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

Bob Hopkins - Bank of America Merrill Lynch Isaac Ro - Goldman Sachs & Co. LLC Lawrence Biegelsen - Wells Fargo Securities LLC David Ryan Lewis - Morgan Stanley & Co. LLC Anthony Petrone - Jefferies LLC Jason Richard Mills - Canaccord Genuity, Inc.

Vijay Kumar - Evercore ISI Christopher Pasquale - Guggenheim Securities LLC Joanne Karen Wuensch - BMO Capital Markets (United States) Glenn John Novarro - RBC Capital Markets LLC Frederick Wise - Stifel, Nicolaus & Co., Inc. Bruce M. Nudell - SunTrust Robinson Humphrey, Inc. Joshua Jennings - Cowen & Co.

LLC Danielle Antalffy - Leerink Partners LLC Robert J. Marcus - JPMorgan Securities LLC.

Greetings, and welcome to the Edwards Lifesciences Second Quarter 2018 Results 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 your host, David 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 second quarter 2018 financial results, and during today's call we'll be discussing these results that are included in the press release and accompanying financial schedules. And then we'll 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, expectations for product opportunities, clinical trials, new product approvals, reimbursement and competitive matters 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 2017 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, organic 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. And now, I'll turn the call over to Mike Mussallem.

Mike?.

Thank you, David. We're pleased to report strong second quarter performance that delivered double digit organic sales growth driven by robust sales of our innovative therapies. Total adjusted sales of $972 million grew 10% on an underlying basis, consistent with our expectations and in line with our 10% to 11% underlying full year growth forecast.

We experienced broad-based growth across the Edwards portfolio. Bigger picture, structural heart disease is largely undertreated and underdiagnosed and we remain committed to increasing awareness and providing innovative life-saving therapies so even more patients can benefit.

In transcatheter heart valve therapies, second quarter global sales were $585 million. Underlying sales were up over 12% compared to the prior year, which reflects strong organic growth, partially offset by lower royalty revenues. Our global average selling price increased slightly as a result of favorable country mix.

We estimate global TAVR procedures continue to grow in the mid-teens while our growth globally was a bit lower due to share decline outside the U.S. In the U.S., total procedures for the second quarter grew in the mid-teens versus the prior year, and our growth was comparable.

Strong therapy adoption continued to fuel procedure growth across a broad spectrum of TAVR centers in the network of approximately 600 hospitals. As physicians presented at TVT last month, evidence continues to show a large number of diagnosed patients who are not being treated for aortic stenosis. We are introducing new capabilities to help U.S.

hospitals properly identify patients and streamline the care pathway to enable an efficient patient management process. We still expect the limited Continued Access Protocol, or CAP, for our U.S.

PARTNER 3 Trial to begin in the third quarter, and we continue to anticipate data from the PARTNER 3 Trial to be presented at the ACC meeting in March of 2019, followed by the receipt of a low risk indication late that year.

Yesterday, the Centers for Medicare and Medicaid Services convened a panel to consider procedural volume requirements for TAVR programs. This panel listened to presentations from a wide range of stakeholders including Edwards.

CMS will take the panel's comments along with other inputs into consideration as it shapes the updated National Coverage Determination, or NCD. We expect this to be finalized sometime over the next year. We have confidence in the thoughtful process, and our positive outlook on long-term TAVR opportunity is unchanged.

Outside the U.S., procedures showed continued impressive growth estimated to be in the mid-teens. We continue to see excellent long-term opportunities for growth as we believe international adoption of TAVR therapy is still relatively low. Our underlying sales growth this quarter was around 10%.

In Europe, we're impressed that TAVR procedures continue to grow in the double digits across nearly every country even after more than 10 years since the therapy introduction. With the advances of low profile systems, we've seen the expected decline in our TA platform which was significant this quarter.

We have maintained price discipline and ceded share to competitors who have chosen to price aggressively in this region. While our SAPIEN 3 valve continues to demonstrate best-in-class clinical performance, we look forward to reinforcing our leadership position with the introduction of our SAPIEN 3 Ultra and CENTERA valves later this year.

In Japan, our highest growth region, we continue to see strong TAVR therapy adoption with several new centers being added. We continue to enroll patients in this small clinical trial of our SAPIEN 3 Ultra System to supplement our European regulatory submission and remain on track to receive a CE Mark later this year.

This same valve system is also on track to gain U.S. regulatory approval in late 2018. We have completed a minor modification to the delivery system of our self-expanding CENTERA valve. We plan to continue the commercial introduction and commence our U.S. pivotal trial late in the third quarter.

In summary, we continue to expect our 2018 THVT underlying sales growth rate to be at the higher end of 11% to 15%, aided by new TAVR and TMTT platforms in the fourth quarter. There are many patients who would benefit from TAVR who are not diagnosed or treated today, and we're encouraged that the TAVR opportunity remains robust.

And we're confident in our ability to maintain a strong leadership position as this opportunity grows to over $5 billion by 2021. In Surgical Heart Valve Therapy, adjusted sales for the second quarter of $219 million were up 3% on an underlying basis, excluding the impact of the consignment conversion.

Once again, our new premium aortic valve products drove underlying sales growth faster than the total procedure growth. We were pleased to see adoption of our INSPIRIS RESILIA aortic valve accelerate during the second quarter.

This valve is designed to be an attractive option for active patients, and we've observed a trend of physicians treating younger patients in our early experience. We continue to expect to introduce this new class of resilient tissue valves in Japan this year, pending reimbursement approval, and adoption of our INTUITY Elite valve system in the U.S.

contributed to our growth again in the second quarter. We are examining the root cause of the complications in specific Harpoon patients discovered last quarter and will update our introduction plans once completed.

We do not expect that this will have a material impact on our 2018 surgical heart valve sales and remain optimistic about this novel therapy to treat degenerative mitral valve regurgitation. In summary, in Surgical Heart Valve Therapy we continue to expect full year 2018 underlying sales growth of 2% to 4%.

Even as TAVR adoption expands, we are excited about our ability to provide innovative surgical treatment options for more patients and to extend our leadership in surgical heart valve technologies. In Critical Care, sales for the quarter were $169 million and grew 12% on an underlying basis.

This performance was driven by strong growth across our product lines, led primarily by HemoSphere. Additionally, sales in the U.S. were uniquely strong this quarter aided by new GPO contracts.

HemoSphere, our next generation all-in-one monitoring platform, continues to receive excellent feedback from clinicians and is expected to be an important growth driver in 2018 and beyond. As a reminder, HemoSphere offers clinicians an intuitive, simple-to-use touchscreen platform that provides a patient's hemodynamic status.

We continue to plan to introduce our Acumen Hypotension Prediction Index, or HPI, to a limited number of hospitals utilizing our current platform until it becomes available on HemoSphere later this year. Our HPI algorithm was recently acknowledged in the peer-reviewed journal, Anesthesiology.

It concluded that in 84% of surgical cases, HPI predicted potential dangerously low blood pressure 15 minutes before it occurred. In summary, we continue to expect full year 2018 underlying sales growth in Critical Care to be at the higher end of 6% to 8%, and we remain confident in our innovation strategy in this market-leading product line.

Turning to our transcatheter mitral and tricuspid therapies, or TMTT, we continue to invest aggressively in this portfolio and believe we are well positioned to address this opportunity as there are millions of patients without effective treatment options.

We're encouraged by the progress on each of our programs, and today I will cover some select updates. Beginning with the transcatheter mitral repair, patients are being treated commercially with Cardioband, and we're encouraged by the high level of interest from clinicians in its potential.

We believe that this platform advances – we believe that as this platform advances the annular reduction provided by Cardioband can be an important first-line therapy for many mitral patients.

The ongoing integration into Edwards' supply chain is making good progress but continues to constrain supply in both the mitral and tricuspid programs which limited second quarter sales to approximately $1 million. We continue to target a ramp in TMTT sales in the second half to reach approximately $15 million for the full year of 2018.

Enrollment in the CLASP CE Mark trial for our PASCAL mitral repair therapy remains on track, and we still expect to launch this platform in 2019. And we continue to treat patients in our U.S. early feasibility study.

In mitral valve replacement, we're continuing to see good clinical progress with both of our transseptal programs, Edwards' CardiAQ and SAPIEN M3, and we're encouraged by the positive scientific presentations at TVT last month.

In transcatheter tricuspid repair, we're pleased to announce the receipt of a CE Mark for our Cardioband Tricuspid Valve Reconstruction System, and clinicians have begun treating patients. In the U.S., we're on track to begin the early feasibility study but may be limited by supply.

Overall, we remain enthusiastic about the opportunities to treat patients suffering from mitral and tricuspid valve disease with our transcatheter therapies, and we continue to expect the global opportunity to be more than $3 billion by 2025.

We're optimistic in achieving significant clinical milestones in 2018 and realizing our goal of launching at least one new therapy a year in each of the next several years. You can expect to hear incremental clinical updates at the upcoming PCR London Valve and PCT medical meetings. And now I'll turn the call over to Scott..

Thank you, Mike. We continued this year's strong performance with adjusted sales in the second quarter of $972 million. At the foreign exchange rates we used to provide guidance back in April, adjusted sales would have been approximately $10 million higher. Adjusted sales grew 10% on an underlying basis.

Adjusted sales exclude a $28 million sales return reserve related to our conversion to a consignment inventory model for surgical valves in the U.S. As a reminder, we initiated this consignment model in the first quarter to complement the introduction of our new premium products and streamline inventory management at hospitals.

We expect to complete the conversion by the end of 2018 and estimate the conversion will impact sales by $60 million to $75 million this year. We are excluding these conversions in our non-GAAP sales results and underlying growth rates. In addition to our strong sales performance, adjusted earnings per share grew 14.8% to $1.24.

GAAP earnings per share was $1.32, which includes several tax benefits and the surgical valve consignment conversion I just mentioned. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release, and I will provide further details on the tax benefits in a moment.

I'll now cover the details of our second quarter results and close with an update on guidance for 2018. For the quarter, our adjusted gross profit margin was 74.4%, compared to 75.3% in the same period last year.

This reduction was driven by a 120-basis point impact from foreign exchange and continued investments in our operations, partially offset by a more profitable product mix. We continue to expect our 2018 adjusted gross profit margin, excluding special items, to be between 74% and 76%.

Selling, general and administrative expenses in the quarter were $275 million or 29.1% of sales, compared to $244 million in the prior year. This increase was driven by personnel-related expenses and the strengthening of the euro against the dollar.

The ratio of SG&A as a percentage of sales would have been 80 basis points lower if you exclude the impact of the consignment conversion. We continue to expect SG&A, excluding special items, to be between 28% and 29% of sales for the full 2018 year. Research and development expenses in the quarter grew 15% over the prior year to $154 million.

This increase was primarily the result of continued investments in our transcatheter heart valve therapy programs, including spending on clinical trials. For the full year 2018, second half spending is expected to be higher than the first half, and we continue to expect R&D, excluding special items, to be between 16% and 17% of sales.

Turning to taxes, we now expect our 2018 full year tax rate, excluding special items, to be at the low end of our previous guidance range of 13% to 16%. This quarter's rate benefited from several items.

Accounting for employee stock-based compensation benefited our tax rate nearly 7 percentage points and earnings per share by $0.08, which was in line with our guidance. Additionally, our reported tax rate benefited from special items this quarter that we excluded from adjusted earnings per share.

Most significantly, during the quarter, we settled tax audits that resulted in a $36 million benefit to our tax provision. Additionally, we realized a year-to-date $9 million nonrecurring benefit stemming from updated U.S. tax reform planning. This quarter, total special tax items combined to benefit GAAP earnings per share by $0.24.

Foreign exchange rates increased second quarter sales by $19 million compared to the prior year. At current rates, we now estimate a $30 million lift, or about 1%, to full year 2018 sales compared to the prior year. This current estimate is about $50 million lower than our estimate last year.

Compared to our April guidance, foreign exchange rates impacted earnings per share by less than $0.01 this quarter, reflecting the effective currency hedging program we have in place. Free cash flow generated during the second quarter was $87 million.

We define this as cash flow from operating activities of $140 million, less capital spending of $53 million. Turning to our balance sheet. At the end of the quarter, we had cash, cash equivalents and short-term investments of $1.4 billion. Total debt was $1.2 billion.

During the quarter, we extended our credit facility and refinanced bonds to strengthen our capital structure. In June, we issued $600 million of 10-year bonds in advance of the maturity of our outstanding bonds this October and entered into a related swap agreement.

As a result of our revised debt position and forecasted higher interest income for the year, we now expect our net interest expense for 2018 to be approximately $5 million. In April, we entered into an accelerated share repurchase agreement for $400 million. Average diluted shares outstanding during the quarter declined to 214 million.

We continue to expect average diluted shares outstanding for 2018 to be between 213 million and 215 million. As of the end of the quarter, we had approximately $850 million remaining of our share repurchase authorization.

Turning to our 2018 guidance, given our strong performance during the first half of the year, at current exchange rates we remain confident in achieving the higher end of each of the sales guidance ranges shared at our Investor Conference in December.

Those ranges are $2.1 billion to $2.4 billion for transcatheter heart valve therapy, $810 million to $850 million for Surgical Heart Valve Therapy and $610 million to $650 million for Critical Care. And for total Edwards, $3.5 billion to $3.9 billion.

For full year 2018 adjusted earnings per share, we are raising our guidance range to $4.60 to $4.75, up from our previous guidance of $4.50 to $4.70. This improvement is driven by our strong first half performance and a lower projected tax rate.

Lastly, we will continue to expect full year 2018 free cash flow to be at the higher end of our original guidance range of $700 million to $775 million. For the third quarter of 2018, at current foreign exchange rates, we project total sales to be between $900 million and $950 million and adjusted earnings per share of $0.93 to $1.03.

And with that, I'll hand it back to Mike..

Thanks, Scott. We remain confident in our outlook for continued strong sales growth, and we remain passionate about helping more patients around the world. We continue to focus on driving organic growth with leading innovative technologies while aggressively investing in our future.

Our foundation of leadership coupled with a robust product pipeline positions us well for continued longer term success and greater shareholder value as we pursue multi-billion dollar market opportunities. And with that, I'll turn it back over to David..

Thank you, Mike. Before we open it up for questions, I'd encourage you to mark your calendars for Tuesday and Wednesday, December 4 and 5, when we will host our 2018 Investor Conference here at our corporate headquarters in Irvine. This event will include updates on our latest technologies as well as our outlook for 2019.

Look for more information in the next few months. We're ready to take questions now. In order to allow broad participation, 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 call. Operator, please go ahead..

Thank you. We will now be conducting a question-and-answer session. And thank you. Our first question comes from the line of Bob Hopkins with Bank of America. Please proceed..

Oh. Great. Thank you very much, and thanks for taking the questions. I just wanted to ask two TAVR related questions, if okay. First is a question on the TAVR pipeline, and the second is a question on TAVR numbers in Europe this quarter. So I'll start with the pipeline, and I apologize if is missed this.

But can you just update us on when will CENTERA be back in full launch outside the United States? And also please update us on what your latest expectations are for Ultra, both outside the United States and in the United States. Thank you..

Sure. So what we indicated, Bob, was that we had completed the minor modifications to the delivery system on CENTERA and that we planned the commercial introduction and our U.S. pivotal trial late in the third quarter. So we're going to start the pivotal in the U.S. and have a commercial introduction ready to go by the end of the third quarter.

As it relates to Ultra, we're continuing to enroll patients in the small clinical trial, and we are using that to supplement our European regulatory submission. So we're on track to receive the CE Mark later this year, and in the U.S., we expect to gain U.S. regulatory approval late in 2018..

So basically, no real changes there from what you were articulating previously..

Exactly right..

Okay. And then one other question I wanted to ask is on the European TAVR growth. Last quarter, you said the market grew double digits and Edwards was slower due to competition. It sounds, maybe, like from your comments here today that the competitive pressures in Europe got a little worse in the second quarter.

Is that the right read? Was that all pricing? Or was that volume? Just maybe a little more color on what's going on outside the United States this particular quarter..

Yeah. We felt like we saw some change in behavior from our competitors on pricing. We made a strategic decision. We've been operating this way for quite a while to maintain our pricing, and we're willing to cede share over the short term to competitors who have chose to price aggressively.

We've observed some recent behavior, appears to be – it's kind of a more aggressive regional pricing and they don't – they're not – we kind of maintained this careful control on a global basis. So we don't see that same behavior all the time from our competitors..

All right. I'll leave others to follow-up a little on that. I'm sure there'll be more questions on pricing, but thank you..

Thanks, Bob..

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

All right. Good afternoon. Thank you. Just a follow-up on the same topic with regards to European share trend and pricing.

Can you just talk a little about what you're assuming for the rest of this year to the extent that the change in competitive behavior was perhaps a bit of a surprise? Why are you confident that that dynamic doesn't get worse throughout the course of this year such that you're able to still hit the higher end of your range? And as part of that, can you talk a little about the importance of having CENTERA and Ultra available? Is that a big part of why you're confident? Thank you..

Well, thanks, Isaac. You put your finger on it. Yeah, one of the things that gives us comfort is the fact that we have SAPIEN 3 Ultra and CENTERA, two terrific valve systems, coming. We really believe that it's going to reinforce our leadership position. We're quite prepared for that Ultra launch in Europe, and we expect that to be a strong one.

And then CENTERA's coming along as well. And so this is going to be a chance for us to touch many of our customers across Europe and, we think, change the dynamic in a time when, even though SAPIEN 3 is the best-in-class valve platform, it's been in place for a couple years now..

Thanks, Mike. And Scott, just a question on the EPS cadence for the rest of this year, your updated guidance does seem to call for a pretty big sequential pickup from 3Q into 4Q.

Can you maybe give us a little more detail as to the key assumptions that underpin that? And to the extent that the new product launches are part of it, that'll be a helpful addition. Thank you..

Sure. The EPS guidance increase midpoint is $0.07 or $0.08, and it reflects the beat in the second quarter, which resulted from a couple things. One was the – really the delay in recording some expenses that we expect to record now in the second half of the year.

And so part of that beat in the second half is going to be contributing to EPS – or beat in the first half is going to be contributing to higher EPS in the second half and part of it is going to go to more investment in R&D and catching up on some spending..

Okay. Got it. Thank you..

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

Hi. Good afternoon. Thanks for taking the question. Hey, Mike, let me ask you two big-picture questions. So the MEDCAC and the NCD, just could you give us your thoughts on the MEDCAC yesterday and if you think the reopening of the NCD will be a net positive for TAVR? And if so, why. And I had a follow-up question..

Yeah, yeah. Thanks a lot, Larry. We saw, obviously, those mixed reactions that came out of the MEDCAC panel yesterday. There was a – we'd say, a lack of consensus. That was not surprising to us. We believe that CMS understands the key issues.

They're going to take them into consideration, and they'll look at volume correlations but they'll also think deeply about quality. And they'll also think deeply about access and how that relates to the underserved. So ultimately, we believe that this is really not a change to our long-term thinking.

We expect the adoption of TAVR therapy to continue to grow, and we're confident in the $5 billion plus opportunity by 2021..

Thanks. And then there's several ongoing mitral group (28:46) outcome studies, Mike, as you know that'll begin reading out in 2018, most notably MITRA.fr at ESC and COAPT which is expected to be at TCT in September.

Can you talk about the potential impact to the field and your expectations? There's been obviously a lot of nervousness among clinicians, a lot of this reported in the medical press.

If these studies only show quality of life benefits but no benefit to mortality and hospitalizations, for example, how will that impact the field? Thanks for taking the questions..

We continue to believe that a successful COAPT will be very beneficial, but aside from that, we believe the TMTT opportunity is likely to reach more than $1 billion by 2021 regardless of the result. Negative COAPT could perhaps be an issue, but more likely people are going to point to the trial endpoint design. So it's something that we think deeply.

We work very closely with FDA when we design our own endpoints, but it's pretty rare – when have you a technology that's going to impact mortality, I think you're going to have some very successful products that have an impact on quality of life.

If you were to actually get a mortality impact, I think that is probably above and beyond what people are anticipating today..

Thanks for taking the questions..

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

Good afternoon. Scott, just a financial question for you, and then maybe a strategic one for Mike. Just on the three tier earnings guide, Scott, if I look at your historical cycling at the midpoint of your range, it kind of implies you do the upper end around $1.03 in the third quarter.

So I'm just sort of curious, what gets to you the bottom end of the earnings range for the third quarter? Because that would put you sort of outside of your kind of historical cycling..

That's probably, David, really tied to just sequencing and phasing of when we record expenses during the third quarter. That's probably what's going to influence most our earnings per share.

We will get some contributions to EPS from the CENTERA introduction and from the CAP in the U.S., but those are really fourth quarter events, not third quarter events, to your question..

Okay. And then, Mike, just two kind of strategic thoughts, clinical questions. The first would be embolic protection. Obviously one of your competitors sort of made a move to perhaps build that market. Have your views around embolic protection changed at all? And I appreciate your comments on PASCAL, it sounds like you're on track.

We heard some things about detachment issues ex-U.S. Just want to sort of ask about those issues and why you still remain very confident in the outlook for PASCAL. Thanks so much..

Sure. Yeah. On the acquisition, the system that was studied, when it was used with Edwards valves it didn't show any benefit. And so recall with the SAPIEN 3 data that you've seen in the past, there's very low stroke rates at 1% at 30 days.

So our belief is that adding another delivery system, another catheter, potentially adds as much risk as it erases. So for the additional cost, it's not worth it. So, we don't think it's going to be an important part of the therapy.

As it relates to PASCAL – does that answer that question, David?.

Yeah. Yes, sir..

Okay. So as it relates to PASCAL, we're pleased with the way that's going. Enrollment is on track, and we look forward to having the results presented at future medical meetings. We plan to complete the PASCAL CE Mark trial in 2018 and expect to launch the product in 2019..

Okay. Thanks so much..

Sure..

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

Hi. This is Anthony in for Raj. Maybe just to go back to NCD, MEDCAC. Just – when you compare the public comments, they seem to be more notably positive than sort of the comments out of MEDCAC.

I'm just wondering, how do you weight those two as you go into the final decision? And should we get a situation where the volume requirements are actually eased, do you see a situation where perhaps that possibly could bend the growth curve upward? And then a quick follow-up would just be on Cardioband into second half.

I think the guide is still for $15 million full year. Just how should we think about the ramp into Q3, Q4? Thanks..

Yeah. So, yeah, I mean if you watched that MEDCAC panel, there were a lot of different voices that came through. Our belief is that CMS understands those key issues pretty well and are going to take them into consideration the full range. It's not the MEDCAC panel that ultimately matters, its how that new NCD gets written.

And that's probably going to happen sometime over the next year. We believe that the qualification shouldn't be based solely on volume requirements and our priority is to ensure equitable access. It's probably too early for us to comment on how it's going to go.

The – I think all of their comments in total, whether it's the panel themselves or the public comments that have been coming in and continue to come in are all going to be considered by CMS..

And on the Cardioband second half impact, I think you should expect that we're going to be ramping between now and year-end and so you should expect more sales in Q4 than in Q3..

That's helpful. Thanks..

So as we previously indicated, we're in the process of integrating the Cardioband supply chain into the Edwards quality system and the inventory might be constrained throughout 2018 as we continue that process. So we're still in position where we expect to ramp TMTT sales in the second half to reach approximately $15 million for the full year..

Thanks..

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

Hi, Mike. Thanks for taking my question. Two TAVR related questions for you. More sort of 20,000-foot view, one of them. And then one specific to your business. So you exit the first half I believe somewhere around 11% underlying growth in that business and you've reiterated the expectation you'll be at the top end.

So you're obviously looking to accelerate that in the second half.

And then I know you're not ready to give 2019 guidance but it certainly looks like the set-up is with low risk data coming in the first half of the year, CENTERA and Ultra launches as you've mentioned and then the approval for low risk in the second half of the next year, are we possibly about to embark on a calendarized next four or five quarters where the growth profile for your TAVR business, perhaps TAVR for everyone in the market, accelerates a little bit?.

Yeah. Let me see if I can answer. First, I believe that the first half sales was more in the 12%, 12.5% range and not 11% so it's not maybe quite as big a leap. But we do continue to expect to be at the higher end of 11% to 15%. What we've got going for us is the fact that we've got Ultra and CENTERA coming later in the year.

The TMTT, the Cardioband, gets reported in that category. And we also have CAP which will be a contributor. Remember, that's a nonrandomized trial. So, all those help contribute to the growth rate in the fourth quarter if you will. Looking forward, we're not ready to share any growth rates for next year.

As you know, we feel like the CAGR is going to average in the mid-teens to reach this $5 billion plus opportunity by 2021 for the broad market and we expect and we're confident that we're going to prove non-inferiority with the positive clinical trial output. We're not really – expecting superiority, Jason, if that's a bit of where you're going.

So at this point, I think you're going to have to wait for the investor conference to get a projection for 2019, but we continue to feel that strategically, we're very well positioned.

We have a rich pipeline and we're aggressive investors in this space and we continue to know that there's a large untreated group of patients that we can reach in the future..

Okay. That's helpful, Mike. And just following up on that. Your comment about the non-inferiority versus superiority.

Do you think that there is a different market reaction if you do indeed get – show data that's either superior or trending towards that? And if you don't get it as you'd expected, do you still expect that the low risk data will have a positive impact on the market? And then lastly on that front, similarly, with respect to your market estimates, at even 10% growth the market would CAGR over the next two years, you're going to get to that $5 billion mark probably a year earlier than 2021.

So I just wanted to make sure that I heard you right, that when you say by 2021 that....

Yeah..

You're not expecting slowing growth. Thanks..

So I mean, on your first point, Jason, we think the market's pretty smart. They know that this trial is powered for non-inferiority, that it would take a much, much larger trial to drive superiority. So I don't think anybody is really seriously expecting superiority.

So when we prove non-inferiority, we think that's a net positive because it's going to impact an FDA approval, which will be supported then by reimbursement, and it will give clinicians the opportunity to expand their treatment.

Separate from that though, I think you were talking about how we think that – we're continuing to see that this technology has a lot of legs. Length of stay is improving, quality of life. It's a preferred procedure by patients. And so when we said plus $5 billion by 2021, we realize that there's upside.

So, of course, there's an upside in that number, that marker out there but I think I think when we made that prediction, it was out there four or five years, which always is a little bit dangerous. But we continue to feel confident in what we said..

Thanks, Mike..

Sure..

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

Hey, guys. Thanks for taking my question. So maybe, Mike, now I want to start off on the last question on the back half guidance, right, the acceleration implied by the guidance.

If you look at the Cardioband guidance, so that's going to contribute somewhere north of 100 bps of growth in the back half, right? So TAVR which has done about 12%, 12.5% in the first half, that's going to accelerate north of 13.5% in the back half, which still implies TAVR is going to improve by about another 100 bps, right, to get us close to that 15% in the back half or north of 15%.

Now, I'm just curious because it seems like a lot of this optimism is being baked around Ultra and CENTERA launch in Europe and given that these are premium price product and the commentary we've heard on competition being – pricing aggressively in select regions for it, I'm just trying to match why CENTERA and Ultra, if they're going to be premium priced, why are they going to accelerate growth in the back half?.

Yeah. So a couple of things. One is, we're not shaken by what happens in any given quarter on market share that it's some kind of fundamental change to the heart valve market. These are heart valves. People buy heart valves based on quality, based on proven outcomes with scientific studies, and we think that they'll continue to do that.

When we have products like CENTERA and Ultra that are going to be introduced, those are some pretty terrific products, and we think they're really going to get people's attention and they're going to be interested in those. And those are going to give us some lift.

But as you properly no doubt note, TMTT, what happens in Cardioband is also going to give us a lift and that CAP study that's going to coming shortly will also give us a lift. So that combination gives us a lot of confidence that we're going to be at the high end of the 11% to 15% range..

That's helpful, Mike. I forgot about the CAP study. Maybe on that last comment on TMTT, that's implied fourth quarter Cardioband number, right? Is that a normalized run-rate number, Mike? Because is there some catch-up of this demand, right? Because right now we're supply constrained.

Does that 4Q, if that's a north of a $12 million – let's call it high singles or $10 million number – should we annualize that for next year? Or is there – what's the normalized quarterly run-rate for that Cardioband number?.

Yeah, Vijay, in the field this soon I think it's a little early for us to be projecting how we end the year and how to plan 2019 and beyond. We do think there's a lot of demand there and that we'll be able to hit the numbers that we projected during the fourth quarter.

But I'll ask that you have some patience and wait till the Investor Conference, and we'll try and lay out what our longer-term plans are at that time..

Thank you, guys..

Sure..

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

Thanks. Mike, Abbott announced the start of their Tendyne U.S. trial earlier today. You mentioned you're making good progress with your own mitral replacement programs.

Can you give us any more color on when you think you could be in a position to ramp up clinical activity there with one or both of those products? And is it still your plan to wait until you have a transseptal system fully ready to go before you start your own U.S.

trial?.

Yes. Yeah, I think we reported on the call here that we continue to see good clinical progress with both of those platforms, and our strategy is unchanged. We are very focused on transseptal. We think that the transseptal solution is going to be necessary to drive the safety and the efficacy and the chance to really drive that opportunity.

And so we're not deterred by the fact that there might be a transapical system that comes sooner. We just don't think that's going to be really meaningful in the long-term..

Okay. And then I wanted to ask a rare Critical Care question here. That business has been a real standout performer in the first half of the year, and at this point you're running at about 10% underlying growth. You guided to 8%.

Can you talk about the drivers there? And is there any reason we should necessarily expect that momentum to fall off and come down to that lower level?.

Yeah. Our Critical Care team is not used to having the spotlight here, but I'm sure they welcome it. We did see really strong growth, and one of the things that underpins it is the HemoSphere. But the other thing that I'll note is that we had some help in the U.S. by new GPO contracts.

So we're not ready to say that you should count on this same growth rate throughout the year, but nonetheless, we're expecting this to be a strong year for Critical Care and to be at the high end of the 6% to 8% growth rate..

Thanks..

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 question. Can we revert back for a moment into Europe? Trying to better understand the dynamics there.

How much of it is companies who have had products in the market for a long time compressing their pricing? And how much of it may be is some newer products or companies just coming on in now with lower prices?.

Yeah. You know, it's actually a little bit of both. So we still have the longer term competitor that does some aggressive pricing, but we also see that the Symetis product that's now in the hands of a larger company, going to places that they haven't been before and also sort of continuing some of the aggressive pricing of the past..

And as a follow-up, just to sort of set the stage for next year because I think most investors assume you get low risk approval in 2019, what kind of ramp do you think we should expect? And similar to the intermediate risk level approval, do you think that you'll start to see some flow-through after the data presentation and before approval by the FDA?.

Yeah. It's a good question, Joanne. We're going to spend some time really trying to lay that out in detail. Our history is that, yeah, the data itself does drive some level of performance, but the actual approval by FDA does also bring reimbursement along with it. So those both are factors. In our experience, it kind of smoothes over time.

It's not a step function, and we would expect that to be the case in 2019. But probably not prepared at this point to be able to get much deeper than that..

Okay. Very helpful. Thank you..

Sure..

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

Hi. Good afternoon. Mike, two questions on the U.S. market. So it sounds like the U.S. market was in line with your – the market and your sales were in line with your expectations, but in past quarters when the U.S. would come in better, Mike, you always called out new centers. And you always called out volumes coming in stronger at the new centers.

So I'm wondering, can you give us some color as to how many centers you started up in the second quarter? And are you still getting the strong demand from these new centers? And then I had a follow-up..

Yeah. Thanks, Glenn. Yeah. We did get new centers. I don't know the number, but I think we're closing in to around 600 centers at this time in the U.S. And what my commentary was intended to do was not to say that we didn't get a lift from new centers, because we did, but we saw it very broad-based.

We also saw a lift in the centers that had been around for – very large centers that have been around for a while. So it was particularly broad-based this quarter..

And then just as a follow-up, the NCD that's going to be considered over the next 12 months. Do you think that has any impact near-term on more centers opening up? Thanks..

Well, I mean, I don't think in the near term there's going to be any change. When we actually see what's written in the NCD, it could have some impact. Now, what do we think is going to happen? It's a little difficult for us to predict the future, but if you were to ask us strategically if we changed our outlook, no. We haven't changed our outlook.

We think the NCD is going to provide a favorable climate, and so that TAVR technology will continue to expand..

Okay. Great. Thanks, Mike..

Sure..

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

Good afternoon, Mike. How you doing? I know – turning to mitral, you've touched on it in various ways. It's hard to predict and you're not yet in the clinic with M3 or CardiAQ but just as I reflect on the next couple of years it would seem like there's going to be a couple of mitral replacement devices hanging in the clinic with very large trials.

Do you worry at all? Should we be concerned at all that it's going to be difficult to enroll or something more challenging than usual? How are you thinking about that?.

Well, this is one of the reasons why we're, frankly, attracted to TF as an option. We would imagine it might be difficult to enroll a TA trial. We know what the rate of surgery is today for mitral patients and its not attractive.

And although TA might be incrementally better than open chest surgery, we don't think it's a big enough leap to really change treatment patterns and that's why we're convinced the transseptal offering is the right approach to take on a longer-term basis..

Got you. And to follow up on Ultra, just wanted to make sure I understand your viewpoint. Is Ultra market share driving, price sustaining? Is it procedure expanding? Just help me understand how it might stem – or offset the EU tide of share loss that we've seen there if at all.

Is that the right way to think about it? Maybe reframe the way I'm saying it..

Yeah, we hadn't initially pegged it as a share gainer. We look at it as one that has greatly enhanced features and help us maintain our leadership. But having said that, it's an opportunity for us to go out there and spend time with each center. It's a chance for us to go through the training process and we think they're going to like what they see..

And just a last quick one on Japan. You said it was strong. Is it running as expected? Are you – now you that – every quarter that passes, do you have a greater sense of that market that there might be some upside there? Again, any color would be welcome. Thanks so much..

Yeah, we've always found Japan to be an incredible opportunity. We think the opportunity is still very significant. It's tracking just about what we expected but it's a lot to say. As fast as TAVR is growing, it is our fastest growing region again this quarter. We continue to see strong TAVR adoptions and several new centers were being added there.

So, that's an encouraging sign..

Thank you..

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

Good afternoon. Thanks for taking the question. Mike, I unfortunately watched that MEDCAC yesterday and I was struck by the almost total lack of interest in the data that both you and Medtronic put forward regarding center variability and the fact that even if there's a little bit, it pales in comparison to non-treatment, which is your point.

But my question is, you guys have a lot of experience with SAVR. There was no real discussion about what the volume to outcome relationship is for SAVR, which is a much more invasive procedure with probably greater chance for poor outcomes if things aren't done exactly properly.

Could you comment on that and how that might fit into the ultimate decision CMS makes?.

Yes. Yeah, I wish you were on the panel yesterday because your observation is a good one. I think there are going to be a number of considerations that go into reconsidering the NCD. The panel was asked to focus on nine specific questions and that wasn't one of the questions that they were really asked to delve into.

I think we think it's a fascinating one and it's a really important one. We continue to believe that both TAVR and surgical valve replacement procedures should be expanded but they should be restricted to programs that deliver high quality outcomes.

So, we are of that mind, and we think that CMS is going to take a broad perspective when they reconsider the NCD..

And a very brief follow-up. Just on the – when you mentioned 10% ex-U.S. underlying growth in TAVR, was that not counting the slight ASP uplift you're referring to procedures? I just want to be very clear about that..

So the slight uplift in ASP – what we were talking about was on a global basis.

And so on the global basis, you saw regions like Japan and U.S., which have stronger ASPs grow faster, and so that's what I was trying to indicate by the ASP, right?.

Okay. So your TAVR revenue growth ex-U.S.

was around 10%?.

Correct. Yes..

Thank you so much..

Yeah..

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

Hi. Good evening. Thanks for taking the questions. I was hoping, Mike, to just get your view or just experience here over the last half of the year on surgeons' behavior, particularly whether or not they're defending their territory, or any last gasp efforts in front of low risk data next year. I mean, the MEDCAC meeting occurred.

You had the consensus expert document that was run by surgical societies primarily, but just wanted to kind of hear what you're experiencing out there on the surgeons' side in terms of whether they're defending their turf more aggressively at some of these centers..

Yeah. I think we have a lot of common views with those that were involved with the consensus documents, but there's other places where we depart. And we can accuse the other side just as they accuse us of being self-interested, so I set that aside. I like to think that the evidence is going to prevail and that there's going to be good sense.

You have this remarkable procedure in TAVR that really addresses a very serious and debilitating disease with a procedure that's safe and very effective and can be performed around the world, actually, at a high level of proficiency, and we don't think that's going to be lost. So ultimately I think it's going to come through.

The practice of medicine always changes frustratingly slow, and so we're not totally surprised by that. But ultimately we think the technology will stand on its own merits..

Thanks for that. And I just wanted to follow up just with you calling out the CAP program as a modest tailwind in the second half year.

Can we just – help us think through the clinical revenue headwinds that you guys were facing in the first half? I mean, low risk trial was enrolling at full pace is my understanding in the first half of last year, and the early TAVR and TAVR UNLOAD I believe are kind of slower enrolling trials.

But any type of color in terms of the clinical revenue headwind you faced in the first half that's now going to be resolved by the CAP program coming on, it would be great. Thanks again..

Yeah. I don't know. I mean, it's possibly helpful to think about it this way. Our low risk finished up at the end of last year, but remember the low risk trial was a randomized trial, so half of the patients would have gotten SAPIEN 3, half of them no therapy. When you implement a CAP program, it's not a randomized trial.

So you can almost think of it as at twice the pace as you would have had in terms of clinical, because you don't have the half that would have gotten surgery.

Hello? Are you there?.

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

Hey. Good afternoon, guys. Thank you so much for taking the question. I just wanted to follow up – and I'm sorry. It keeps coming up on the call, but just as we look at the back half and the market share loss that you guys talked about in Europe, and I appreciate that Ultra's definitely an improvement, CENTERA as well.

You'll be re-launching or restarting the launch of CENTERA. But how do you think about the receptivity of some of the European accounts to price uplift? I am hearing that Medtronic is getting a premium relative to their Evolut R for Evolut PRO, but I'm also hearing Portico is pricing it at a 50% discount.

So I'm just trying to get a sense of how aggressive some of these other players are and what that's doing to the mindset of some of these centers as it relates to paying even more relative to SAPIEN 3..

Yeah. We think that heart valves are very important. We have a very long term history with surgical heart valves, and we choose not to really approach that as a market that should be buying on price. I mean, this is something that's expected to keep you alive for years, and we think that – we try and offer a lot of value.

We back up our best technology and continue to try and push it and back it up with a lot of evidence. And so we just – we don't compromise on pricing. It's not surprising to have competitors at a lower price, and so this is not unexpected. And it's always going to be a little bit lumpy.

But on a long-term basis, we expect that the best technology is going to prevail and maintain a strong leadership position..

And so, I guess, are you in essence sort of saying you highlighted some share loss the last two quarters ex-U.S.? These new products, even though you are expecting to price them at a premium, you think they help you regain share? Or do you think it just improves the mix for Edwards?.

Yeah. I think we're very proud to be the leader, and we expect to be able to maintain that leadership. It probably does help from a share perspective, Danielle..

Okay. Thank you so much..

Sure..

Thank you. Our next question will come from the line of Robbie Marcus with JP Morgan. Please proceed..

Great. And thanks for taking the question. Scott, I wanted to ask you a financial question here.

With the tax guidance, the low end of 13% to 15% now, versus 19% to 21% at the Analyst Day before tax reform, can you help us understand how much of the EPS revision this year has come from financial leverage, like lower tax, debt pay-down, share buyback and how much of it has been from operational gains?.

Sure. So tax legislation probably contributed about 5%, 5 percentage points to the reduction in our effective tax rate. Before we got some benefit from some refined interpretation about the tax legislation. So it's probably a bit more than 5 percentage points.

And then we got some benefit as well that was in excess of what we expected for the excess tax benefit from stock-based compensation. So those two together reduced the rate pretty significantly from the original guidance at the Investor Conference..

Okay.

And how much of this tax rate is sustainable? How do we think about what it should be on an ongoing basis in 2019 and beyond?.

Sure. So this year, think low end of that 13% to 16% range. Longer term, we're still processing how we're going to true-up and realize the benefits of the tax legislation, and so we'll give you more guidance at the Investor Conference.

But I think directionally the guidance we would provide would probably be mid-teens at this point, and we'll give you some more definition around that as we get to the Investor Conference..

Okay. Great. And maybe just one quick follow-up. Capital allocation, you did the ASR earlier this year, but cash continues to build. How should we think about future uses of that cash? Do you look to build out or supplement the mitral – transcatheter mitral and tricuspid pipeline? Or is share repurchase going to be the focus? Thanks..

Sure. So, our capital allocation priorities haven't really changed. The first call on cash is continuing to invest in our internal growth programs and programs especially that would generate higher returns over the long-term.

Second is supplementing those internal programs with external investments, whether it's minority investments or acquisitions of companies on the smaller size. And then we get to financial engineering and using our balance sheet, like share repurchase, which we'll continue to do over time.

As a reminder, we've got $850 million of share repurchase authorization left..

Okay. Well, thanks, all. We appreciate your continued interest in Edwards, and Scott and David and I welcome any additional questions by telephone. Back to you, David..

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the 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 136-81-143. Let me repeat those numbers. Dial 877-660-6853 or 201-612-7415, and the conference number is 136-81-143.

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

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