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Edited Transcript of EW earnings conference call or presentation 30-Jan-20 10:00pm GMT

Q4 2019 Edwards Lifesciences Corp Earnings Call

IRVINE Feb 2, 2020 (Thomson StreetEvents) -- Edited Transcript of Edwards Lifesciences Corp earnings conference call or presentation Thursday, January 30, 2020 at 10:00:00pm 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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* Danielle Joy Antalffy

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

* David Ryan Lewis

Morgan Stanley, Research Division - MD

* Frederick Allen Wise

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst

* Jason Richard Mills

Canaccord Genuity Corp., Research Division - MD of Research & Analyst

* Kristen Marie Stewart

Barclays Bank PLC, Research Division - 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

* Suraj Kalia

Oppenheimer & Co. Inc., Research Division - MD & Senior 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. Welcome to the Edwards Lifesciences Fourth Quarter 2019 Results Conference Call. (Operator Instructions) Please note this conference call is being recorded. I will now turn the conference over to our host, Mark Wilterding, Vice President, Investor Relations. Thank you. You may begin.

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

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Thanks, Diego. Good afternoon, and thank you all for joining us. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, Chief Financial Officer.

Just after the close of regular trading, Edwards Lifesciences released its fourth quarter 2019 financial results. During today's call, management will discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q&A.

Please note that 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 were 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 these differences and important 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 adjust, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP measures. Reconciliations between GAAP and non-GAAP measures mentioned during the call are included in today's press release.

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

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

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Thank you, Mark. 2019 was a year of major milestones and significant investments for Edwards. Groundbreaking PARTNER III clinical trial results demonstrated superiority of our SAPIEN 3 valve technology that led to U.S. regulatory approval for patients at low surgical risk. We also initiated our European introduction of PASCAL, an important early addition to our portfolio of transcatheter mitral and tricuspid therapies, or TMTT. We extended our leadership position in surgical heart valves and implemented valuable additions to our smart monitoring technology and critical care with the growth of HemoSphere and the addition of CASMED.

Most importantly, in 2019, even more patients benefited from Edwards' life-saving technologies than ever before. I'd like to touch on several full year financial highlights before I get into the quarterly details.

Underlying sales increased 15% in 2019 to $4.3 billion, including double-digit organic growth in each region. Excluding special items, we were able to achieve 19% growth in earnings per share, while increasing R&D by 21%. The significant increase in R&D investments this year helped fuel important breakthrough innovations to strengthen our longer-term outlook.

As you heard at our investor conference last month, we are as convinced as ever about the tremendous opportunity to enhance patients' lives through the treatment of life-threatening conditions and bringing significant value to the health care system.

Now turning to our quarterly results. We're pleased to report strong fourth quarter underlying sales growth of 19%. Our sales growth this quarter was significantly higher than we expected, led by transcatheter aortic valve replacement or TAVR. Now let's take a closer look at TAVR. Full year 2019 global sales of $2.7 billion increased 21% on an underlying basis over the prior year, significantly exceeding our original guidance of 11% to 15% growth. Stronger-than-expected 2019 growth was lifted by increased awareness of the benefits of TAVR therapy with SAPIEN 3, following the strong PARTNER III clinical results presented and published in the first quarter of the year. The U.S. national coverage determination released late in the second quarter also resulted in improved access for more patients suffering from severe aortic stenosis.

In the fourth quarter, global TAVR sales were $763 million, an increase of approximately 30% on an underlying basis, with impressive strength in the U.S. We estimated global TAVR procedure growth was comparable with our growth in the fourth quarter. Globally, average selling prices were stable, and we maintained our disciplined pricing strategy.

In the U.S., we estimate total TAVR procedures grew approximately 40% on a year-over-year basis and that Edwards growth was comparable. Stronger-than-expected growth in the fourth quarter continued to be driven by the step-up in TAVR treatments following the strong PARTNER III evidence that led to the recent FDA indication expansion for our SAPIEN 3 and SAPIEN 3 Ultra systems. Fourth quarter growth was broad-based across more than 700 centers in the U.S.

Outside the U.S., in the fourth quarter, we estimate total TAVR procedures grew in the high teens on a year-over-year basis, and Edwards growth was comparable. I'm particularly gratified to see the meaningful impact that our dedicated employees are having on helping so many patients around the world.

In Europe, Edwards growth was in the mid-teens, and we estimate our competitive position was stable. We continue to be encouraged by the strong adoption of TAVR, especially in countries where therapy penetration is still low. It is also worth highlighting that in the fourth quarter, Edwards became the first company to receive CE Mark in Europe for the treatment of patients diagnosed with severe aortic stenosis, who are at low-risk for open heart surgery.

Lastly, the rollout of SAPIEN 3 Ultra is well underway in the U.S. and Europe. Early clinician feedback on the ultra valve related to improved paravalvular leak performance has been outstanding. We feel this is a significant step forward, especially for low-risk patients.

In summary, based on our momentum in TAVR, we now expect our 2020 underlying sales growth to be around the top of the 12% to 15% range that we shared at our investor conference. As previously noted, while we expect this healthy trend to continue, we expect the growth rates will be lower as the year progresses and we annualize the stepped-up procedure growth following the PARTNER III presentation. We continue to believe this large global opportunity will exceed $7 billion in 2024, which implies a compounded annual growth rate in the low double-digit range.

Turning to TMTT. We are on track to achieve all of the milestones discussed at our recent investor conference, including executing 4 pivotal studies. We continue to invest aggressively in our portfolio, and you can expect to hear important updates at medical meetings this year. In addition, we're pleased to announce that the EVOQUE tricuspid replacement valve system has recently received FDA approval for an early feasibility study and a breakthrough device designation, a program intended to help patients receive more timely access to designated medical technologies.

Full year 2019 sales of $28 million came in below our original guidance of approximately $40 million as we continue to execute a disciplined introduction and premium pricing strategy of PASCAL, which moderated European site activation. Fourth quarter revenue of $7 million was negatively impacted by the voluntary PASCAL field corrective action completed in the quarter. Importantly, we are able to minimize disruption to physicians and patients in need.

Despite the slowdown of our launch cadence, PASCAL acute clinical outcomes are excellent and physician feedback is positive. As we expand the rollout, we will remain focused on procedural success and differentiated patient outcomes.

To further update our transcatheter mitral therapies, we continue to enroll patients in the CLASP IID pivotal trial study of mitral valve repair with PASCAL in degenerative mitral disease, and are on track to complete enrollment by the end of the year. In addition, we're also enrolling our CLASP IIF pivotal trial for patients with functional mitral disease.

In mitral replacement, we continue to gain experience with SAPIEN M3 and EVOQUE, and anticipate enrollment in our M3 pivotal trial to begin in the second quarter. Early clinical evidence with both these low profile transfemorally delivered technologies has been encouraging.

Turning to transcatheter tricuspid therapies. We are committed to providing solutions for patients with poor prognosis and very few treatment options. We have initiated enrollment in our CLASP IITR pivotal trial to study PASCAL in patients with symptomatic, severe tricuspid regurgitation. As mentioned, we made meaningful progress on our EVOQUE tricuspid replacement program. And in addition, we're continuing to gain experience with our Cardioband tricuspid system in select sites as we develop our next-generation technology.

In summary, we remain committed to all of the milestones outlined in our recent investor conference and continue to expect TMTT sales of $50 million to $70 million for 2020. We are optimistic that the global TMTT opportunity will grow to approximately $3 billion by 2024, and are passionate about bringing our portfolio of solutions to these life-threatening diseases.

In surgical structural heart, full year 2019 global sales of $842 million increased 1.5% on an underlying basis over the prior year, in line with our original guidance of 1% to 3%. Fourth quarter sales of $205 million declined 3% on an underlying basis, reflecting lower surgical aortic valve procedures in the U.S. as TAVR adoption stepped up, partially offset by our continued strong adoption of our premium high-value technologies.

Despite the fourth quarter headwinds, our innovative INSPIRIS valve continue to be a growth driver in the quarter as it has been throughout the year. We remain encouraged by the actions of our focused team has taken to advance leadership as the partner of choice for surgeons. Our surgical portfolio strategy also positions Edwards to generate sustained growth through innovation.

We're pleased to confirm that late in the fourth quarter, we received European regulatory approval for our Harpoon beating heart mitral valve repair system and are in the process of beginning our commercial launch. Harpoon offers the potential for earlier treatment of degenerative mitral valve disease with faster recovery and more consistent outcomes for surgical patients.

In summary, in surgical structural heart, we continue to expect full year 2020 underlying sales growth of 0% to 3%. We anticipate that surgical aortic valve procedure headwinds experienced in the fourth quarter will continue into 2020, with a return to positive growth expected later in the year as we anniversary the 2019 step-up in TAVR growth.

Even as TAVR adoption expands, we're 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, full year 2019 global sales of $740 million increased 9% on an underlying basis over the prior year, exceeding our original guidance of 5% to 7% growth. HemoSphere, our all-in-one monitoring platform grew faster than expected in 2019, following the global launch of that platform with our FloTrac sensor and our Acumen Hypotension Prediction Index software.

Fourth quarter Critical Care sales of $199 million increased 8% on an underlying basis driven by strong demand for HemoSphere and continued growth in Smart Recovery. Growth in the quarter was led by sales in the U.S.

In line with our commitment to enhance our broad portfolio of sensors, we initiated the commercial launch of FORE-SIGHT, our cerebral oximetry technology on HemoSphere in the fourth quarter. As discussed at our recent investor conference, the integration of a full range of technologies on HemoSphere creates a unique offering of enhanced recovery tools and predictive analytic capabilities to further strengthen our leadership in hemodynamic monitoring.

In summary, we continue to expect 2020 underlying sales growth of 6% to 9%, and we remain excited about our pipeline of innovative critical care products.

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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Thank you, Mike. I am pleased to report that our strong finish to the year enabled us to broadly exceed our financial guidance for 2019. So today, I'll provide a wrap-up of 2019, including detailed results from the fourth quarter as well as provide an update on guidance for the first quarter and full year of 2020.

For the full year 2019, sales increased 15% on an underlying basis to $4.3 billion. Adjusted earnings per share grew 19% to $5.57, and we generated $1.1 billion of adjusted free cash flow. We were pleased to generate strong margins during 2019, while still investing aggressively for profitable future organic sales growth.

With the repeal of the Medical Device Excise Tax at the end of 2019, we will be able to continue our aggressive research and development investments, fund the growing field of clinical organization to support patient care and strengthen our global supply chain.

Sales in the fourth quarter grew 19% on an underlying basis, and adjusted earnings per share grew 25% to $1.46 versus the prior year. This reflects positive operating results partially offset by our decision to accelerate strategic spending in the fourth quarter to drive therapy awareness as well as onetime costs associated with migrating Cardioband production from Israel to Ireland.

GAAP earnings per share was $1.32, which included a $41 million or $0.19 per share noncash impairment of Cardioband intangible assets that we referenced at last month's investor conference. A full reconciliation between our GAAP and adjusted earnings per share for these and other items is included with today's release.

I'll now cover the details of our results, and then discuss guidance for 2020. For the fourth quarter, our adjusted gross profit margin was 75.8% compared to 76.1% in the same period last year. This reduction was driven by spending in support of the new European medical device regulations and a migration from our Cardioband facility in Israel, partially offset by the benefit of a more profitable product mix. We continue to expect our 2020 adjusted gross profit margin to be between 76% and 77%. Our rate should be lifted primarily by an improved product mix, offset by lower foreign exchange hedge gains and capacity investments.

Selling, general and administrative expenses in the fourth quarter were $347 million or 29.6% of sales compared to $288 million in the prior year. This 21% increase reflects additions we have made in field clinical personnel to support TAVR cases in the U.S. and TMTT in Europe as well as the previously mentioned accelerated actions related to disease awareness and therapy adoption. We continue to expect SG&A, excluding special items, to be between 28% and 29% of sales for the full year 2020.

Research and development expenses in the quarter grew 19% to $194 million or 16.5% of sales. This increase was primarily the result of continued investments in our transcatheter structural heart programs, including spending on clinical trials. For the full year 2020, we continue to expect R&D as a percentage of sales to be between 17% and 18% as we invest in developing new technologies and generating evidence to expand indications for TAVR and TMTT.

Turning to taxes. Our reported tax rate this quarter was 11.2%, or 12.3% excluding the impact of special items. Stock appreciation drove a 450 basis point benefit this quarter from the accounting for employee stock-based compensation. We continue to expect our full year rate in 2020 to be between 12% and 14%, including an estimated benefit of 5 percentage points from stock-based compensation accounting.

Foreign exchange rates decreased fourth quarter sales growth by 40 basis points or $4 million compared to the prior year. At current rates, we now expect an approximate $25 million negative impact or about 0.5% to full year 2020 sales compared to 2019. Foreign exchange rates positively impacted our fourth quarter gross profit margin by 30 basis points compared to the prior year. Relative to our October guidance, FX rates positively impacted earnings per share by about $0.01, reflecting our effective currency hedging program.

Free cash flow for the fourth quarter was $328 million. We define this as cash flow from operating activities of $399 million, less capital spending of $71 million. For the full year 2019, adjusted free cash flow was $1.1 billion a 35% increase over 2018.

Turning to our balance sheet. At the end of the year, we had cash, cash equivalents and short-term investments of $1.5 billion. Total debt was $594 million. Average shares outstanding during the quarter remained relatively constant at $212.6 million. We continue to expect average diluted shares outstanding for 2020 to be between $212 million and $214 million.

Before turning the call back over to Mike, I'll finish with updated financial guidance for 2020. Momentum in TAVR sales has been stronger than we expected at the time of our investor conference. As a result, we now expect higher sales in 2020, which would result in higher underlying full year growth rates. We now expect the TAVR underlying full year sales growth rate to be around the top of our 12% to 15% range. And for the total company, full year underlying sales growth rate around the top of our 10% to 12% range. We continue to expect sales growth rates to decline as the year progresses as a result of higher prior year comparisons.

For TAVR, we are raising the bottom end of our range and now expect sales of $3.0 billion to $3.2 billion versus our previous range of $2.9 billion to $3.2 billion. We continue to expect surgical structural heart sales of $820 million to $860 million. Critical Care sales of $780 million to $820 million and TMTT sales of $50 million to $70 million. We are raising the bottom end of our guidance range and now expect sales for total Edwards of $4.6 billion to $5.0 billion versus our previous range of $4.5 billion to $5 billion.

For full year 2020, we now expect adjusted earnings per share of $6.15 to $6.40 versus our previous guidance of $6.05 to $6.30. For the first quarter of 2020, we project total sales to be between $1.15 billion and $1.2 billion and adjusted earnings per share of $1.49 to $1.59.

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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Got it. So in conclusion, we are very proud of the significant progress we made in 2019, advancing new transformative therapies and delivering strong financial performance. We continue -- we expect continued growth and progress in 2020. We're enthusiastic about the continued expansion of transcatheter-based therapies for the many structural heart patients still in need, which positions us well for longer-term success. Edwards is fortunate to have a strong leadership position focused on serving patients who today have few treatment options for longer and better lives.

We believe our patient-focused innovation strategy can transform care and bring value to patients, health care systems and shareholders. This year, we'll mark the 20th anniversary of Edwards Life Sciences as a public company. In acknowledgment of this milestone, we will host our annual investor conference at the New York Stock Exchange on December 10. We'll share more details on that event as we get closer.

And with that, let me turn it back over to Mark.

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

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Thank you, Mike. We're ready to take questions now. (Operator Instructions) Diego?

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Questions and Answers

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Operator [1]

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

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

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Congrats on a remarkable 2019. Mike, if okay, I'd like to start out with you. Just sort of an obvious question here. Any more detail you can provide on the U.S. TAVR upside that you experienced in Q4, kind of where it came from? Did you have a big pickup in the number of new centers and growth in those new centers? Just any further comments on the U.S. upside in TAVR would be great.

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

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Yes. Thanks, Bob. I think it feels like it was a continuation of the momentum that we started to feel in the third quarter. It was broad across all segments. As we mentioned, there are more than 700 sites at this point. But we saw that growth, whether it was in new sites or some of our mature sites that are quite large centers. We think that it came across the risk spectrum, and it wasn't just low-risk patients coming into it that, indeed, it was patients of all risk profile. And even though there was clearly a switch from surgery to TAVR in a number of cases, we think the predominant effect was new patients coming off the sideline for treatment.

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

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Okay, interesting. And then I also want to ask one quick one on TMTT. Just wonder if you could give us an update on the litigation on PASCAL. Just specifically, Abbott has said that there could be a ruling on injunction in Germany for PASCAL in early March. I was wondering if you could just kind of confirm that time line and any other milestones in the first half of the year on litigation.

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

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Thanks. Well, as you know, Bob, this litigation is playing out in several countries over an extended period of time, so there is going to be a lot of stories. In fact, there was a recently completed trial in the U.K., and there's a decision that's pending on that probably sometime in Q1. In Germany, there's going to be a couple of hearings, I think the first one that started March with results to follow, so -- and I think there is a possibility for a U.S. hearing beyond that.

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Operator [6]

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Our next question comes from David Lewis with Morgan Stanley.

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

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Just 2 for me. First, Mike, just thinking about the ex U.S. growth rate there was a difference between procedure growth and constant currency growth in the quarter of about 5 points. Was there any particular driver accounting for that? Was it Japan stocking maybe in the third quarter? 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 that I'm tracking with you on the difference in the numbers, David. So maybe you're seeing something that I'm not, but I can make some general comments anyway. Although we did see a little bit of stocking of Japan in the third quarter, it was minor by comparison. And we'd say, generally, OUS that the procedure growth in the market and our growth was pretty comparable. I mean it's hard for us to be exact in predicting that, but we think that they're pretty close to each other. And there really wasn't appreciable difference in ASP either.

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

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Okay. That's really helpful. And then, Mike, I guess, the dynamic a lot of investors are focused on is you're clearly seeing TAVR acceleration probably slightly ahead of plan, but yet your SAVR guidance is unchanged. Can you just sort of share with us how you think we're seeing this very significant acceleration of momentum in the U.S. TAVR business, but yet we're not seeing the degradation in the SAVR business that I think many people would have expected?

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

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Yes. Thanks, David. Well, if you were to ask the folks in the surgical business, they would say they're feeling what's going on right now. But again, we think that there is kind of a step-up in procedures in TAVR. And we think the bulk of that step-up is new patients coming off the sideline as opposed to switching from surgery. Hard to quantify that? Is it 2/3, 1/3? I don't know. But it's something that probably feels closer to that from our perspective. So although we're going to feel it or we're feeling it today in surgical, we feel like we rebound from that out as we kind of anniversary this surge in growth.

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Operator [11]

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Our next question comes from Raj Denhoy with Jefferies.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [12]

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I wonder if I can maybe just dig in a little bit more to the new centers. Is there any way you can maybe parse out what percentage of growth they might have added in the quarter? Such a strong quarter, there's got to be some more detail you can provide for us.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [13]

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Yes. Thanks, Raj. Yes, I mean, the new centers added, but it really was broad-based. There's -- I couldn't say that they were a primary driver of growth. We saw it across the board. We saw it in our large centers that were some of the very first partner centers from the beginning of TAVR all the way through every people that have started more recently and in between.

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Rajbir Singh Denhoy, Jefferies LLC, Research Division - MD, Equity Research & Senior Equity Research Analyst [14]

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Okay. Maybe I could just ask one on mitral then. I know this quarter, obviously, was a little bit mixed up with the PASCAL issue you had in Europe. This pricing discipline strategy you have in Europe, has there been any -- anything more you can offer on that? Are you seeing more receptivity amongst your customers to the premium price strategy of PASCAL as we're moving here to 2020?

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

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Yes. So we were very committed to this. We feel like we have differentiated technology. We have a high-touch model. And we're executing this price discipline, and we're going to continue to do that. We know that there's not a lot of data out there today, but we think, ultimately, that will prove to be the case. We obviously have confidence in this strategy.

For us, it's more important to build toward long-term leadership. We're committed and feel confident in the estimate that we gave you that we'll have $50 million to $70 million of TMTT sales in 2020. So hopefully, that's a reflection of how we feel.

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Operator [16]

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Our next question comes from Larry Biegelsen with Wells Fargo.

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Lawrence H. Biegelsen, Wells Fargo Securities, LLC, Research Division - Senior Analyst [17]

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Mike, one big picture question for you and one TMTT question. So big picture, Mike, you've delivered 10-plus years of double-digit growth, and you're on track to do it again in 2020. But I think investors want to understand the durability of your growth. So my question is how important is it to deliver 10% growth each year to you? And just how are you feeling about the durability of growth right now at Edwards? And I have one follow-up.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [18]

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Well, thanks, Larry. So 2 different things. One is do we think it's going to continue and how important is it for Edwards. You know us pretty well by now. We are not a financially driven company that just is driven only to hit a number. We really feel like when we focus on great therapies for patients and we get that just right that the numbers end up taking care of itself. And it has played out on a long-term basis.

Having said that, I have a lot of confidence in our future. When you start with our biggest product area of TAVR, that continues to be one that has a lot of growth associated with. You'll remember that we said more than $7 billion by 2024, which infers a double-digit growth rate. We believe that TMTT, which is a brand-new addition to our portfolio has an opportunity for overall market to be $3 billion by 2024. So when you think about us pursuing a $10 billion opportunity out in 2024, it makes me feel pretty good about our prospects ahead.

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

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And how much did the ship hold impact TMTT sales in Q4? And is the mitral -- transcatheter mitral market, in general, developing as you expected, or a little bit slower because of the MITRA-FR results?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [20]

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Yes, it's a good question. We started our sales in October. It was interrupted. We had basically stopped supply during November, and we restarted in December. If we wouldn't have had that, we certainly would have had higher sales growth and maybe growing modestly off of Q3. Overall, we feel good about the market opportunity. As you probably note, there has been more growth in the U.S. than there has been outside the U.S. And so probably this MITRA-FR is having some kind of impact in Europe, but we hope that we'll be able to influence that as they get to see our -- as they get to see results from the PASCAL system. And again, when we look forward at our own results, we expect to regain momentum in Q1 and start focusing on new site activation again.

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Operator [21]

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Our next question comes from Kristen Stewart with Barclays.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [22]

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I was just wondering if you could maybe explain a little bit just about whether or not we would expect any data that could be coming out at the ACC conference coming up here, we would expect to see, to your data on low risk, any PASCAL data that could be coming up here over the coming months. And then I have a follow-up.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [23]

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Yes. I can't tell you for certain the number. We expect there to be some data. So for example, in TMTT, we expect there to be an update on some of the early class studies. So both longer-term data, and more patients added, maybe some data on PASCAL, tricuspid and Cardioband tricuspid. So there could be those. In terms of whether we'll see 2-year data on PARTNER III, it's too early to say. I don't know that there's anything official yet. So we really can't say anything until it's clear.

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Kristen Marie Stewart, Barclays Bank PLC, Research Division - Research Analyst [24]

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Okay. And then just with respect to the SAPIEN M3 study, I know that you had commented at the Analyst Day that you did get FDA approval and breakthrough, I believe, designation for that. Do you have any clarity on the trial design of that yet, and any time lines that we should expect for enrollment? I know that's pretty critical, it sounds like, towards you starting to achieve the timelines for getting to that $3 billion market opportunity along with PASCAL as well.

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

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Yes. Thanks, Kristen. There may be some confusion there. I don't believe we ever indicated a breakthrough pathway for SAPIEN M3. What we said is that we expect to be going to a clinical trial. What I just updated is that indeed is proceeding and we expect to have our first patients in Q2. But bigger picture here, we're very excited about having 2 pretty impressive transseptal replacement programs, both that are transfemoral and small profiles. Ultimately, those -- that M3 trial will go up on ClinTrials.gov, but there's still some details being ironed out.

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Operator [26]

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Our next question comes from Jason Mills with Canaccord Genuity.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division - MD of Research & Analyst [27]

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So first, big picture question on TAVR. Years ago, when we were talking about developing the market model, I don't think we ever discussed 700-plus centers. I think it was something less than that. So could you talk about how we've gotten sort of got from there to here? What's transpired in the market to promulgate 700-plus centers? And where do you think that could go now with the benefit of hindsight? And also maybe within that, discuss whether or not 700 to 750 centers is enough to generate the type of growth, compound growth that you're projecting over the next couple of years, or if you think that there needs to continue to be additions to the number of centers.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [28]

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Yes. Thanks, Jason. Well, I mean, clearly, we wouldn't be where we are today if it wasn't for a greatly improved procedure. This procedure has really gotten to deliver incredible outcomes. And it's also demonstrated to be a teachable procedure so that people that are starting new are able to stand on the shoulders of those that went before them and deliver really good results right from the beginning. And with that acknowledgment, we've had some favorable rulings in terms of the interpretation by CMS. And with that, came an updated NCD which allows more centers to become qualified for it.

If we were to look forward, we would say that maybe up to 850 have the ability to qualify as a TAVR center. Now again, we're not sure that all those 850 are going to go for it, so it depends on their own sites. But bigger picture, you asked the question, can we get the kind of growth necessary with, for example, 850 centers in the U.S.? We think absolutely yes. Center -- a lot of what has to change is not just center capacity, but the behavior of patients and physicians in the system, and patients actually with severe aortic stenosis getting treated. And there are a number of places where the system is less than ideal. We're trying to be an assist to that, but we see it getting better on a regular basis.

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Jason Richard Mills, Canaccord Genuity Corp., Research Division - MD of Research & Analyst [29]

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Mike, it's very helpful. And then more of a housekeeping item for Scott. Scott, when you come into a quarter and you see the press release and you see that kind of upside in TAVR relative to consensus estimates and guidance, do you expect it to generate positive leverage?

And one thing that you called out in the press release was the onetime spending associated with moving Cardioband, and perhaps there are other more onetime things in nature. But would you care to help us understand maybe what that -- and how that impacted, how those things impacted earnings quantitatively in the quarter? Congrats on a great quarter.

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [30]

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Sure. Thanks, Jason. So I guess, you had 2 questions. One was leverage on increased sales, the second was the impact of moving Cardioband. On the first one, so we've increased the midpoint of our sales guidance range by $50 million. And we increased earnings per share, midpoint of the range by $0.10. So that gives you a sense of the leverage that we're putting through the P&L. We are planning to accelerate some investments with some of the expected incremental sales.

Regarding your second question about gross profit, yes, we've taken some decisions in the fourth quarter involving our production operations, including migrating production from Israel, for Cardioband product, to other Edwards facilities, including our new facility in Ireland. And so you saw that show up in the fourth quarter results, which were a little bit lower than we expected. And it's reflected in 2020, but our guidance for 2020 for gross profit is unchanged at 76% to 77%.

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Operator [31]

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Our next question comes from Robbie Marcus with JPMorgan.

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Robert Justin Marcus, JP Morgan Chase & Co, Research Division - Analyst [32]

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And I'll add my congratulations on the great quarter as well. Scott, 2 financial questions for you, maybe I'll just give them both upfront. I totally get the reasoning for investing in the business here on such a great quarter. But maybe just help us understand exactly where the investments went in fourth quarter. And how should we think about any potential benefit flowing through in 2020? And then second, you ended the year with about $1.5 billion of cash on the balance sheet. You're generating north of $1 billion in free cash flow. What's the updated plan for utilization of cash here?

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [33]

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Sure. Thanks. So first question regarding where we invested extra dollars relative to, I guess, our expectations at the beginning of the quarter, about 2/3 of the incremental investment were reflected in operating expenses. They included things like disease awareness and therapy adoption initiatives. Just to give you one example, there was an announcement by the American Heart Association in November regarding an initiative that they're undertaking that we're supporting.

And then we've also been adding field resources to support significant growth. You don't grow 40% in the U.S., for example, NCD growth that we are expecting in Europe without also putting in resources to help support the high-touch model that we have in place. So that was probably 2/3. And then the other 1/3, it probably showed up in cost of sales, and I mentioned those earlier, the European medical device regulations and the migration of Cardioband production.

Regarding our cash balance, our philosophy and our strategy for deploying capital has not changed. We've got a number of priorities. The first one is investing in a global supply chain to support the growth of Edwards. Second, investing externally in things like acquisitions, strategic alliances, purchasing options to buy other companies. And then third, managing the balance sheet. So we're going to continue to be a buyer of Edwards stock over time. And opportunistically, we'll be executing share repurchases to help offset dilution, and over time as well, manage the share count down.

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Operator [34]

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Our next question comes from Matt Taylor with UBS.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [35]

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So I guess the first thing I wanted to ask about was the center growth and whether you have insight into how many centers could grow this year. And do you still think that we're going to get towards about a 50 or is it possible that there could be more given how quickly they seem to be growing here?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [36]

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Yes. Well, thanks, Matt. It's a little tough for us to tell how fast the centers are going to join the -- we saw pretty good growth in center. I think the last time we had reported on it, we said more than 650. So you can see where we are now. Yes. When we look forward and try and interpret the NCD, our estimate is that about 850 centers would be qualified to do it. How many do those actually go forward and how fast they act is hard for us to know. If we were guessing, we'd say, we get to that kind of 850-ish number, maybe over the next year or 2, something like that. And so that gives you some insight, but we can't be certain.

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Matthew Charles Taylor, UBS Investment Bank, Research Division - Equity Research Analyst of Medical Supplies & Devices [37]

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And then I was hoping you could give us some more insight or insights based on the trends in the U.S. The growth was so strong in Q4. It seems like you must be seeing the same kind of strong growth here in Q1. I think investors have some questions around how much of this is kind of a bolus versus sustained, and you seem to be suggesting with your comments that it's growing across the board, that it's more sustainable. Can you talk a little bit about what you're seeing in Q1 and how it could be sustained?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [38]

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Yes. Thanks, Matt. Well, you know how difficult it is for us to predict quarters, and we always hate to take 1 month and to do anything important with it. But we'll just say this, you could see what our revenue assumption is for TAVR for full year 2020. And we think it is going -- that the growth rate is likely to decrease during the course of the year as we anniversary the growth rates. In that assumption is that probably Q1 TAVR looks similar to Q4 in terms of revenue dollars. You'll have to remember, there was a big step-up in Q4 versus Q3. And we saw a similar trend last year going from Q4 '18 to Q1 '19. So it's hard to know for certain, but maybe that's helpful.

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Operator [39]

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Our next question comes from Vijay Kumar with Evercore ISI.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [40]

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A Congrats on a really solid feat here. Mike, maybe on the last comment on the back half revenue growth in TAVR, the underlying of -- I guess, the high end of 15%, is the implication that we sustain hold the line on double digits in the back half? Or maybe how should we think about the back half?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [41]

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Yes, it's a good question, Vijay. It's difficult for us to know. Do we stay at double digits? Do we dip below it? Either of those are certainly possibilities. The growth is so strong. I mean the good news is there are going to be more TAVRs done in the second half of 2020 than ever done in history. And so in terms of procedures per day, those are going to be records. Now how much growth is there over this year, it's not clear. But we've given you the -- probably the best guidance we can in terms of annual growth rates.

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Vijay Muniyappa Kumar, Evercore ISI Institutional Equities, Research Division - MD [42]

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Got you. And then, yes, one on the gross margins here, Scott. Did the recall impact you guys on the gross margins for Q1 just -- excuse me, Q4? How should we think about gross margin progression throughout the year?

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [43]

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So it's a little bit difficult to predict gross margin progression throughout the year because a lot of it ends up getting tied to our TAVR performance. But maybe I can help at least with the baseline on Q4 and explain what happened in Q4 '19 versus Q4 '18, where we had about 30 basis points of higher FX hedge gains in the fourth quarter of 2019 than we did in '18.

We had about 40 basis points of mix benefit that showed up in the fourth quarter, offset by those higher operating costs that we mentioned earlier in Israel and with European MDR. So if you look out to 2020, we're expecting to continue to get a mix benefit that shows up in our gross margin. It can be 50 to 100 basis points or even more. But generally, I think it's probably relatively flat during the course of the year, at least for modeling purposes, that's the right assumption at this point.

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Operator [44]

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Our next question comes from Suraj Kalia with Oppenheimer & Company.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [45]

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Mike, congrats on an excellent quarter. So Mike, the question about capacity and your growth assumptions in TAVR have been asked. Let me see if I can come at it from a different way. Our math is suggesting roughly 140 to 150 cases per year per center in the U.S. Can you give us a perspective of what percent of the cases being done currently in these 7 centers are independent in nature? And how do you look upon capacity utilization within these centers?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [46]

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Yes, very good questions. We don't look at it that way in terms of average number for a center. As you might imagine, there is a great difference, Suraj, between the amount of procedures done in a very large center and one that's small. So those are different. The thing that has been remarkable to us is the ability of centers to add capacity. They have found a way to manage. They add more cases per day, sometimes they add on a day. Actually, it's been quite a test for our team, and I'm so proud of our team has found the ability. We have a high-touch service model, so we're in every one of these cases. So as they grow, for us to have the ability, for example, to flex in the U.S. and cover 40% growth versus the prior year, was a heavy lift for us. But what happens is more patients show up, the line, the list gets to be pretty long and hospitals react to that by adding capacity. And so far, we've been impressed about their ability to do that.

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Suraj Kalia, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [47]

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Got it. And finally, Mike, forgive me, I'm drawing a blank here, did you all mention the M3 comparator arm? Congrats on a great quarter.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [48]

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Thanks. No, we didn't mention the M3 comparator arm. So that trial design is still one that has not been finalized, and we just decided it's prudent for us not to communicate it until it's really final. So at some point, that will be published at ClinTrials.gov and you'll see it, and so we'll let you know.

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Operator [49]

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Our next question comes from Rick Wise with Stifel.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [50]

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China hasn't come up. I think your exposure there is small. And maybe if I recall correctly, mostly SAVR and Critical Care. But can you remind us the impact and what you're assuming or how you're thinking about the situation and what's reflected in guidance?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [51]

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Yes. Thanks, Rick. Yes. First of all, obviously, our key concern is always for our employees and patients. We feel -- we've been fortunate so far. We haven't had any impact to employees inside Edwards that we're aware of, and we've been able to maintain our supply line. So at this point, you're right, China is not really huge for us. It's still just a small percentage of Edwards sales. But we don't expect there to be a significant change at this point from what's going on with the coronavirus, but we stay watchful.

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Frederick Allen Wise, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Equity Research Analyst [52]

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And just as a follow-up, sort of a strange question maybe, but you probably saw that Abbott's Tendyne mitral device got approved for placement in Europe today. My question is not about that as much is this an important moment for the field? Does this -- how does this make you feel about the openness of European regulators to consider the mitral waves coming at them? Does it say anything that we can extrapolate that makes you feel better, worse, the same?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [53]

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Thanks, Rick, well, you know we are big believers in the opportunity for transcatheter mitral therapies. And so whenever there's movement and a new regulatory approval for the whole field, that's a positive. So we're glad to see that. You know about our portfolio. We're very focused on it. We're just pleased. We think what's going to be most meaningful is when will we have these smaller transfemoral type systems. We think those are the things that really cause a change in behavior of patients and physicians. And so we keep our eye on that. But any kind of favorable movement is good. And I think there is a general openness to innovations within mitral disease.

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Operator [54]

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Our next question comes from 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 [55]

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Congrats on a really strong year, strong quarter. Mike, I was hoping you could comment on the competitive landscape, specifically in the U.S., what you're seeing out there. It sounds like your competitor had called out share loss. It seems like you guys are holding on to share, not losing share. So what are you seeing? And specifically, I'd be curious about what you're seeing as the new centers open up and how they're adopting valves. Are they just going with 1 player? And so they're a little bit more protected from share loss. Just curious about how that's playing out.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [56]

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Well, so Danielle, as we indicated, we believe that our growth was comparable to the growth that was going on in overall procedures, whether that was in the U.S. or OUS. So from our point of view, no real change of significance in our share position in the last quarter. Now there may have been changes in share position between our competitors, but we really don't have clear visibility to it.

When we gave our guidance in December, we indicated there would probably be some modest share loss in 2020. So that's yet to play out. We did -- we also expected that to happen in 2019. It didn't really. And so it may have been just delays on the part of our competitors, but we know they're still early in their launch process.

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Danielle Joy Antalffy, SVB Leerink LLC, Research Division - MD of Medical Supplies & Devices and Senior Analyst [57]

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And safe -- just a quick follow-up. Safe to say, in Europe, it feels like things have stabilized there? Is that -- it sounds like that's what you're seeing, too, from a share perspective?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [58]

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Seeing big share shifts, we obviously watch that very carefully, and that's not such a fast-moving market that we don't feel like we have a reasonable handle on it. So yes, it does feel reasonably stable at this point.

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Operator [59]

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Our next question comes from Pito Chickering with Deutsche Bank.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [60]

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First question is just to dig a little more into the new centers, is your market share in those centers similar to your market share of the more established centers?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [61]

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That's a good question. I'm not sure that I really have data at my fingerprint -- at my fingertips on that one. My sense is that it varies significantly. There are some centers that probably start up that are primarily Edwards and there are others that may start up with others. We just say when we look at our overall growth in the U.S., the 40%, there was a nice addition from those new centers. But again, it was just -- we saw it kind of across the board.

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Philip Chickering, Deutsche Bank AG, Research Division - Research Analyst [62]

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Great. Then on the SG&A side, I understand that hiring field personnel in the U.S. for TAVR and TMTT in Europe makes sense relative to the growth there. But can you help us break out the marketing costs you incurred in the fourth quarter? And are those costs recurring at similar levels in 2020? Or should they decrease?

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [63]

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Yes, thanks. I can begin here then Scott can add on what our 2020 guidance looks like and SG&A. Yes, I mean, we try and stay one step ahead of what we see as procedure growth, and we add resources that we think are commensurate. And when we have fast-growing businesses like TAVR and what we anticipate in TMTT, we try and stay a little bit ahead of that.

Having said that, we still think that there's probably some leverage on the SG&A line. We maintain a high level, as you properly noticed of case coverage, and we're in every case. But having said that, maybe, Scott, you're best to comment on what our guidance is for SG&A for 2020.

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [64]

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I guess I'd say 28% to 29% for 2020. But in addition to the field clinical support and selling resources around the field, we're also doing work around patient education regarding the severity of aortic stenosis and treatment options, the benefits of TAVR. And we're doing outreach to referring physicians on therapy options available today, so there are other activities and expenses associated with those activities beyond just the field resources we talked about earlier.

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Operator [65]

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Our next question comes from Matt Miksic with Crédit Suisse.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [66]

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Congrats on a really outstanding quarter and year. The question I had was maybe just a follow-up on something you talked a little bit about on your Analyst Day meeting or Investor Day. And you've touched on here, I think, in terms of investments to kind of support identifying patients and so on. And Mike, you talked a while back about tracking patients through the system. It sounds like maybe part of the investments you've made around cardio care or helping to do that, I think, if I understand it correctly. And maybe if you could just talk about how that's going, how widely you've rolled that out, and to what degree you're employing -- are there other types of technology to help you kind of support this growth and identify these patients?

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

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Yes. Thanks, Matt. Scott started going down this path. There's 3 broad or a few broad categories here. One is educating patients themselves, others trying to help the referral pathway be better educated. That continues to be a priority for us. We also have a team that helps systems have better echo findings and make sure that their referral pathways actually work.

We have a benchmark program that allows centers to operate at maximum efficiency. So it's pretty broad-based. As Scott mentioned, we've got a new initiative with the American Heart Association. It's broad-based and rather than to try and detail here, you should know that, that is an area of new investment.

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Matthew Stephan Miksic, Crédit Suisse AG, Research Division - Senior Research Analyst [68]

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That's great. That's great. And then just one follow-up, if I could, on the moving into early feasibility study for EVOQUE. If you could maybe just give us a sense of what should we expect in terms of kind of the enrollment at some of these mitral programs. It takes a little while. And what should we think about in terms of maybe getting that enrolled and maybe getting to a point where we'd be seeing some data from that program?

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Scott B. Ullem, Edwards Lifesciences Corporation - Corporate VP & CFO [69]

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(technical difficulty)

enrollment cadence looks like. We're excited about the technology. But we're not in a position yet where we're going to disclose time lines or predict how these early stage, early feasibility studies, and ultimately, pivotal trials are going to enroll.

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Operator [70]

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Thank you. Ladies and gentlemen, we have exhausted our allotted time for questions. I'll now turn the call back to management for closing remarks.

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Michael A. Mussallem, Edwards Lifesciences Corporation - Chairman & CEO [71]

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Thanks for your continued interest in Edwards, and Scott, Mark and I welcome any additional questions.

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Operator [72]

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Thank you. To access a replay of this call, please dial (877) 660-6853 or local access (201) 612-7415. Please use the conference ID 13697863. This concludes today's conference, and you may disconnect your lines at this time. Thank you all for your participation.