mitral, aortic and tricuspid valve programs including development expenses associated with Cardioband. As with the SG&A ratio, the R&D ratio would have been 40 basis points lower without the Germany destocking sales.

We continue to expect our research and development investments, excluding special items, to be between 16% and 17% of sales for the full year as we increase R&D investments in the second half of the year, while enrollment and clinical trials increases.

During the second quarter, we recorded $8 million in intellectual property litigation related expenses, which have been excluded from adjusted earnings per share consistent with our convention. These expenses related primarily to IP litigation in the U.S. and Europe.

Our reported tax rate for the quarter was 9.5% compared to 25.1% in the prior year period. This quarter's rate benefited from the new accounting for employee stock-based compensation. Without this benefit, earnings per share would have been $0.13 lower.

As we mentioned at our investor conference, this accounting benefit will fluctuate in each reporting period, making period comparisons less consistent. Our benefit in the first half of 2017 has exceeded our estimate driven primarily by our higher stock price, which results in a higher tax deduction.

We now expect our full year GAAP tax rate to be between 17% and 19%. Excluding the excess tax benefit and special items, our full year tax rate would be consistent with our prior guidance of 22% to 23%. Forecasting remains difficult, because stock option exercises and stock price are not predictable.

Foreign exchange rates negatively impacted second quarter sales by $10 million compared to the prior year. At current rates, we now estimate an approximate $20 million negative impact to full year 2017 sales versus the prior year. Our previous estimate was $50 million.

Compared to our April guidance, foreign exchange rates had less than a $0.01 impact on earnings per share in the second quarter. Free cash flow generated during the quarter was $140 million. We define this as cash flow from operating activities of $198 million, less capital spending of $58 million.

Our capital spending reflects investments we are making to increase valve manufacturing capacity. Given our strong operating performance in the first half of this year, we now expect our full year free cash flow to be between $625 million and $675 million.

During the first half of 2017, we opportunistically repurchased 5.4 million shares for $511 million to more than offset dilution associated with our Valtech acquisition and stock-based incentive compensation. Average shares outstanding during the second quarter declined to 215.7 million.

We have over $500 million for share repurchase available under our current authorization, and we continue to expect average diluted shares outstanding for the year of 216 million to 218 million. At the end of the quarter, we had cash, cash equivalents and short-term investments of $1.1 billion, and total debt was $1 billion.

Turning to our 2017 guidance. Given our strong start to the year, we are raising our full year sales estimate to be at the high end of our previous range of $3.2 billion to $3.4 billion. This higher estimate reflects the stronger than expected first half performance and a weaker U.S. dollar.

We continue to expect our underlying growth rate to moderate in the second half. Our expectation is that hospitals in Germany fully utilize their stocking inventory by the end of the year, which result in no impact to full year results.

Our full year guidance for transcatheter heart valve therapy sales is at the high end of $1.7 billion to $2 billion and for critical care, at the high end of $560 million to $600 million. We are raising our sales guidance for surgical heart valve therapy to be between $780 million and $810 million.

Given our strong first half sales performance and favorable tax rate, we now expect our full year 2017 adjusted earnings per share to be between $3.65 and $3.85, up from $3.43 to $3.55. This includes increased SG&A and our research and development expenses in the second half of 2017.

For the third quarter of 2017, our seasonally lowest quarter at current foreign exchange rates, we project underlying sales to be between $810 million and $850 million, and adjusted earnings per share to be between $0.80 and $0.90. And with that, I'll hand it back to Mike..

Thank you, Scott. As we reflect on our first half results, we're very pleased with the performance achieved across all our product lines and believe our future remains bright. Our innovative TAVR therapies continue to deliver value to patients.

Our surgical heart valve and critical care product lines remain strong, as we invest in innovative products to strengthen our leadership positions. And our transcatheter mitral and tricuspid valve technologies continue to represent exciting opportunities for breakthrough therapies.

Overall, we're confident that our valuable innovations will result in a continued strong outlook as we deliver important solutions for the patients that we serve. And with that, I'll turn the call back over to David..

Thank you, Mike. Before we open up for questions, I encourage you to mark your calendars for Thursday, December 7, when we will be hosting our 2017 Investor Conference in New York. This event will include updates on our latest technologies as well as our outlook for 2018. More information will be available in the next couple of months.

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. Our first question comes from the line of Bob Hopkins with Bank of America. Please proceed..

Great. Thanks and congratulations on a really strong first half. My first question this afternoon is, I just wondered if I could get some clarifications on your comments on the pipeline.

So regarding, Ultra and CENTERA outside the United States, are there any changes to the previous timelines that you've articulated? And then, on mitral replacement, I think your previous comments were that you hope to be commercial in 2019 and that you're screening patients.

But I noticed you talked about a more refined system and more refined clinical protocol, so maybe if you could just give us a thorough update on mitral and Ultra and CENTERA. Thank you..

Well, thanks a lot, Bob. Appreciate your comments. Yeah, actually the guidance on CENTERA and Ultra is unchanged. That's consistent with what we said before. So, Ultra will be launching later this year, and CENTERA will be launching actually late in the year, and so that really is no change.

And we're optimistic about both of those platforms being really important and valuable to customers. On the marginal side rather than go through all our micro programs, maybe I'll just restrict my comments to the CardiAQ product line. As you correctly noted, we said last quarter to expect a 2019 launch. Nothing has changed in that regard.

What we are pleased to announce is we actually began implants again. Remember we were very deliberate about this. We're doing implants again, which not only helps these patients that really don't have many options, but it also allows us to learn which is really important.

And it helps us not only in the design of our product, but also in the selection of patients and the procedure itself and understanding anticoagulation protocol and a long list that becomes important for the long-term success of this therapy..

Great. That's very helpful. And then the second question, I just wanted to ask about the TAVR performance in Europe. You made some comments about growth in the market and then your growth and your share position.

I was wondering if you could just provide any additional color on what you're seeing in Europe and you said you maybe lost a little bit of share in Europe. Just maybe a little more color there would be appreciated. Thank you..

Thanks, Bob. You do a pretty good job of packing a lot into a couple of questions. Anyways, what we've tried to say is in the Europe that we estimated the market probably grew in the mid-teens, we grew less than that. And so actually that reflects a market share reduction versus a year ago.

We also tried to suggest that there was really no market share change in 2017, so this really lapsed back to a period in time, when there was increased competitive activities. But we're very pleased with the way things are going overall in Europe..

Great. Thank you very much..

Sure..

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

Good afternoon, guys. Thanks for taking the question and congrats on another good quarter. One financial for Scott, one big picture question for Mike.

Scott, how much of the $0.26 EPS raise at the midpoint is due to the stock-based comp benefit, how much is operational, and should we use that 17% to 19% tax rate going forward? And then I have one follow-up for Mike..

Yeah. So on 17% to 19%, that's the right estimate for the full year. And so if you average out the little bit lower 9% rate this quarter, it gets you a little bit higher rate for the back end of the year.

In terms of the EPS, an increase for the rest of the year, it's about 60% operations, 40% excess tax benefit resulting from the stock-based compensation accounting change..

Scott, I meant beyond 2017 and while I'm on that for the – 17% to 19%, that sounds like that's probably the best rate to use at this point. And then Mike, 2017 is shaping up to be another strong year obviously for Edwards.

Given that the low risk indication isn't expected until probably late 2019, is there enough runway, any intermediate risk, in your pipeline to drive strong growth until you receive a low-risk indication? Nothing specific, but just directionally, how you're thinking about between now and the low-risk indication? Thanks for taking the questions, guys..

So, Larry, I'll try to answer your question about tax rate. If there were no excess tax benefit, think about our baseline tax rate for now as low 20% range. It's really hard to estimate beyond that, what the impact's going to be on this excess tax benefit, because there are three elements that contribute to the calculation.

One is the number of stock options that are exercised. Two is the strike price of those options that are exercised and the third one is our stock price. And so, to give you much color beyond just that baseline, tax rate reference really isn't possible at this point.

We'll talk more about it at the investor conference, when we give guidance in December for 2018..

And thanks, Larry. From a big picture perspective in TAVR, yeah, we enjoyed a terrific first half, that's for sure. We expect a really strong second half, although the growth rate is going to be lower, probably more consistent with what we originally thought.

We're not prepared to give long-term guidance at this point, other than to remind you that we've said we believe this market is more than $5 billion and that we expect to be the leader going forward.

If you just sort of play that out, Edwards would sustain a growth rate that would be somewhere in the teens, right, and it depends on the year, it's just exactly where it is, whether it's mid-teens or low teens. But no, we don't expect there to be a big drop. It will obviously change from quarter-to-quarter.

We're always subject to volatilities, which I think you should be cautious of, but now, we feel good about our runway..

Thanks for talking my questions, guys..

Sure..

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

Thank you, and good afternoon everybody. Just two product questions on my end. So, one, Mike, with CENTERA is what is the limiting factor beyond wanted to have a good initial experience from going from a trialing, kind of limited rollout to a broader rollout.

When would you expect the broader rollout to occur? And then on the Cardioband MR commentary, I think you mentioned in your prepared remarks that it's taking longer to build out a support team. Could you just expand on that? That sounds a little surprising just given your wealth of experience on the TAVR side..

Sure. And first of all, on CENTERA, there is nothing fundamental that's an obstacle there, Mike, that you need to be concerned about. We're going to go through the normal scale-up even though we have some outstanding results in the CE Mark trial. Again, it's hundreds of patients, and we want to execute this at a high level.

We already have a heart valve in the marketplace by the name of SAPIEN 3 that's performing at an extraordinarily high level. And so, we don't feel the urgency that we have to rush CENTERA, and we're just going to be deliberate about it in terms of ramping it up.

Our production ramp and our training is something that we'll do, we feel comfortable with, and so, no special news or limitations in that regard. On Cardioband, it's just a matter of us putting a dedicated team in place.

We've made the decision that we are going to have a dedicated team and not trying to get leverage out of our transcatheter aortic valve team or our heart valve team, but have a dedicated team for this. We're building that right now. It's taken us a little bit longer than we like.

So we're probably still building that during the second quarter and expect that to be effective and start to ramp up in the third and start hitting our stride here in the fourth quarter.

So it has taken us longer than we like, but I think it's the matter of this development, and I think it's a little bit of what to expect here as we ramp some of these future therapies..

Okay. Then just one financial follow-up for Scott. So Scott, if I look at the first half of the year, your incremental operating margin was 50% on your sales. The guidance for the back half to the year implies a pretty good step-down from that type of drop-through.

But can you just talk about where incremental spending might go in the second half of the year that would drive that?.

Yeah, sure.

So in the second half of the year, our expenses are actually going to grow probably two times the rate of sales growth, and it's really driven in research and development by continuing increases in clinical trials and timing on SG&A expenses and just building up SG&A to support some of these new initiatives that we've talked about in the transcatheter, mitral, and tricuspid areas..

Okay. Thank you, Scott..

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

Great. Thanks so much. Two market questions for you, Mike. The first is, I wonder if you could help us think about the U.S. picture in the second half relative to the first half. I think in the first half, Mike, you talked about faster center starts and less competitive impact in the U.S. How should we think about the ex-U.S.

experience? Are we expecting competition to sort of heat back up, and how should we think about center adds in the second half? And I had a quick follow-up..

Yeah. So a bunch of questions in there, David. Let me see if I can take it apart. We still think we're going to have a robust growing U.S. market. In terms of growth, yes, we think centers will continue to be added. We don't think there'll be anything unusual, probably consistent with past trends.

From a competitive point of view, we expect that to intensify. Got to recall that we had a competitor that just got an intermediate risk approval recently. And so, we would expect that to have some kind of impact in the marketplace.

And then, the other thing, and maybe the most important factor is remember, there was some pretty terrific growth in TAVR procedures in the U.S. during 2016, a pretty aggressive ramp. And some of that actually was the movement from surgery to TAVR.

That sort of starts moderating to some extent in 2017, and so you wouldn't expect the same kind of growth from that driver in the back half that you saw in the front half..

Okay. Thanks, Mike. And then just a similar question, but ex-U.S. I mean it's interesting. By our math, your ex-U.S. business actually had a momentum acceleration in the quarter, but yet you called out the expected share loss in the European market. So I wonder, is the bridge Japan, which didn't come up in the call so far.

How is Japan going, and was that the source of sort of outperformance versus our estimates here in the second quarter? Thanks so much..

Yeah. Thanks. Japan is certainly a factor. I think what we said in our commentary is that those countries where TAVR is lightly penetrated really had accelerated growth and Japan is a perfect example of that, but it also was true in countries across Europe and even other countries in Asia.

So yes, indeed the international growth is significant, not just in Europe, and yeah, even with the share loss, and some of that share loss is something that we fully anticipated and expect over time. Again it's not something that's happening to us so much in 2017, but historical in nature.

We think we're able to put some pretty good growth numbers on the board and mostly attributable to the fact that adoption is still early in these. Japan for example is a place where we're probably still only treating high-risk patients.

And so, we got quite a runway in front of us for us to be able to grow and that adoption there is still slower and it started later than in the big markets like Europe and the U.S..

Thank you..

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

Hi, Mike. Thanks for taking the question.

Can you hear me, okay?.

Hear you great, Jason..

Super. Congrats on another great quarter. I wanted to stick with David's question on centers. And I guess more specifically, Mike, in 550 U.S.

centers now, what changes if anything in your approach to new centers in the United States? And I guess, are you dealing with any different dynamics than you've been dealing with in the past as you go forward with center expansion? And maybe you could comment on any contemporary data you've collected or seen on length of stay as a contributing factor to new centers' ability to build programs?.

Yeah. So, so big picture, yes, as TAVR has developed and matured, it's become apparent to centers that if you want to be a real player in treating patients with the aortic stenosis that you need to have a transcatheter heart valve program. So, you can imagine the incentive for hospitals to add programs.

There are significant hurdles and there are payment hurdles that they have to overcome. So, we expect hospitals to continue to add that. What we saw that what – it's happened for a few quarters now, is these new centers that joined are having almost immediate impact on our growth rate.

So, if you look at where the growth is coming from the U.S., there is a significant portion that it's not just coming from the big centers, although those are certainly growing, but the new centers that are added. And so, that's been interesting. And it helps you get a sense for just the learning curve associated with SAPIEN 3.

It's a relatively short one. They're able to perform at a pretty high level. The other thing it probably says is that there is patients out there that are in their own networks. And so, as hospitals join, it's a chance for them actually to be treated.

And even though there might have been a center not far from them, they might have never found their way to that center, if it wasn't added. And it's a bit of a signal here of what's in front of us here to make sure this therapy actually gets expanded..

So that's – segue into the second part of that question. As you look at the second half of the year and into 2018, I know a question was asked about growth between now and the approval for a low risk in 2019.

How much will you rely on new centers and efficiency gains, productivity gains at existing centers to achieve double-digit growth over the next sort of six quarters?.

We still think that the hospitals that are currently treaters are going to be the lion's share of the growth and that continues to expand. And I think you know from our past discussions that we feel like the treatment rate of patients with severe aortic stenosis and symptoms is still quite low.

So, these hospitals can handle the volume and they're continuing to mature and they're continuing to develop their referral network and that's going to be the primary source of our growth. We've been pleased this is – I guess we were approved in the U.S. in 2011.

So you can see how many years we're into it and still have a pretty heavy growth rate, and so, we feel comfortable that growth is going to stay significant into the foreseeable future..

Thanks, Mike..

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

Hi. Thanks for taking our questions. So I had a follow-up on mitral and tricuspid and then just one follow-up on – just last question on centers.

So, Mike, if you could expand a little bit on you mentioned some of the learnings and you described earlier related to Cardioband, it may be pertaining to the duration of the procedure if that's part of what you're able to take away from those, and on mitral, the impact of this valve-in-valve label expansion for SAPIEN 3.

And as I mentioned I have one follow-up..

Okay. So, well, a couple of things. First of all, on Cardioband, remember that there is a mitral program and we already have a CE Mark approval. So, we are expanding that and we're about to initiate the U.S. IDE trial. And then separately what we announced is that we completed enrollment of the CE Mark trial for Cardioband in the tricuspid position.

And so when I talked about our learnings, part of what I was trying to share was that we've learned a lot about tricuspids over the recent past. And so not that we are not learning a lot on mitrals, but I was just calling that out as a fact.

Between Cardioband and FORMA, we have now over 100 patients – we've treated nearly 100 patients that are suffering from tricuspid regurgitation. We have learned a lot and that's going to help us refine our strategy because we're thinking deeply about what we would launch in Europe in 2018 and I was more reflecting on that.

The second part of the question?.

On mitral valve-in-valve, SAPIEN 3?.

Valve, there was valve-in-valve. Yeah. Yeah, this is an important point from a patient perspective. So, for patients, we don't see these patients very often, but they are in desperate need, and a transcatheter valve inside of a failing valve is very powerful for these patients and potentially lifesaving.

In terms of what it does for our numbers, it's not very significant. It's actually a small part and when you consider the size of the transcatheter aortic valve business, it's not a meaningful driver of growth..

Okay. And then the second on the centers and the progress that you've seen there. I guess a follow-up to this last question. Is there a seasonal cycle to these centers? It seems like this time last year, there was a lot of new centers starting up and then, the first half of this year, many of those centers are really contributing.

So is there a seasonality to that, is there a size metric that you used to talk about the centers as being kind of on the smaller, newer size to add annual volumes or any color you can provide around that expansion..

Yeah. Thanks. I think I understand the question. When we talk about seasonality, we talk about the normal seasonality that affects all of Edwards business, particularly surgeries.

We know for example, in the third quarter, this is a higher vacation season for a lot of our treaters and volume is low, and in the fourth quarter, we have holidays that affect us as well. But I'm not sure that we see an impact related to centers that are becoming new TAVR centers that there is a seasonal impact.

There may be some level of that, but it's not one that we're prepared to call out. The thing that probably that's more meaningful is the impact of these new sites are having immediately because even though – and you'd have to acknowledge that most of the centers that are being added are smaller centers, they must have a captive patient population.

And so, as they do join, we get an impact immediately in the TAVR procedures. So it probably speaks somewhat to the point that patients don't naturally flow across hospital systems, and it probably highlights the importance of that and why new centers are meaningful..

Great. Thanks..

Sure..

Thank you. Our next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed..

Good afternoon, guys. Thank you. Just hoping for a comment on the pricing backdrop. If I look at your comments regarding the share trend Europe and then compare that to margins, it looks like pricing has been very stable, but just that that in fact has been the case..

Yeah. So, we spoke to pricing from a couple of dimensions. One is, overall pricing ASP for the globe, we said that's very stable, and remember that has a product mix in it with probably higher pricing in places like Japan and the U.S. and lower in Europe.

We said there is some impact on pricing, that's pretty minimal and I characterize it as low single digit, both in Europe and even lower in the U.S. related to volume discounting, but other than that, it's been quite a stable pricing picture..

Okay. And is it fair to say that you expect that pricing trend to remain stable into 2018, as the competitive dynamic evolves? And maybe separate from that, if you could just give us a sense on CENTERA. I'm interested in, whether or not you guys might give us a little more color on your U.S.

strategy at the December analyst meeting or might that be more of a 2018 event? Thank you..

Yeah. Thanks. Yeah. So, in terms of what we're going to do with our pricing going forward, yeah, we think pricing is going to be pretty solid. We really don't have anything to share, it's different.

There is a pretty significant price premium that we're enjoying in Europe at this point, and if anything, it seems like it's growing, but it hasn't had a lot of impact on us at this point. And it certainly varies by country. We talk about CENTERA pricing, we haven't announced that yet. It's just likely to be a little different by country.

It's a premium product and will be positioned that way. And in terms of the launch plan for CENTERA in the U.S., yeah, we'll probably have more to say about it at our investor conference. At this point, what we really want to do is to gain some more experience in the U.S. – I mean in Europe with the CENTERA system to help and form that strategy..

Understood. Thank you, guys..

Sure, Isaac..

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

Hi. Good afternoon. Thanks for taking the question. Mike, I have two questions, one on mitral, one tricuspid. On mitral, it looks like mitral could go in, will post around $500 million more white sale this year.

And I was just wondering, how in your mind does PASCAL stack up to that product?.

We ask ourselves the same questions, Bruce. It's pretty early at this point. We've got very limited number of implants. We're optimistic about it. We get nice feedback from our clinicians. They're clearly excited about it, but it's too early to say really how competitive it is..

Okay. And then on tricuspid, we count a lot of patients in the U.S. You seem excited about the opportunity, part's Cardioband, part's FORMA.

Could you just convey the basis for your excitement and why Cardioband perhaps might do better in the tricuspid application?.

Yeah. So, we're fortunate to have a portfolio in the tricuspid position that includes more than one therapy. And it's too early for us to declare one of the therapies better than the others. What we've learned is that, it is a real opportunity that patients just don't have many options.

And so, physicians are enthusiastic to be able to have something to help patients. What's not clear in the tricuspid position is whether we can have any long-term lasting impact, but we believe certainly that we're hearing about an improvement in their quality of life that comes pretty rapidly.

So, there is still lots of questions, Bruce, for us to answer, but we get encouraged by clinicians to persist on this. And we're glad to be able to gain experience at this point, so that we could sort through what is our sort of lead play in Europe in 2018 and we would probably have more to say about that at the investor conference..

Thanks so much..

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

Thanks. Mike, the strength in the heart valve therapy business this quarter was nice to see. I know you guys do have some easy comps because of what happened on the mitral side last year, but it also sounds like INTUITY was a big factor and maybe exceeding our expectations.

Can you just quantify that at all for us either in terms of the percentage of sales or procedures INTUITY represents today or maybe how the non-INTUITY piece of the business is doing?.

Sure. So we were clearly pleased with what was happening. In terms of the recovery, that was probably more than half of the total growth came from the recovery of mitral position, but INTUITY was a real contributor, probably added two points of growth to the product line in the quarter..

Okay. That's helpful.

And then, how you're thinking about the launch dynamics around SAPIEN Ultra? Is your expectation an Ultra replaces SAPIEN 3 the same way we saw SAPIEN 3 replaced XT or are you guys going to try and position a little differently?.

Yeah. We think that ultimately – I shouldn't have used the choice of words that Ultra will replace SAPIEN 3. We think it will be a next-generation platform and that our customers will prefer and that they will all migrate in that direction..

Great. Thanks..

Thank you. Our next question comes from the line of Vijay Kumar with Evercore ISI. Please proceed..

Hey, guys. Congratulations on the nice quarter here. Thanks for taking the question. Mike, maybe on the TAVR guidance, I know you've raised it to 20% to 25% for the year. I'm just curious, does it now assume your TAVR business is growing in line with the market rate of growth? Or if not, I'm just curious as to the reasoning..

Yeah. No, I think that's not bad. That's probably pretty consistent with the growth of the market. We think that the competitive dynamic is going to increase in the back half of the year. So for example, we have mentioned that a competitor has intermediate risk. So we might grow slightly slower than the growth of the U.S. market.

But in the first half of the year, we probably have been very consistent with the market and in the back half, maybe been slightly slower..

Thanks. And then maybe one follow-up for Scott. In Cardioband, I know, originally when you guys gave the guidance, we had sort of expected $10 million to $15 million contribution on the revenues and $0.10 of dilution.

I mean, just given how that business has trended, are we to assume the dilution, the impact would be higher? Can you just give us some color, Scott?.

Sure. We think that the revenues are going to come in below the $10 million to $15 million than we thought originally for the year. And as a result, the dilution may be a little bit more.

We feel pretty positive about the ramp, that by the time we get to Q4, we're expecting low single digits, $2 million or $3 million in revenue and over time, this should make positive contributions and work out of the dilutive position that is in here in the initial quarters..

Thanks, guys..

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

Good evening, gentlemen. Thanks a lot. I was hoping to ask on the international TAVR franchise in Europe specifically.

With the TAVR, worldwide TAVR guidance bump, was the expectation for Europe's share to be stable throughout the year as it experience in the first half and is there any incremental competitive challenge from Symetis being over Boston Scientific's roof and in their sales force's hands in your view?.

Yeah. Thanks. Thanks, Josh. I think I heard you. You're coming through a little bit muffled, but right now, we don't expect much change in terms of the competitive dynamics in Europe in the second half of the year.

Of course, we have a lot of respect for Boston, but we haven't modeled that there is a big change in terms of what the Symetis performance will be in the second half..

Great. And then just on the U.S. TAVR performance in Q2, were there any one-timers, either headwinds or tailwinds, either on clinical revenues or cap programs ending by from competitors? Thanks for taking the questions..

Okay. I'm not sure I understood. Can you say that one more time Vijay, or Josh, I'm sorry..

No problem. In the 2Q performance in U.S.

TAVR, were there any one-timers, either tailwinds or headwinds? I know some of the things we were thinking about where on clinical revenue with a low risk trial pace picking up where some of your competitors' cap programs I believe ended, Boston Scientific's, I think Medtronic's ended prior to the end of 2Q?.

Yeah. Clinical revenues weren't, I think, a big contributor. I think the kind of things we already talked about, the fact that the new centers contributed to growth. We probably didn't feel much competitive impact in the second quarter not as much as we anticipated. We think that will probably step up.

International growth is probably a little bit better. But the other one that I always like to remind us of is just how difficult it is to predict this business precisely. With 550 hospitals and a TAVR device costing about $30,000, if you do one more or one less procedure in the quarter, that's a $16.5 million swing.

So, just a reminder that we try and dial this in pretty closely, but it's difficult sometime to predict..

Great. Thanks for the answers..

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

Hello. Hi. Good afternoon, guys. My first question, Mike, U.S. market, U.S. TAVR market, very strong once again, and all our channel checks suggests that we're finally starting to see the pull-through on the intermediate risk patient population.

So, my question, Mike, is, is there any way you can quantify how the intermediate risk indication is impacting U.S. volumes? Thanks. And then I had a follow-up on CardiAQ..

Yeah. A few things. One is, we think that the intermediate risk indication is going to be probably a slow developing trend, that it's going to take time for practice to really change over time. We think there was some encouragement to switch from surgery to TAVR, and we saw sort of some pretty good movement from surgery to TAVR during 2016.

But I think that growth rate has slowed down in our minds in 2017. So, I think we're probably back on sort of this change ramp, if you will, of how long it takes for therapy change to really become part of practice. And that's why we think frankly TAVR growth is going to continue for some time to come..

Okay. So, in other words, most of the implants that you saw in 2Q, you believe were extreme risk and high risk and still not a lot of impact from intermediate risk.

Is that fair?.

I don't know if that's fair. We've tried to move away from this purely a risk conversation because as we know age is a significant factor as well.

So there is probably a lot of elderly patients that might even been characterized as intermediate risk that join that, but I think more and more, there is an acknowledgment that it's not just purely risk and we caution you not to just rely on that as a single factor..

Okay. And then just my follow-up on CardiAQ. Mike, you said earlier in the call that you're back to implanting patients. Are you implanting patients in your CE Mark trial or are these patients you're implanting in the U.S.

feasibility study? And the reason I'm asking is obviously the CE Mark trial is key to getting the CardiAQ valve on the market in 2019. Thanks..

Yeah. And I think primarily, we're enrolling here right now where we started here with our EFS trial in the U.S. The CE Mark depends on some roll-in patients, and so ultimately, we expect that to pick up momentum, but that we're not trying to signal that that's off and running yet..

Okay.

And the EU trial, you do assume it does start enrolling at some point later this year?.

I would think so. I think really the benchmark we put out there is that we'd like to think that we get this valve CE Marked by 2019 and so, we're on a path we think to do that..

Okay. Great. Thanks for taking my questions..

Sure..

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

Good afternoon, and thank you for taking my questions. I think on the first quarter call, I asked you about gross margins because they had stepped up really nicely, and then they did so again in the second quarter.

Before we all start modeling this as a go-forward rate, could you please give us an idea of, is this really a go-forward rate and how much of the benefit year-over-year came from things like FX versus mix, versus maybe something else?.

So yeah, in the second quarter for the first time in a while, FX had a negligible impact versus last year and really the THV growth was reflected in most of that 160 basis point improvement. It might have been about 10 basis points from mix.

The other thing that's I think changed from years past is we had very little impact from investment in operations in the second quarter. Now, we do expect that that will ramp up a little bit in the second half, but most of the gross margin improvement you saw was due to THV mix.

Again, just in terms of going forward, the modeling assumption that we've been recommending is somewhere in the mid 70% range, call it 75%, which is right in the middle of this year's gross profit range.

And we'll talk about how that may change as we continue to gain experience, making these investments in valve capacity around the world and continue to see how these new products come to market, what kind of gross margin performance they deliver as well..

Thank you. And as a follow-up, you raised your free cash flow guidance for 2017, which is really nice, but what do you plan on doing with all the cash? Thank you..

So, our first call on cash is just to invest in internal R&D platforms.

But when we get down to actual free cash flow, really we're going to look at continuing to fund external investments and look into things like investing in minority positions in earlier stage companies, making acquisitions as well, though you shouldn't expect that we're going to be doing any bet the ranch transformational kinds of acquisitions.

After that, we really look to share repurchase as the means of delivering capital back to shareholders, and I think we feel good about our long-term performance including recently on being opportunistic about buying back stock in the open market.

And so, this higher cash flow isn't exactly a can of corn, but we feel pretty good about being able to generate good cash off of the income statement this year, and we're going to be very disciplined in making sure we're deploying it intelligently..

Thank you very much..

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

Hey, guys. Thanks for taking the questions. I just want to get some additional color on the Ultra system.

Given the on-balloon design, the attributes of the Axela sheath and with more TAVR devices coming and outcomes in TAVR generally being pretty good, could you just help us understand how these things will impact the user experience, as that may become more important to physicians' decisions going forward? Thanks..

Yeah. Thanks. We do think the Ultra will improve the physician experience. I think it should lend itself to a simpler procedure as we take stems out. It mistake-proofs it, allows it to be faster, so real improvements there. And then we'd like to think ultimately that leads to good patient results as well.

Right?.

Okay. Thanks. And then just as a quick follow-up to that, stroke rates are obviously already extremely low but there has been a recent FDA approval for cerebral protection device, so there is still some interest there.

Would any of the attributes of the Axela sheath potentially reduce debris or is that already so low that that's not really on the radar screen right now?.

Yeah. This is not really important factor in our mind. We think the sheath is primarily about vascular complication, is not a serious contributor to stroke. And in terms of embolic protection, I think we're already on the record saying that we're not sure that embolic protection really makes SAPIEN 3's performance improve.

The matter of fact, even the data that was generated in that earlier trial did not demonstrate that to be true, so we have trouble thinking that there is going to be much impact..

All right. Thanks, guys, and congrats on the quarter..

Thank you..

Thank you. Our next question comes from the line of Suraj Kalia with Northland Securities. Please proceed..

Good afternoon, gentlemen. Congrats on the quarter. So Mike, two questions. First of all most, I heard in your prepared remarks you talk about CardiAQ that these patients had few options.

I guess what I'm trying to understand, Mike, is are you honing in on a subset of the patients, MR 4 plus (61:47), failed MitraClip, or just curious about your commentary about these patients having few options..

Yeah. I think we would acknowledge at this point that these patients are at high risk. In many cases physicians consider them non-operable. If they had other good choices for them, they would use conventional therapies.

So you'd almost argue that we're in a compassionate group of patients at this point and that's where we started to try and have – really to help the patients that are in greatest need. Is that clear? Yeah..

That's fair enough..

Thanks..

And Mike, the second one, in terms of your Cardioband mitral team, what specific skill sets are you looking for this dedicated Cardioband team and was this sort of decided upfront, when you all acquired Cardioband? I'm just trying to understand what changed on the ground that now you all feel.

You know what, it's better to have a 50 men or 20 men sales team, just for Cardioband. Thank you for taking my questions..

Yeah. Thank you. Yeah. It's a small team. I think Cardioband had a contract to team, we've got a dedicated Edwards team that we're putting in place. These are clinical specialists that are in the procedures.

They actually do training, they do proctoring, they actually try and help these clinicians in these very early procedures get outstanding clinical outcomes.

And so, it's not big hiring, because we're in targeted countries at this point, but we think that the potential for this procedure is and the opportunity is significant enough that we wanted a focused and dedicated team that could grow with the procedure..

Thank you. I'd now like to hand the floor back over to management for closing comments..

Okay. Well, thanks very much to all of you for your continued interest in Edwards. Scott and 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 877-660-6858 or 201-612-7415 and use conference number 13665308. Let me repeat those numbers, dial 877-660-6853 or 201-612-7415 and the conference number is 13665308.

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..