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Edited Transcript of EW earnings conference call or presentation 23-Jul-19 9:00pm GMT

Q2 2019 Edwards Lifesciences Corp Earnings Call

IRVINE Aug 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Edwards Lifesciences Corp earnings conference call or presentation Tuesday, July 23, 2019 at 9:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mark Wilterding

Edwards Lifesciences Corporation - VP of IR

* Michael A. Mussallem

Edwards Lifesciences Corporation - Chairman & CEO

* Scott B. Ullem

Edwards Lifesciences Corporation - Corporate VP & CFO

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Conference Call Participants

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* Cecilia E. Furlong

Canaccord Genuity Corp., Research Division - Associate

* Christopher Thomas Pasquale

Guggenheim Securities, LLC, Research Division - Director and Senior Analyst

* Danielle Joy Antalffy

SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Joanne Karen Wuensch

BMO Capital Markets Equity Research - MD & Research Analyst

* Joshua Thomas Jennings

Cowen and Company, LLC, Research Division - MD and Senior Research Analyst

* Lawrence H. Biegelsen

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Matthew Charles Taylor

UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices

* Matthew Stephan Miksic

Crédit Suisse AG, Research Division - Senior Research Analyst

* Philip Chickering

Deutsche Bank AG, Research Division - Research Analyst

* Rajbir Singh Denhoy

Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst

* Robert Adam Hopkins

BofA Merrill Lynch, Research Division - MD of Equity Research

* Robert Justin Marcus

JP Morgan Chase & Co, Research Division - Analyst

* Vijay Muniyappa Kumar

Evercore ISI Institutional Equities, Research Division - MD

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Presentation

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Operator [1]

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Greetings, and welcome to the Edwards Lifesciences' Second Quarter 2019 Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to Mark Wilterding, Vice President, Investor Relations. Thank you. Please begin.

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Mark Wilterding, Edwards Lifesciences Corporation - VP of IR [2]

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Thank you, Rayah. Good afternoon, and thank you for joining us today. Just after the close of regular trading, Edwards Lifesciences released its second quarter 2019 financial results. During today's call, management will discuss the results included in the press release and accompanied financial schedules and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, Chief Financial Officer.

Before we begin, I'd like to remind you that today's -- during today's call, management will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they are made, and Edwards does 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 differences and important product safety information may be found in the press release, our 2018 Annual Report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com.

Finally, a quick reminder that when using terms underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP results. Additional information about the use of non-GAAP measures is included in today's press release and available at edwards.com.

With that, I'd like to turn the call over to Mike for his comments.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [3]

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Thank you, Mark, and welcome to the team. We're pleased to report strong second quarter total adjusted sales of $1.1 billion, representing 14% underlying sales growth with balanced strength across all 4 product lines. Sales were lifted by high teens global growth in TAVR, which reinforces our belief in our projection of a $7 billion opportunity by 2024. We continue to aggressively pursue breakthrough technologies with the potential to help an even broader group of patients and in turn drive significant future value. Given our first half performance, we have increased confidence that we will again achieve double-digit sales growth in 2019.

In transcatheter aortic valve replacement, or TAVR, second quarter global sales were $678 million, up 18% on an underlying basis. We estimate global TAVR procedure growth was comparable with our growth. We anticipated growth would accelerate after the first quarter, and our results this quarter exceeded our expectations. Globally, our average selling price remained stable as we continue to exercise price discipline. For the first half of 2019, we estimate global TAVR procedures grew in the mid-teens, consistent with our guidance from the December investor conference.

In the U.S., our TAVR sales grew in the high teens, and we estimate that our share of procedures was stable. We believe growth was stimulated by increased confidence in the therapy following the strong PARTNER 3 clinical results presented and published in late Q1. It was encouraging to note that growth was broad-based across both high- and low-volume centers. Nevertheless, based on our continued research, we are increasingly confident that there are many patients who would benefit from TAVR and who are not diagnosed, referred or treated today. We remain focused on our efforts to increase awareness in diagnosis, improve referral patterns and help patients receive the care that they need based on medical guidelines.

Patients are continuing to be treated with the PARTNER 3 low-risk continued access protocol in more than 30 high-volume clinical trial sites. We now estimate that in the third quarter, the FDA will approve SAPIEN 3 and SAPIEN 3 Ultra for patients at low surgical risk.

Late in Q2, the U.S. Centers for Medicare and Medicaid Services, or CMS, released the final updated NCD, which we believe better reflects today's practices and the needs of patients. We commend CMS and its thoughtful approach toward updating the TAVR policy. While the NCD did not achieve equipoise between surgery and TAVR, we believe the modernized requirements and more streamlined patient evaluation process are meaningful enhancements that should improve access for more patients suffering from severe aortic stenosis.

Outside the U.S., in the second quarter, we estimate total TAVR procedures grew in the mid-teens on a year-over-year basis, with Edwards' growth being comparable. We continue to see excellent opportunities for OUS growth as we believe international adoption of TAVR therapy remains quite low.

In Europe, we estimate that TAVR procedures also grew in the mid-teens on a year-over-year basis, and Edwards' growth was comparable. We are continuing our launch of SAPIEN 3 Ultra System in Europe, which we expect to account for a majority of our TAVR sales in Europe by year-end. CENTERA was a limited -- was in a limited number of centers and did not contribute meaningfully to this growth.

In Japan, we continue to see strong TAVR adoption driven by SAPIEN 3, and new centers are being qualified. We remain focused on expanding the availability of TAVR therapy throughout the country driven by our belief that aortic stenosis remains an immensely undertreated disease along this large elderly population.

As we discussed earlier this year, the landmark PARTNER 3 Trial clearly demonstrated superiority of SAPIEN 3 over surgery in the low-risk patient population. A highlight was a low 1% risk of death or stroke at one year. Combined with prior robust clinical evidence, we believe a great majority of patients with aortic stenosis are ideally treated with Edwards' best-in-class SAPIEN 3 platform. Given the pending approval for patients at low risk and the continued excellence and versatility of our balloon expandable platform, we have made the difficult decision to discontinue the CENTERA program. While the CENTERA valve has demonstrated excellent clinical outcomes and is performing well for patients, the time and resources required to optimize deliverability as well as expanding the indications to match SAPIEN 3 are significant. Going forward, we believe we best address patients' needs by focusing resources on our robust pipeline of next-generation balloon expandable technologies and indication expansion trials.

We continue to be pleased with the SAPIEN 3 Ultra valve performance. And throughout the disciplined launch, our confidence has been reinforced by positive clinician feedback. Many clinicians have also expressed the preference for aspects of the SAPIEN 3 delivery system, and we're working to incorporate those changes to optimize the SAPIEN 3 Ultra System. We expect physicians to continue to transition from SAPIEN 3 to SAPIEN 3 Ultra System around the world.

In summary, our year-to-date underlying sales growth in TAVR was 14%, and we are raising our full year guidance to around the top end of our previous 11% to 15% range. Although the strategic decisions we made in the quarter resulted in a special charge, these decisions strengthened the execution of our long-term strategy. We are encouraged that the TAVR opportunity remains robust and continue to believe that our TAVR innovations will sustain our strong global leadership position.

Turning to Transcatheter Mitral & Tricuspid Therapies, or TMTT, second quarter global revenue of $7 million was lifted by the continued rollout of PASCAL in Europe. In our early commercial experience, we remain focused on physician training, procedural success and great outcomes for patients. We're pleased with our progress as well as the positive physician feedback that we're receiving regarding PASCAL as a differentiated therapy. We also treated patients commercially with our Cardioband mitral and tricuspid annular reduction therapies, and there have been improvement in supply as we continue transferring production to other Edwards manufacturing sites.

As we advance our comprehensive portfolio, we remain focused on developing clinical evidence. We recently presented positive data on our mitral and tricuspid experience with PASCAL and Cardioband at the EuroPCR and TVT medical meetings. We're encouraged by the data from the CLASP study of the PASCAL system. At 6 months, patients experienced substantial MR reduction as well as clinically and statistically significant improvements in functional status, exercise capability and quality of life.

Looking ahead in mitral repair, as previously announced, we received approval of our CLASP IIF pivotal trial for patients with secondary or functional mitral valve disease and plan to initiate enrollment in late 2019. And we continue to enroll in our CLASP IID pivotal trial to study PASCAL in primary or degenerative mitral valve disease. In mitral valve replacement, we're pleased with the ongoing early feasibility study experience in both EVOKE and SAPIEN M3 transseptal therapies, and we remain on track to initiate a U.S. pivotal trial of SAPIEN M3 in late 2019.

In transcatheter tricuspid repair, we've gained significant clinical experience through our 3 simultaneous U.S. early feasibility studies for PASCAL, Cardioband and FORMA. We believe that PASCAL and Cardioband can treat a significant number of patients suffering from tricuspid regurgitation, supporting further optimization of our portfolio. We plan to initiate a pivotal trial using PASCAL in the tricuspid position late this year and plan to initiate a second tricuspid pivotal trial with Cardioband in the future. Further, while we have experienced positive clinical outcomes for patients who've been treated with FORMA, we've made the decision to discontinue work on FORMA to support the acceleration of other tricuspid programs.

Overall, we remain enthusiastic about the opportunities to treat patients suffering from tricuspid and mitral disease with our transcatheter therapies. We remain on track to achieve our 2019 milestones, including continued enrollment in our CLASP IID pivotal trial as well as planning to initiate 3 additional pivotal trials by late 2019. And you can expect to hear more updates regarding our 1-year CLASP study data at the upcoming TCT medical meeting.

In summary, we remain confident in achieving approximately $40 million of total TMTT revenue for 2019. We continue to estimate the global TMTT opportunity to reach approximately $3 billion by 2024 and are passionate about bringing a portfolio of solutions for patients in need.

In Surgical Structural Heart, sales for the quarter were $218 million or up 2% on an underlying basis. Growth was lifted by increased adoption of our premium high-value technologies and strength outside the U.S. This was partially offset by lower surgical aortic heart valve procedures in the U.S. as TAVR adoption expanded. Of particular note, the INSPIRIS RESILIA aortic valve continued to grow in all regions with notable usage in more active patients who might otherwise get a mechanical valve.

Separately, we now anticipate that our Harpoon system, an echo-guided beating heart mitral valve repair therapy, will be commercially available in Europe in late 2019 versus our previous expectation for a mid-2019 launch. The delay in timing reflects what we believe is generally a slower regulatory environment in Europe. We remain enthusiastic about this unique therapy and believe that it will offer the potential for earlier treatment of degenerative mitral valve disease while providing faster recovery and more consistent outcomes for patients.

In summary, in Surgical Structural Heart, we remain comfortable with our full year underlying sales growth range of 1% to 3%. We remain excited about our ability to provide innovative surgical treatment options for more patients and to extend our global leadership in premium Surgical Structural Heart technologies.

In Critical Care, sales for the quarter were $184 million and grew 9% on an underlying basis. All product lines contributed to this performance boosted by HemoSphere sales primarily in the U.S. and Europe. HemoSphere, as our all-in-one monitoring platform, is an important growth driver in 2019 and with the recent full market launch of the platform that includes our FloTrac sensor and our Acumen Hypotension Index software. This platform is designed to provide greater clarity on a patient's hemodynamic status while introducing a predictive algorithm to improve decision-making.

In April, we successfully completed our acquisition of CASMED's FORE-SIGHT, a noninvasive cerebral oximetry monitoring technology. Sales of CASMED were $5 million in the quarter. Integration is underway to enable the use of FORE-SIGHT on our HemoSphere platform. This combination will create a unique offering of enhanced recovery tools and predictive analytics capabilities to further strengthen our leadership in smart monitoring.

In summary, given the strong first half sales performance and the momentum from the recent HemoSphere launches, we now expect full year 2019 underlying sales growth of 8% to 10%, an increase versus our previous 5% to 7% projection.

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

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [4]

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Thanks a lot, Mike. Our top line performance this quarter was outstanding with underlying sales growth of 13.6%, reflecting strength in all 4 of our product lines across all regions. Particularly strong this quarter was our TAVR sales, which likely benefited from the recent clinical evidence supporting SAPIEN 3 therapy. Our adjusted earnings per share in the second quarter of $1.38 grew 11% over the prior year and was driven by our strong sales performance partially offset by higher research and development spending primarily in our transcatheter and structural heart programs.

As Mike previously discussed, this quarter, we made strategic decisions regarding our transcatheter aortic valve portfolio, which resulted in a $46 million special charge primarily comprised of finished goods inventory. This charge, combined with other adjustments, reduced our GAAP earnings per share to $1.14. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release.

I'll now cover the details of our second quarter results and then discuss guidance for 2019. For the quarter, our adjusted gross profit margin was 76.4% compared to 74.4% in the same period last year. This improvement was driven primarily by the favorable impacts from foreign exchange and product mix partially offset by investments in our global supply chain expansion. We continue to expect our full year 2019 adjusted gross profit margin to be between 76% and 78%, although we are expecting a lower benefit from foreign exchange than originally anticipated at our investor conference.

Selling, general and administrative expenses in the second quarter were $308 million or 28.4% of sales. This 12% increase over the prior year was driven by transcatheter structural heart field personnel-related expenses, including expanding the TMTT field organization in Europe partially offset by the strengthening of the dollar. We continue to expect SG&A, excluding special items, to be between 28% and 29% of sales for the full year 2019.

Research and development expenses in the quarter grew 25% over the prior year to $192 million or 17.7% of sales. The increase was primarily the result of significant investments in our transcatheter structural heart programs, including an increase in clinical research for the PASCAL system. For the full year 2019, we continue to expect research and development, excluding special items, to be between 17% and 18% of sales.

Turning to taxes. Our reported tax rate was 10.7% for the quarter or 12.0%, excluding the impact of special items. This rate included a 530 basis point benefit or $0.08 from the accounting for employee stock-based compensation. We continue to expect our full year 2019 tax rate, excluding special items, to be between 12% and 14%, which reflects the continuing benefit of accounting for employee stock-based compensation.

Foreign exchange rates decreased second quarter sales growth by approximately 2% or $20 million compared to the prior year. At current rates, we continue to estimate an approximate $60 million negative impact or about 1.5% to full year 2019 sales compared to the prior year. Foreign exchange rates positively impacted our second quarter gross profit margin by 260 basis points compared to the prior year. Relative to our April guidance, FX rates had less than $0.01 impact on earnings per share, reflecting our effective currency hedging program.

Free cash flow for the second quarter was $277 million, defined as cash flow from operating activities of $341 million less capital spending of $64 million. We now expect full year 2019 adjusted free cash flow to be around the top of our $800 million to $900 million guidance. We remain on track in implementing capital expansion projects in line with our strategy to increase global capacity and increase the robustness of our global supply chain.

Turning to our balance sheet. At the end of the quarter, we had cash, cash equivalents and short-term investments of $934 million. Total debt was $594 million. Consistent with the company's plans to offset dilution from equity-based compensation, Edwards repurchased 1.4 million shares in the second quarter for $250 million. Average shares outstanding during the second quarter remained level with the prior quarter at 212 million. We continue to expect average diluted shares outstanding for 2019 to be between 211 million and 213 million.

Turning to our 2019 guidance. Given our strong first half performance, we have increased confidence in achieving our expectations for financial performance in 2019. We are increasing the bottom end of our sales guidance ranges for Edwards and for TAVR. For total Edwards, we now expect $4.0 billion to $4.3 billion and underlying sales growth around the top end of our previous 9% to 12% range. For TAVR, we now expect $2.5 billion to $2.7 billion. We continue to expect TMTT sales of approximately $40 million and Surgical Structural Heart sales of $810 million to $850 million. We now expect Critical Care sales, including CASMED, around the top end of our previous $700 million to $750 million range. We are raising our full year adjusted earnings per share guidance range to $5.20 to $5.40, up from our previous guidance of $5.10 to $5.35.

For the third quarter of 2019, our seasonally lowest quarter, at current foreign exchange rates, we project total sales to be between $1.02 billion and $1.06 billion and adjusted earnings per share of $1.13 to $1.23.

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

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [5]

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Thanks, Scott. We're very pleased with our strong performance in the first half of 2019. As patients and clinicians increasingly understand the significant benefits of transcatheter-based technologies supported by the substantial body of compelling evidence, we remain as optimistic as ever about the long-term growth opportunity. Our foundation of leadership combined with a robust product pipeline positions us well for continued success.

And with that, I'll turn it back over to Mark.

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Mark Wilterding, Edwards Lifesciences Corporation - VP of IR [6]

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Thanks, Mike. We're ready to take questions now. (Operator Instructions)

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bob Hopkins with Bank of America.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [2]

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Congrats on a phenomenal second quarter. I guess the first and obvious question is really on the TAVR growth acceleration in the quarter both for yourselves and for the market. Can you just comment on what drove that acceleration? How much do you think that was actually low risk versus some other driver?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [3]

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Yes. Thanks, Bob. There were multiple factors that probably contributed to the growth in Q2, and it's pretty hard for us to isolate each one. I'll remind you, there's been high variability in the past quarter-to-quarter, it just has not been uncommon in TAVR. Recall, the Q1 growth rate was lower than the recent past, and the second quarter here was certainly higher. You look at the first half in total, and it was around 14% back in the mid-teens. But it was quite a difference between quarters, and there could have been some seasonality associated with it.

But to add to that, I mean to be fair, we believe that the growth might have been stimulated globally just by the increased confidence in the therapy following the strong PARTNER 3 clinical trial results. It could have had several influences. There was a lot of awareness and publicity that could have encouraged treatment. It's possible that there are some borderline patients that received TAVR. There was a minor increase in more cap. But what we're encouraged by in particular, Bob, was that was broad-based growth across the globe and even in the U.S., it was in both large and lower volume centers.

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Robert Adam Hopkins, BofA Merrill Lynch, Research Division - MD of Equity Research [4]

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Great. I just wanted to ask one follow-up just on mitral. You're still guiding to approximately $40 million. You need to almost triple your revenue in the back half. So just can you talk, Mike, a little bit about what gives you the confidence that PASCAL can accelerate as much as you're expecting in the back half of the year?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [5]

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Yes. So we weren't really focused on the numbers this quarter. Our early commercial experience, we just stayed focused on physician training, procedural success and just trying to get great outcomes for patients. The procedures did actually increase quite a bit over Q2, and it's possible that some of the Q1 sales actually was consumed in Q2. But we're pleased with the kind of feedback that we've gotten on PASCAL, and we remain confident in achieving the $40 million guidance.

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Operator [6]

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

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David Ryan Lewis, Morgan Stanley, Research Division - MD [7]

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Just 2 from me. Mike, just thinking about TAVR guidance for the back half of the year, it's pretty stable. Frankly, that's what we saw from a growth perspective in the second quarter. So is that how we should think about the business? Why should we not expect sort of further inflection? Or do you expect that after the approval and NCD? And then a quick follow-up.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [8]

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I'm not sure I followed exactly. You're saying why shouldn't it be more, is that the question, David?

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David Ryan Lewis, Morgan Stanley, Research Division - MD [9]

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If growth rates back half top end of the range means back half of the year is consistent with the second quarter. So the question is why do we not see further inflection. Or do you not expect that until we see the approval or NCD?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [10]

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Yes, we think it's pre-mature. As you're well aware here, we've decided to discontinue the CENTERA program, so that won't be a driver of growth. We know that Boston Scientific is in the process of launching, and we expect that to have some impact. So those are going to be some headwinds, and so we feel pretty good about where we guided things, David.

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David Ryan Lewis, Morgan Stanley, Research Division - MD [11]

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Okay. That's helpful. And then Mike, just competition was a big debate this year. So competition in the U.S. from a third entrant, you suggested stable share this quarter. Was there any impact in the second quarter from new entrants? And how should we think about the second half of the year relative to new entrants?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [12]

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Yes. It's always difficult for us to estimate market growth, but we assume that we -- that the growth in procedures overall and our growth was quite comparable. As it relates to Boston, it appears that they're executing a disciplined launch and that they're focusing on training. And we expect them to get more active in the coming months, but we remain confident in our guidance.

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Operator [13]

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Our next question will come from the line of Vijay Kumar with Evercore ISI.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [14]

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Congrats on a really nice quarter here. Mike, just back on this TAVR guidance for the back half. I just wanted to understand that sequentially, we had 800 basis points of acceleration versus 1Q. Your comps did not seem like it was easier. And based on your comments, this was broad-based, right? This was not just a U.S. phenomenon. You saw this across the geographies. Your comments on Europe accelerating, I think that's the first time we've seen Europe -- you guys being -- holding back and make mid-teens in a while. And this is all happening before the formal approval, right? So back to, I guess, the question. 2Q was so strong, why shouldn't it accelerate post the approval in the back half?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [15]

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Yes. No, thanks for that, Vijay. And I can understand how you do that analysis. But when you do the sequential look of Q1 versus Q2, we certainly expected Q2 to be stronger than Q1 from a growth rate perspective. The way it turned out, Q1 we think turned out surprisingly low. And there may be some reasons behind it that we don't fully understand that has to do with seasonality and the way the calendar fell. Q2 turned out to be even stronger. So I would caution you not to expect that kind of sequential growth on a routine basis. And so when we lay out the back half of the year -- as I said, we would expect to get the approval sometime in Q3. And remember that Q3 is traditionally our slowest seasonal quarter as it is for our customers. And we mentioned without CENTERA and with Boston Scientific launching, we think that our guidance is in the appropriate place.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [16]

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That's helpful, Mike. And maybe one on the mitral side. Cardioband, I'm not sure I heard Cardioband being mentioned on what its contribution was for -- in TMTT. Is it being used in mitral because I certainly heard about tricuspid and the trial starts but I'm just curious on Cardioband in the mitral area?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [17]

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Yes. So the Cardioband supply situation has improved. It was used in both the mitral and the tricuspid position, actually more tricuspid this last quarter. And so we're pleased to see that supply situation get better so that we can allow some of our operators to really get in -- get to come down the learning curve and allow -- apply that on a regular basis, yes.

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Operator [18]

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

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [19]

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Congrats on the really, really impressive quarter. One on the EPS guidance, one on Ultra. So if I'm doing the math right, Scott, EPS beat by the midpoint of the Q2 guidance by about $0.06. But you raised the fiscal Q2 -- fiscal 2019 EPS guidance by only about $0.07 at the midpoint. Why is that? And I had one follow-up.

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [20]

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So you're generally right about the math, Larry. And this is, by the way, about $0.12 over our investor conference guidance. But effectively, expenses and sales in the second quarter came in higher than we expected. And so as we look at the second half of the year, we're also expecting expenses to come in higher than we originally expected. Remember, we've got new pivotal trials coming online and some additional other R&D and SG&A expenses that go along with those.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [21]

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And then Mike, on SAPIEN 3 Ultra, do you think the balloon issues have been resolved with the update to the IFU and are you now planning to roll out Ultra more aggressively? And can you provide a little more color on the SAPIEN 3 delivery system comments you mentioned during your prepared remarks?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [22]

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Yes. Thanks, Larry. Yes, what we expressed is we're getting a lot of favorable feedback on the SAPIEN 3 Ultra valve itself and the way that, that valve is performing. But we are seeing many clinicians also express a preference for aspects of the SAPIEN 3 delivery system. So we're working to incorporate those into the Ultra system. Ultimately, we think that, that will have impact on the balloon issue. The balloon issue, we identified some factors that were associated with that. And actually, there's been less of that, that have occurred with this SAPIEN 3 delivery system, so we expect that to be a real enhancement in that regard.

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Operator [23]

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Our next question comes from the line of Joanne Wuensch with BMO Capital Markets.

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Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD & Research Analyst [24]

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Congratulations on a very good quarter. Two quick questions. I want to spend a moment on the international market, the pricing dynamics. And last quarter, we talked about stable market share and a slower market. This quarter, we're talking about stable market share and a faster market. And I'm just trying to make sure I understand what's going on here.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [25]

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Yes. Thanks, Joanne. Yes, so we do think that OUS procedure growth did pick up in the second quarter. And you did hear correctly that we feel like our growth was comparable with the market, so we didn't really see a share shift in our minds either last quarter or this quarter. And this is true year-over-year and quarter-over-quarter. Now exactly why it picked up is a little difficult to say. Our team would say that there was probably some positive influence that came from the PARTNER 3 news that came in the end of Q1.

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Joanne Karen Wuensch, BMO Capital Markets Equity Research - MD & Research Analyst [26]

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Okay. That's helpful. And then I just want to also understand the impact of the Continued Access Program in low risk, what you may think it helped in the second quarter and how you're thinking about that for the second half contribution.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [27]

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Yes, thanks. So that stays in place until there's an approval. The CAP program in the second quarter generated a little more than the first quarter, but it was pretty small. It was minor. I want to say something maybe in the 10% improvement, so I think maybe a couple of million dollars.

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Operator [28]

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Our next question comes from the line of Robbie Marcus, JPMorgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [29]

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Great, and congrats on a nice quarter. I heard you mention comments that the M3 is moving into pivotal trials late in this year. I didn't hear an update on timing for EVOKE. Can you just give us an update on if you're doing implants in patients in both of those right now and the status for EVOKE?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [30]

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Yes. We are doing patients with both systems. We've been really pleased with the feedback on both systems. We have, at this point, decided that we're going to initiate the SAPIEN M3 clinical trial before the end of the year. One of the reasons that we feel comfortable going first with that is because we have literally thousands of patients in which the SAPIEN valve has been used in the mitral position, so it gives us an opportunity to start there. But we don't mean to send the signal that we're not excited about the EVOKE platform. We also feel great. SAPIEN M3 is going to go first.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [31]

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And you gave some good color on what you thought about second quarter and maybe some of the drivers of growth there. But maybe just diving into the international markets a little bit and if you could break out Europe and outside of Europe. This is a market that's been doing low risk for a while. It's been growing mid-teens for an impressive number of years. What is it there that you're seeing a trend that drove the growth this quarter well above the expectations? Was it less competitive pricing? Was it some change in competitive dynamics? Was it some markets doing better than others? Any kind of color you could give would be great.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [32]

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Sure. So I mean this was a really remarkably level quarter for us in that we had -- we experienced double-digit growth really around the globe, and that was driven by TAVR. In Europe, in particular, what we have seen is that the less penetrated countries continue to grow faster than the more penetrated countries, but there's still a ways to go. Europe is influenced to some extent by its reimbursement programs, and so that's a key element of this. But I think you said there was already low risk in Europe. Actually, there's no low-risk approval at the EU level. That will probably come in 2020. But we do think that there was some influence from the PARTNER 3 data that appeared at the end of Q1 and that, that probably had some impact on the treatment of patients in the quarter.

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Operator [33]

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

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [34]

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This is actually Cecilia on for Jason. I just wanted to ask about Japan and the strong TAVR adoption trend you've seen recently, just juxtapose what's the current number of qualified centers in the region. And as you look forward, can you talk about the TAVR upside you view here and the leg work necessary to really open up the opportunity, what still needs to be done to increase the total number of qualified centers as well as establish an improved current referral pattern?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [35]

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Yes. Thank you, Cecilia. Yes, the growth rate in Japan has been nice, and we've been pleased with that. But we're not pleased at all with the treatment rates in Japan. Given the large elderly population there, we would expect TAVR penetration to be much higher at this stage of the game. And we believe that one of the reasons it's not higher is because it's really been limited in terms of the way their system has allowed centers to start up and that there should be more centers, and the centers that are doing it should probably be doing more procedures. So we still have our work to do to make sure that proper policies are put in place, and we're applying energy to do that. So although Japan is nice, it's still a big opportunity for patients to be treated at a much higher rate.

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Cecilia E. Furlong, Canaccord Genuity Corp., Research Division - Associate [36]

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Okay. Great. And then just turning to Europe. I realize it's still very early in the process, but could you talk more about your ongoing PASCAL launch in the region and specifically the training programs you're implementing, the learning curve associated with the platform and adoption trends within centers following initial utilization and just what types of patients are you seeing the platform be used in initially as centers trial the device? And where does this expand in your view longer term?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [37]

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Thanks. So early on here, we've really put a premium on making sure that the training was very well done, that we had great procedural success, that patients had great outcomes, and that's been job 1 for us. It really hasn't been so much about the numbers. We've gotten a lot of great feedback. We saw the number of procedures really accelerate in Q2, and we are indeed adding centers in Europe during Q3 and Q4. So you can tell from our projection that we expect to do around $40 million in 2019, and that's going to be primarily from PASCAL. So I think it kind of speaks for itself in terms of what we think the adoption rate will be.

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Operator [38]

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Our next question comes from the line of Matt Taylor with UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [39]

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So the first question I wanted to ask was you mentioned this difficult decision to discontinue CENTERA. I was wondering if you could talk a little bit more about that as it certainly implies a lot of confidence in SAPIEN 3, which you should have, but you're not going to have a self-expanding option going forward. And what does that do in terms of the additional flexibility or horsepower that you get from discontinuing that, that you could put behind PASCAL or some of these other programs?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [40]

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Yes. Thanks a lot, Matt. You're right, a lot of this was headlined. The incredible body of evidence that exists on SAPIEN platform, in SAPIEN 3 in particular, and the way it performed in the PARTNER 3 data has just given us a lot of confidence, and it's also placed a very high bar in terms of how systems need to perform. And although we're really pleased and excited about CENTERA, there's a number of clinicians are as well and that valve performed well, the way that valve delivers didn't work as well in all anatomies as we would have liked, so it would have required us to make some enhancements to the delivery system. And at the same time, remember, the CENTERA trial that we're involved in now would only give us an intermediate risk indication, and we would have to continue to do trials. So when we put that altogether and thought about where we're going to apply the resources of our team and how much confidence we have in the existing platform and how excited we are on future platforms, it was a tough decision, but we made it and decided that we're going to focus our resources on the next generations as well as the excitement we have around our existing platforms.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [41]

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Okay. Understood. And then can you just spend a second on how you've kind of retooled the investments in mitral and tricuspid as kind of a follow-up to that? And where are you accelerating these more? You mentioned the PASCAL trial starting in tricuspid later this year. Maybe give us some intel on where you're really trying to accelerate?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [42]

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Yes. So a few things. One is PASCAL was really kind of going first on the repair side. And so we are pleased now that we already had a program that was focused on these primary degenerative patients. And to be able to launch a pivotal trial for the functional or secondary patients, we're excited about because that's a significant group of patients that we're looking forward to treat. On the tricuspid side, after a lot of deliberation, we decided that our first tricuspid trial should be done with PASCAL. So we made that call. You also heard that we decided and made the tough decision to discontinue the work that we have on FORMA. And so that one, we're in discussions with FDA in terms of what that trial design would look like. And so hopefully, that gives you a sense and, at the same time, I think we just explained where we are in the mitral replacement with M3 going into a clinical trial late this year.

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Operator [43]

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Our next question comes from the line of Matt Miksic with Crédit Suisse.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [44]

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I echo everyone's congrats on the quarter. So I think one of the things that folks have been trying to get to on the quarter is sort of the strength and what drove it, and it doesn't sound like it was continued access per se. And I guess, Mike, if you could elaborate maybe, it didn't really sound like it was low-risk patients that came in but you've said a few times, awareness of and the impact of the PARTNER data. So is it -- I mean is it something like stroke risk or something that stood out or changed the conversation for the, say, the intermediate risk indications? Or any kind of color that you can provide on how does awareness translate into volumes. And then I had one follow up.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [45]

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Yes. Thanks very much, Matt. I understand the confusion, and I wish I could point you to one thing that really drove this. And I know this call feels a little bit like a birthday party, but it is -- there are a bunch of serious issues in here. The -- we think that there was just plain variability between the first quarter and the second quarter. We believe that all of this data that was presented at the end of Q1 generated a lot of buzz, a lot of excitement and that people started moving through the system. We know that people don't move through the system that fast. And so oftentimes, we think it could take 90, 120 days, even more for people to move through it. So how much could have gotten stimulated and move in Q2 is a question mark. So we -- again, we don't think it's about cap. We don't think there were a significant number of low-risk patients that were treated in the quarter. We really think that it was just a stimulation of the overall number of TAVR procedures.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [46]

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Okay. That's helpful color. I understand it's difficult to pin down. But then a similar question, heading into Q3 and again cap not -- let's just say, not a factor per se, maybe talk about seasonality. I mean last year, you're down about $30 million or so sequentially Q2 to Q3, I think. And maybe what does cause a number to come down the way, say, it would need to come down sequentially in order to hit the guidance you've laid out for Q3?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [47]

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Yes, it's a good question. So you know that Q3 is a seasonably slow quarter for our customers, and so that kind of goes without saying. And it wasn't so long ago, I'll remind you, back in 2016, after we got the approval, Q3 was slower growth than Q2, and I'm not sure we fully explained exactly why that was the case, but it happened. And so it causes us to just stay thoughtful and moderate about what our expectations are. We expect to have approval. But again, if the approval does come, it's probably likely to come during one of the slowest times of the year.

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Operator [48]

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Our next question comes from the line of Josh Jennings with Cowen and Company.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [49]

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Just 2 questions on low risk approval. First one is what gives you confidence to kind of narrow the guidance range for approval time lines to 3Q. And should we be thinking about could that -- could approval occur in the next week? Or should we be thinking later in the quarter, in September? And then I just have one follow-up.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [50]

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Yes. Thanks for the question. Yes, I understand where you're coming from, Josh. So what happens usually is we go through questions back and forth with FDA. And you can usually tell when the questions are winding down or when they're coming down to the final questions, and so it makes us feel we're pretty close. One of the things that's not clear is whether our approval would come at the same time or whether the FDA might choose to move to competitors at the same time could be a factor. So we're saying based on everything we know, probably Q3, but we just can't be any more specific than that.

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Joshua Thomas Jennings, Cowen and Company, LLC, Research Division - MD and Senior Research Analyst [51]

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Understood. And just in terms of low-risk approval in the label, I think you've been clear you don't expect any kind of exclusion of bicuspid, just wanted a sanity check that that's still your view. But to follow-up on top of that is -- I mean could you have a labeling advantage in the early days of low-risk approval? It's our understanding that the Medtronic bicuspid arm is still enrolling or just gotten -- started enrolling a couple of months ago. Could you have an advantage in the bicuspid segment for a period until Medtronic gets that data together?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [52]

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Yes. Thanks. Yes, I'll just remind the audience that bicuspid is not contraindicated today, and we do not expect it to be contraindicated in the label or in the future. You saw Raj Makkar's data, which was quite encouraging. So I'm not sure it's going to be much of a competitive dynamic going forward. We feel comfortable that it will be treated in the future much like it is today.

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Operator [53]

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Our next question comes from the line of Chris Pasquale with Guggenheim.

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Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [54]

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Congrats on the quarter, guys. So Mike, just to start off with how close is CLASP IID to completing enrollment, just trying to get a better sense for the regulatory time line there.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [55]

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Yes. Thanks. So we've been enrolling for a while. It's proceeding largely as planned. We're continuing to activate more centers. I don't think we have anything more to share on that. We really haven't laid out what we think it's going to take. This is the first time that we've been engaged in a mitral transcatheter trial just like this, but it is going largely as we planned.

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Christopher Thomas Pasquale, Guggenheim Securities, LLC, Research Division - Director and Senior Analyst [56]

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Okay. And can you talk a little bit more about the tricuspid opportunity? We haven't seen a ton of data yet on these devices in that position. But you guys are moving ahead into 2 trials. That suggests you're encouraged by what you're seeing. What types of patients are you looking to treat in these studies? Is there going to be any difference in terms of how you set up the one for Cardioband versus PASCAL? Anything you could share there will be helpful.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [57]

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Yes. Thanks. So this is really going to be new for these patients. Today, they don't have very much options. One of the reasons that we're enthused as clinicians are enthused, and they say, "We really could use a transcatheter option to be able to help these patients." As we mentioned earlier on the call, we actually have done 3 early feasibility studies in the tricuspid position. And even though each of those systems behaved differently, we've consistently heard back that patients really get an improvement in their quality of life following that. Now of course, that's anecdotal, and we need to do that in a high-quality fashion. We really have not defined the clinical trial at this point. We're working with FDA at this point, but it's going to be some kind of a trial that actually compares it to medical management probably. And so it will be that fundamental.

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Operator [58]

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

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [59]

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Wonder if I could maybe get your thoughts on the NCD, the expanded NCD or the updated NCD that came out a few weeks ago. Do you have any thoughts on what impact that will have in the market? And are you seeing your new centers already starting to gear up to start offering TAVR?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [60]

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Yes. Thanks for the question, Raj. So we often think that the primary risk that face severe aortic stenosis patients is not the treatment complications but the risk of not receiving treatment at all. And we really commend CMS for a thoughtful approach that I think really is going to modernize the requirements, and it will be more streamlined for patients. We know that there are a number of centers that are anxious to open TAVR programs. And when we look ahead, we say, yes, it's reasonable to estimate that approximately 200 new sites could achieve eligibility to initiate a TAVR program by the end of 2020.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [61]

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And in that context, what's your sense on how expansive that will be to procedure volumes versus sort of cannibalizing patients that would have been referred previously?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [62]

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Yes. We don't know this for sure, but based on our past experience, we think new centers often mean new patients. We think that often, patients are trapped in their referral pathways and don't necessarily get referred out to other larger centers, so we think it is going to be additive. But overall, remember that we have an estimate that the overall opportunity is going to grow to $7 billion by 2024, which infers a pretty significant growth rate between now and then and we think that's all part of it. The NCD kind of turned out the way we had hoped it would turn out and had planned for it to turn out so not really outside of our existing guidance.

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Operator [63]

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Our next question comes from the line of Danielle Antalffy with SVB Leerink.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [64]

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Congrats on a really good quarter. And Mike, I wish it was a birthday party. But anyway, just a quick question on you mentioned that a lot of these -- or you didn't say a lot, I'm sorry, you've mentioned that some of these patients might have been borderline patients. Do you have any sense of how many patients would be considered borderline? And maybe to answer this question, do you have any -- a better way would be to look at age. Any sense of where the age is creeping right now, is it still about average age of 80? Is it moving lower, have you seen, in this quarter?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [65]

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Yes. Thanks, Danielle, I appreciate the favorable comments. You know what, we just don't have anything quantifiable. What we hear back is pretty anecdotal, so I really can't track it for you. The borderline patients, we don't think was the majority. We think it was a factor. But we just think that, for whatever reason, there was an acceleration. So we track what's going on in age, but that generally lags by a quarter or 2, so we don't have a really clear handle on that at this time.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [66]

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Yes. Okay. That's totally fair. And then just a quick follow-up on Europe and following up on Joanne's question around cost. Just wondering what's happening as you have conversations with some of the health care systems over in Europe because some of the feedback I got at PCR was we love SAPIEN 3, but we -- it's too expensive, and we actually can't grow volumes because we're limited by the cost of the valves. They need to get cheaper. They need to get cheaper. What are you hearing -- I understand you guys have been very disciplined about price, but not even as it relates to competition but just from a volume perspective and patient access in Europe and how might you address that longer term.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [67]

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Yes. Thanks, Danielle. Yes, we think some of the health care systems in Europe aren't fully prepared to pay for the quality and value that goes along with therapies like TAVR. Actually, I think when you compare with the value that it adds to the system, what it would cost to add a quality year of life and so forth, TAVR compares wonderfully with so many other therapies. We need to do a better job of influencing the policymakers about the importance of this therapy, and that's really what's key for us. We can understand why physicians are in a tough place, they have to live within the existing reimbursement system. But we think, in some cases, they don't fully reflect the value of the technology. That's our job to do.

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Operator [68]

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Our last question will come from the line of Pito Chickering with Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [69]

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A couple questions. The first one, can you refresh us on the number of centers in the U.S. that are using Ultra? What is the reorder rate for these centers on Ultra versus SAPIEN 3? And how quickly are they converting into 100% Ultra?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [70]

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So I don't know the number of Ultra in the U.S. It's a small number. We were further along in Europe. We didn't give a projection of how far we were going to be overall. We did say that we thought it would account for the majority of procedures in Europe before the end of the year and that ultimately, we think that the Ultra system will replace SAPIEN 3 in all geographies.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [71]

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Okay. And then two housekeeping questions. What impact does discontinuing CENTERA have in your gross margins? Now that you shifted more valves into Ultra in Europe, how should we think about how that impacts your gross margins as you need to ramp up 2 production lines to full capacity?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [72]

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So you're saying how does our gross margin impacted by the switch to Ultra from SAPIEN 3?

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [73]

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Yes.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [74]

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Is that -- yes, thanks, Pito. We think that's pretty -- it's pretty negligible. CENTERA would have been a more expensive system to make, but Ultra is comparable to the SAPIEN 3.

All right. Well, thank you, everybody, for your continued interest in Edwards. Scott, Mark and I welcome any additional questions by telephone.

And with that, now back to you, Mark.

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Mark Wilterding, Edwards Lifesciences Corporation - VP of IR [75]

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Thanks, Scott (sic) [Mike], and thank you all 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 as well as amounts adjusted for special items, are included in today's press release and can be found in the Investor Relations section of the website at edwards.com. If you missed any portion of today's call, replay will be available for 72 hours. To access this, please dial (877) 660-6853 or (201) 612-7415, and use the conference ID number 13691682. Additionally, an audio replay will be available on the Investor Relations section of the Edwards Lifesciences website. Thank you.

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Operator [76]

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