Edwards Lifesciences Corporation (EW) Q3 2012 Earnings Report, Transcript and Summary

Greetings and welcome to the Edwards Lifesciences Corporation third quarter 2012 earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, David Erickson, Vice President, Investor Relations. Thank you, Mr. Erickson, you may begin.

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2012 financial results. During today's call, we'll discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q&A. Our presenters on today's call are Mike Mussallem, Chairman and CEO; and Tom Abate, CFO. Before I turn the call over to Mike, I'd like to remind you that during today's call, we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to, our expectations regarding sales and sales growth, gross profit margin, net income growth, earnings per share, SG&A, R&D, taxes, free cash flow, diluted shares outstanding, and foreign currency impacts. These statements also include our current expectations for the timing, status and expected outcomes of our clinical trials, regulatory submissions and approvals, reimbursement conditions and new product introductions as well as expectations regarding improvements in business results, market growth and fundamentals and potential impacts of our acquisition of BMEYE, economic conditions, and our pipeline. These statements speak only as of the date on which they are made and we do not undertake any obligation to update them after today. Although we believe them to be reasonable, these statements involve risks and uncertainties that could cause actual results or experiences to differ materially from the forward-looking statements. Information concerning factors that could cause these differences may be found in our press release, our Annual Report on Form 10-K for the year ended December 31, 2011, and our other SEC filings, which are available on our website at edwards.com. Also, a quick reminder that when we use the terms underlying excluding the impact of foreign exchange and excluding special items, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today's press release. Now, I'll turn the call over to Mike Mussallem. Mike?

Thanks David. Say, we recognize that a late Friday conference call is unconventional so we really appreciate you taking the time to join us. This is a few days earlier than we normally report and we wanted to announce the full financial results as quickly as we could following the sales preannouncement last week and do it before the TCP Meeting next week. So let's get right into it. Our 50% growth rate in transcatheter heart valve sales in the quarter was less than we expected. Austerity measures in Europe posed a challenge and this impacted us harder than we expected. By comparison, we view the issues in the US as more temporary in nature. Looking forward, we expect a strong close to the year. As you may have seen, earlier today we received FDA approval to treat high-risk patients with SAPIEN using both the transfemoral and transapical approaches. We're very excited to begin offering this treatment to a considerably broader group of patients. Now, turning to quarterly results, reported total sales grew 9% to $448 million. Sales growth excluding the impact of foreign exchange was 14% driven by the US launch of SAPIEN. Total US sales grew 29% and represent a growing proportion of our total sales. Turning to transcatheter heart valves, third quarter sales were $124 million or 66% underlying growth driven by the US launch of SAPIEN. Transfemoral systems, which represented nearly 80% of our global THV sales, continue to be lifted by the US commercial ramp which is entirely TS and the launch of our 29-millimeter TF system in Europe. Outside the US, our sales declined 8%, but excluding the impact of foreign exchange, grew 5%. While rest of the world sales grew nicely, in Europe, underlying sales were comparable to the prior year and we estimate the market grew in mid-single digits due to austerity measures. Our unit growth in Europe was comparable to the market; however, pricing was slightly lower than last year as accounts qualified for annual volume rebates. Additionally, during the quarter, we increased our sales reserves by approximately $3 million to better reflect current product return patterns. Procedure growth in Europe was broadly lower than we expected. To provide some granularity, growth rates in Italy and Spain were negative as procedures decreased this quarter. This was driven by heightened economic pressures which further restricted hospital budgets. Additionally, the UK and France did not expand treatment as expected, and as anticipated, procedures in Germany grew 13% over prior year and were similar to the second quarter. Although sales in the third quarter came up short, we continue to believe the fundamentals in Europe related to TAVR are strong. This was reinforced by the high procedural success rates, continued clinician enthusiasm, new joint society guidelines endorsing the use of transcatheter heart valves for appropriate patients, and the real-world benefits of this therapy demonstrated in numerous recent studies including the extensive German aortic valve registry of approximately 3,800 patients. Last quarter, we introduced our larger 29-millimeter SAPIEN XT valve with the NovaFlex Plus transfemoral delivery system. This new valve's strong adoption in Europe resulted in transfemoral unit growth rate of more than 30% in stimulated transfemoral share gains. At the same time, non-transfemoral units declined approximately 20%, likely driven by heart teams more broadly adopting a transfemoral first approach and some volume migrating to the new 29-millimeter transfemoral offering. We estimate that competitive TA products continued to be of minimal impact in the quarter. Turning to the US, THV sales were $55 million for the quarter. Clinical sales of $5 million were lower than the $9 million in the second quarter as two nested registries in PARTNER II primarily enrolled in Q2. Net stocking units of $8 million were down from $14 million in the second quarter as fewer centers were trained during the summer months and the first commercial accounts began transitioning to consignment. Reorder sales increased 13% versus the second quarter. Remember that in May, the final NCD was released, which gave hospitals a better understanding of the requirements for becoming a TAVR center. While enthusiasm remains high, the structural heart requirements in the NCD have created a hurdle for new centers and they're working to meet these new standards. From launch to the end of the third quarter, we had trained approximately 150 commercial centers. Including the PARTNER sites, a total of 186 centers have been trained as of September 30. With the approval of Cohort A, we will use a portion of our training capacity to rapidly train non-PARTNER heart teams on the TA approach over the next two quarters. Under the provisions of the NCD, inoperable patients without femoral access have no coverage. The delay of both the approval of Cohort A and the clinical protocols that would have allowed reimbursement for this sizable group of patients reduce procedures. We expect the STS and ACC to jointly submit the clinical protocols to CMS next week and anticipate a timely approval. As previously mentioned, summer vacations had a more pronounced effect on procedures than we had expected with the requirement that a full heart team be present at every procedure. From a hospital economics standpoint, we believe the current reimbursement rates are fair. With any new technology, as centers gain experience, they generally find their efficiencies improve and their costs decrease. We're very pleased with the overall progress of the US launch. An impressive list of leading heart centers have enthusiastically adopted our SAPIEN technology and overall procedural success rates remain very high. It's also noteworthy that most hospitals will be conducted extensive media outreach to their respective communities announcing the launch of the TAVR program. Importantly, reimbursement has been formally established and, with the approval of PARTNER IA, high-risk patients now have access to this lifesaving therapy. Turning to our US PARTNER II clinical study, which is evaluating the SAPIEN XT technology, we're continuing to enroll patients in Cohort A, the surgical arm. We recently received FDA approval to add to the trial our larger 29-millimeter XT valve with the NovaFlex Plus delivery system and the Ascendra Plus delivery system for both the transapical and new transaortic approach. With this, we expect fourth quarter clinical sales to return to second quarter levels. We remain on track to complete enrollment in PARTNER II by mid-2013. In Europe, we remain on track with the clinical timelines for our exciting new transcatheter platforms. Enrollment in the study of our repositionable self-expanding CENTERA valve is underway, and for our next generation balloon expandable SAPIEN III valve, we continue to expect enrollment to begin by year-end. The pro-TAVI trial in Europe to study that causes of stroke and evaluate our umbrella device continues to enroll and the initial results of this study should become available by the end of this year. In Japan we remain on track to receive regulatory approval and reimbursement for SAPIEN XT in 2013. At TCT next week, three-year data from our PARTNER Cohort B is expected to be presented on Wednesday, October 24. The PARTNER's publication office which facilitates the academic study and publication of PARTNER data has approved the number of additional presentations and sessions at TCT. Overall we are proud of the extensive data that continues to be generated on our transcatheter valve platforms. In summary, we anticipate a strong rebound in the fourth quarter, resulting in a full year underlying growth rate of approximately 70%. With the later-than-anticipated approval of Cohort A, we now expect full year US THV sales of $230 million to $240 million, which assumes increasing consignment. For the full year we now expect global THV sales of $530 million to $560 million. Turning to the surgical heart valve therapy product group, sales for the quarter were $186 million, which included $26 million from Cardiac Surgery Systems. Surgical heart valve sales of $160 million decreased 2% but, excluding the impact of foreign exchange, grew 2% over last year. We believe this growth is the start of an improving trend. Sales growth improved sequentially in all regions outside the US. In the US we estimate that overall procedures were flat and our results were slightly negative due to the continued but diminishing impact from a competitor's product introduction in the prior year. Globally our pricing remained stable. We continue to make progress on our key milestones with EDWARDS INTUITY. In Europe, enrollment in our CADENCE MIS and FOUNDATION clinical trials continue to accelerate in the third quarter and we expect these trials will complete enrollment in the first quarter of 2013. These studies are focused on generating data supporting the patient benefits and health economics of this new procedure compared to traditional open heart surgery. During the third quarter, we also completed enrollment earlier than planned in our TRITON CE Mark trial for our next-generation INTUITY system, which features enhancements to both the delivery system and the valve. In the US, we began enrollment of our TRANSFORM trial, a prospective multicenter trial that will evaluate the INTUITY valve system. We expect to enroll approximately 650 patients in this single-arm study that will follow standard heart valve guidance and historical controls. We expect enrollment on our US IDE trial called COMMENCE to begin by yearend using our GLX tissue platform on a Magna Ease surgical valve. GLX is a proprietary technology already approved in Europe designed to provide additional protection for bovine pericardial tissue by enhancing anti-calcification for improved durability. Ultimately, GLX could be applied more broadly to our surgical and transcatheter heart valve platforms. Cardiac surgery systems sales for the quarter were $26 million, a 4% decrease from prior year, or flat excluding the impact of foreign exchange. Last year's results were higher than usual due to a significant back order release. Additionally, sales growth this quarter was limited by supplier issues with our ProPlege retrograde cardioplegia device which has since been resolved. We are now in the process of initiating a full worldwide launch. In summary, based on year-to-date results in surgical heart valve therapy product group, we now expect to achieve underlying sales growth for the full year at the bottom of our previous 3% to 5% range. The fourth quarter growth rate is expected to improve as prior year comparisons moderate. Turning to critical care product group, total sales for the quarter were $138 million, which included $13 million from vascular products. Within this product group, critical care sales were $125 million for the quarter, down 1%, or up 3% excluding the impact of foreign exchange. Growth was driven by both our pressure monitoring and advanced technology disposable products in Asia. The recent global launch of our next-generation EV1000 monitor generated solid growth in advance monitoring hardware. This was offset by a decline in legacy hardware sales. Last week, we announced the acquisition of BMEYE and its non-invasive technology for hemodynamic monitoring. We expect this technology to expand and strengthen our existing critical care portfolio by offering a new solution for clinicians and their patients. We plan to continue the modest sales of BMEYE's existing products in the surgical setting, but more importantly, we expect to further develop and integrate the technology into our EV1000 platform over the next 18 months. The team in Amsterdam is a welcome addition to our company. With respect to our glucose program, we are completing product validations on our enhanced GlucoClear system. We're still hopeful that we can receive a CE Mark by the end of year. Total reported vascular sales, which is comprised primarily of our Fogarty products, were $13 million this quarter, down slightly from prior year. Based on our year-to-date results, we now are expecting our full-year 2012 underlying sales growth in the critical care product line to be at the bottom of our guidance of 2% to 5%. We expect improved performance from advanced monitoring in the fourth quarter lifted by the launch of our newest EV1000 platform. Now, I'll turn the call over to Tom.

Thank you, Mike. This quarter we achieved diluted EPS of $0.58, a 35% increase over the prior year or 53% excluding special items last year. A significant increase in our gross profit rate combined with the lower SG&A spending allowed us to deliver EPS within our guidance range despite our sales shortfall. At the same time, we increased our R&D investments by 20%. For the quarter, our gross profit margin was 75.1%, a 550-basis-point increase over the prior year. Approximately 200 basis points of this strong improvement resulted from a favorable product mix driven by the US launch of SAPIEN. The remainder was due to the impact of foreign exchange. At current FX rates, we expect to achieve a similar gross profit margin in the fourth quarter. Third quarter SG&A expenses were $168 million or 37.5% of sales, an increase of 1% over the prior year. This slight increase was driven primarily by US transcatheter launch-related investments, offset by a favorable impact from foreign exchange. SG&A expenses were lower than we expected as a result of lower incentive compensation and other variable expenses. As a percentage of sales, we continue to expect SG&A to be between 37% and 38% for the full year. R&D investments in the quarter grew 20% to $74 million or 16.5% of sales. This increase was primarily the result of investments in clinical trials and new product development efforts related to our transcatheter valve programs. For the year, we continue to expect R&D as a percentage of sales to be between 15% and 16%. Our tax rate for the quarter was 25.9%, consistent with our previous guidance. Excluding special items, we continue to expect our rate to be approximately 20% in the fourth quarter, assuming renewal of the federal R&D tax credit. FX rates negatively impacted third quarter sales by $20 million. Relative to our prior guidance, FX did not have a material impact on earnings in the quarter. If rates remain unchanged, we estimate foreign exchange will now have an approximate $45 million negative impact to full year sales compared to last year. During the quarter, we spent approximately $13 million on share repurchases. Under our existing share repurchase program, we had $435 million available for share repurchase at the end of the third quarter. For modeling purposes, we continue to project fully diluted shares outstanding to be approximately $119 million at year-end. Turning to our balance sheet, at the end of the quarter we had total cash and cash equivalents and short-term investments of $622 million and total debt of $175 million. Due to the accelerated reporting timetable this quarter, we are not providing quarterly free cash flow at this time. We continue to expect free cash flow for 2012 to be between $240 million and $260 million. Our DSO at the end of the quarter was 64 days, a six-day improvement over prior year driven by significant payments in Spain last quarter. Inventory turns were 1.6, down from 2.0 last quarter. This decrease resulted primarily from the impact of foreign exchange and our lower Q3 sales. As announced last week, we acquired BMEYE for EUR32.5 million or approximately $42 million. We expect the net earnings impact from this transaction to be immaterial in 2012 and slightly dilutive in 2013. We'll provide complete 2013 guidance at our investor conference in December. Turning to our 2012 sales guidance, in transcatheter heart valves we now expect global sales of $530 million to $560 million and US sales of $230 million to $240 million. For surgical heart valve therapy, we continue to expect sales to be between $775 million and $805 million, which includes approximately $115 million from cardiac surgery system sales. Lastly, in critical care, we now expect sales at the low end of our previous range of $550 million to $580 million, which includes approximately $50 million of vascular sales. Given our updated projections, we now expect full-year sales at the bottom of our previous $1.9 billion to $1.97 billion range, which represents an underlying growth rate of more than 15%. For the fourth quarter of 2012, we project total sales of $490 million to $520 million. We expect diluted earnings per share to be between $0.76 and $0.80 for the fourth quarter and between $2.54 and $2.58 for the full year 2012. Full-year net income growth is expected to be between 25% and 27%. Our guidance for diluted earnings per share and net income growth excludes special items and assumes the renewal of the R&D tax credit. And with that, I'll turn it back over to Mike.

Thanks, Tom. Even in a difficult global economy, given the innovative and medically necessary nature of our portfolio, we are confident in our ability to achieve a strong fourth quarter performance. More importantly, we remain unwavering in our belief in the transcatheter valve opportunity and that our THV technologies can have an increasing impact on the lives of patients well into the future. Additionally, we are enthusiastic about the potential of our robust product pipeline to strengthen our leadership position in structural heart disease and critical care technologies. And with that, I'll turn the call all back over to David.

Thank you, Mike. Before we open it up to questions, I'd like to remind you about our 2012 investor conference which will be held at our corporate headquarters in Irvine, California the evening of Monday, December 3, and Tuesday, December 4th. At this event we will provide an update on our growth strategies, new technologies, and a detailed financial outlook for 2013. We've also lined up several leading clinicians who will share their experiences and views about transcatheter valve technologies and the trends in valvular disease therapies. Additional details will be available in the next few weeks. In order to allow broad participation in the Q&A, we ask that you please limit the number of questions. If you have additional questions, please re-enter the queue and we'll answer as many as we have time for during the remainder of the call. Operator, we're ready for questions, please.

Thank you. [Operator Instructions]. Our first question comes from the line of Raj Denhoy of Jefferies. Raj Denhoy – Jefferies & Co.: Hi, good afternoon.

Hi, Raj.

Hi, Raj. Raj Denhoy – Jefferies & Co.: I wonder if I could ask a little bit about Europe. I appreciate the comments in terms of southern Europe perhaps falling off a bit, and then what was intriguing with the commentary around some of the more established countries in the UK, France not expanding reimbursements. I'm curious what your thoughts are around when that might happen and what that could potentially do to the growth we're seeing in Europe.

Yeah. We had experienced a pretty good growth rate in the UK in the first half of the year, and that didn’t happen in the third quarter. There are limitations on the way that their payors are actually providing coverage to the local hospitals, and so they've already reached the limit at some hospitals. And so we're working closely with them and we're hoping that we can get some coverage improvement, but it could take some time. In France, we literally expected additional accounts to be added that would have impact in the third quarter. Those had been previously approved. Those have just started to become added here in the fourth quarter. I think it's an additional maybe 10, 12 accounts, and the first of those have already come on line. Raj Denhoy – Jefferies & Co.: So there's been some conjecture that perhaps we're seeing something structural in Europe with perhaps the demand for transcatheter valves perhaps not being so great or perhaps competition having better success there. Perhaps given the softness, if you just have any broader comments about your expectations for Europe and what you expect to see there over the next couple of years.

Sure. Well, first of all, I think we've tried to share here that competitively we're just not seeing much. The 29-millimeter transfemoral valve was a boost in the trasfemoral position. The new transapical competition really hasn't done very much to change what's going on in that position. And if we think about what's going on more broadly, I mean we literally saw a decline in the south of Europe, that's the single biggest factor. Structurally, we feel pretty good about things. Germany, the biggest country, grew 13%. And as we mentioned, it's pretty solid in Europe with the GARY Registry having the results that they are demonstrating in real-world conditions, the new guidelines that have come out from societies, the very procedural growth rate. If you were at the London Vale Meeting, there were 1,300 attendants. We think structurally Europe is going to be a very good transcatheter heart valve market. Raj Denhoy – Jefferies & Co.: That's helpful. Thank you.

Thank you. Our next question comes from the line of Glenn Novarro of RBC Capital Markets. Please proceed with your question. Glenn Novarro – RBC Capital Markets: Thanks. Good afternoon, guys. My first question has to do with Mike. You'd mentioned that the societies like STS now has to submit I guess guidelines or protocols to the government for reimbursement. So my first question is, how quickly can that occur? And then second, is that what unlocks the TA backlog or can hospitals start doing TAs starting tomorrow? Thanks.

Yeah, thanks, Glenn. Good question. Yeah, two different things. The approval of Cohort A is going to open up TA procedures for non-operable patients, and that's going to be significant group of patients and maybe the most sizable in terms of the group of patients that we're expecting to be treated. Separate from that, there were some groups of patients that were not covered by the approval of Cohort B, so, for example, people that didn’t have transfemoral access, they were non-operable patients but say their vessels weren’t big to get a SAPIEN valve into. Those required, if you were going to get paid by CMS, those required a special clinical protocol. Because the TBT registry is the natural place to collect that data, we needed the cooperation of the STS and ACC to submit. We expected that to happen really much earlier in the third quarter and there was quite a bit of process for them to work through. That’s going to happen next week. All the signs that we have from CMS is that they are ready to act on that very rapidly once it’s submitted. Glenn Novarro – RBC Capital Markets: So just as a follow-up, if you're assuming it takes the next week or two, is that what's giving you the confidence that 4Q ramp would be there because the next week or two hospitals can start unlocking the backlog?

Yeah. We're prepared to ship immediately transapical units. And so with the approval Cohort A that we just received this afternoon, that’s going to begin immediately into PARTNER sites. And the PARTNER sites are already trained to do transapical, and so that will have an uptake here right away. The rest of the hospitals that don’t have transapical training are going to have to go through that. That’s going to be a couple of quarter process, but that’s beginning immediately. And it's built into our guidance, Glenn. So we feel pretty comfortable in the US that we're going to achieve this $230 million to $240 million range. Glenn Novarro – RBC Capital Markets: All right. Thank you, and congrats on the approval today.

Thanks, Glenn.

Thank you. Our next question comes from the line of David Roman of Goldman Sachs. Please proceed with your question. David Roman – Goldman Sachs: Good evening and thank you for taking the questions. I wanted, Mike, just to clarify something you said regarding Japan. You'd said that both the reimbursement and regulatory approval next year. I thought that there was more of a time lag between when you got the Shonin approval and when reimbursing came into play. Can you maybe just remind us how the mechanics work there and how we should think about the sizing of that market?

Sure, David. Yeah, you're right, there is a lag period between the regulatory approval and the reimbursement approval. The regulatory approval, we'd like to think, happens in midyear and the reimbursement approval would lag that. Our assumption is that we'll get that before year-end and so that really is what unlocks the market. Having regulatory approval really is just the precursor to that. We really haven't sized the opportunity. Our intention is to do that at the Investor Conference in early December. But we continue to feel pretty good that we're going to have both regulatory and reimbursement by the end of the year. David Roman – Goldman Sachs: Okay. Thank you. And then my follow-up is on the US, I think you made a comment that reorder rates were 13% I assume as you kind of take that as same-store sales growth, so to speak, in the centers who are using the device. But maybe could you just talk about how centers are ramping up? Any quantification that you can provide? Particularly as you go out of kind of the PARTNER type centers or the more academic facilities, what the ramp looks like in some of the community facilities and how we should think about that progression as you go further down the curve in terms of size of center?

Yeah. The centers come up pretty quickly, David. What happens is, because they come in with pre-screened patients, and generally that's five pre-screened patients, they go right back and they start doing it. Now it takes a while for them naturally to build a referral network, but the numbers jump up to a pretty good level. Now that's certainly much less than a PARTNER site. A PARTNER site in general might have two to three times the case volumes going than the other sites. But frankly, there's not a lot of difference between the first 50 sites that we've trained and the last 50 sites that we've trained in terms of the volume per month that they're doing, if that gives you some visibility? David Roman – Goldman Sachs: Okay. That makes sense. Thank you.

Sure.

You bet.

Thank you. Our next question comes from the line of Larry Biegelsen of Wells Fargo Securities. Please proceed with your question. Larry Biegelsen – Wells Fargo Securities: Thanks. Just two questions. So, first, Mike, actually I wanted to ask you about the mitral side. The mitral side been obviously tougher to crack in aortic and it seems there's been a lot of progress made recently by small private companies. You didn't talk about mitral at last year's analyst meeting. Can you give us a sense of where you think we are in the development of transcatheter mitral technology in general, and if we'll see anything meaningful on your mitral pipeline at the analyst meeting?

Thanks for that, Larry, I appreciate it. I think we've been pretty consistent in saying that mitral is a very high priority for Edwards Lifesciences and we have more than on mitral development program going on inside the company. We've also been pretty consistent in saying that we're really not going to talk about them until we think that they are pretty close to the market, that we actually have accomplished the first demand and have something that we think is as somewhat sustainable. So it's important to us, we realize that it's also important to investors, and as soon as we feel like we have something that's rock solid, we'll do it. In terms of comparison, the competition, in many cases they might have a different standard for when they talk about their valves than what we might do. Larry Biegelsen – Wells Fargo Securities: And then I just wanted to circle back on Europe. You gave some good color there. But the growth went from 15 -- I'm sorry, outside the US, OUS, 15% last quarter, 5% this quarter. Directionally, do you think you can grow there or keep it at least flat in 2013? I recognize you're going to give guidance in December, but really, how should we think about it given the rapid deceleration we just saw there? Thanks.

Yeah, we felt like we did see deterioration particularly in the south during the third quarter. Our team doesn't feel like that is necessarily going to get worse. We feel like, when we do our projections, we're projecting that they stabilize at current levels, and that much of what we're dealing with right now are yearend budgets, so where there very -- some pretty direct orders to say that we need to stop spending because we're out of money for the year. So it's a little tough to predict exactly how that plays out exactly over the next few quarters, but the bulk of this, Larry, we feel pretty good about. Germany, the biggest country, continues to grow. France is adding centers, even though the UK has some pretty austere reimbursement practices, we’d like to think that over time here that they become more liberal in terms of the way they reimburse. Larry Biegelsen – Wells Fargo Securities: Thank you.

Thank you. Our next question comes from the line of Jason Mills of Canaccord Genuity. Please proceed with your question. Jason Mills – Canaccord Genuity: Hi, Mike. Thanks for taking the questions. I just want to take off from Larry's question and just ask it more simply. From a unit growth perspective in 2013 in Europe, outside of Japan, do you expect to grow units overall next year?

Yes. Jason Mills – Canaccord Genuity: Okay, great. Thanks. Second question, in the US, given that you’re going to use some of your capacity in the next couple of quarters to train existing sites on the TA, could you give us an update on your thinking with respect to the number of centers that you'll have? I guess it's coming up or coming up on the one-year timeframe. The guidance was 150 to 250 relative to that initial assumption.

Yeah, if it helps, as we said, we've got 150 sites trained at the end of the quarter, commercial sites, and 186 if you count the partner sites. We're going to use quite a bit of transapical capacity in the fourth quarter and in the first quarter to train these commercial sites or the non-PARTNER sites, if you will. That's probably going to mean actually that we trained less new centers in the fourth quarter than we actually trained even in the third, right? So it's going to limit that to some extent. But we've given some pretty clear sales guidance in terms of what we think is going to happen in Q4, if that helps answer the question. Jason Mills – Canaccord Genuity: It does. Thanks. One for Tom, gross margins were strong, but a big part of it was from the currency impact. How should we think about gross margins going forward? understanding that TAVI should become a bigger mix, therefore, catalytic to gross margins, understanding also that you haven't given 2013 guidance, but just directionally from a magnitude standpoint.

Sure, Jason. I think that direct question is legitimate. Right now we're probably peaking on the foreign exchange benefit; 350 basis points is a lot of foreign exchange. The good news is the vast majority of it is what happened last year. So, about two-thirds of that is last year's impact. So we will see this continue to affect that GP rate. So I hate to get too far ahead, it almost always has to go with the statement that says at current rates. But just to give you an idea of what’s in there today, there's probably 100 in this quarter. The margin looks good, we had 200 basis points of mix, and we’ll continue to look at that going forward. But it's logical to assume it will go with the sales guidance that we give for you next year and based upon how large that is, that would give you the size of the impact on the GP. Jason Mills – Canaccord Genuity: Perfect. Thanks, guys.

You bet.

Thank you. Our next question comes from the line of Amit Bhalla of Citigroup. Please proceed with your question. Amit Bhalla – Citigroup: Hi. Thanks. I just wanted to just finish bridging between the third quarter US TAVI number and the roughly $80 million that you’re expecting in the fourth. Mike you said, so you're assuming Europe stays in mid-single digits, you're going to fewer sites in the fourth quarter. Can you walk us through the other pieces that bridge between the third and fourth quarter for US TAVI and your assumptions are?

Yeah. One piece that you may not have picked up along the way here is what happens on clinicals. If you go back to Q2, we actually enrolled a couple of registries, the transapical non-operable registry and the six and seven millimeter registry. Those were largely enrolled in Q2 and they were not present during Q3. So that was a drop of almost $4 million. We would expect that to be restored in the fourth quarter because we have the new 29-millimeter registry. We’d expect those levels to pop back up in Q4 to be similar to Q2. So maybe that helps you little bit. The rest of it I think is there, unless you have a specific question on it. Amit Bhalla – Citigroup: Well, I guess stocking and potentially transaortic. Obviously the balance will be Cohort A approval, but those are the little pieces.

Yeah. So let me talk about stocking to try and give you maybe another piece that help you triangulate. There's -- net stocking is really two pieces. One is the stocking themselves and the other is the consignment. So there'll be some stocking that goes along with TA, there'll be some stocking that goes along with the new sites, but remember we're not training quite as many new sites, but consignment is starting to ramp up. And so that's going to run, I don't know, mid-single digits worth of millions of dollars. So net-net we'll get minimal benefit, maybe just a few million dollars net stocking in our estimation in the fourth quarter. Amit Bhalla – Citigroup: Just quick follow-up. You did mention pricing did come down in Europe in the third quarter. Can you give us a little more detail and quantify what that impact was? Thanks.

Yeah. Overall what's going on there is that we give some volume rebates when people obtain that and they're obtaining that level. We're talking about something in the couple of percent range year over year. Amit Bhalla – Citigroup: Okay. Thanks.

Thank you. Our next question comes from the line of Bruce Nudell of Credit Suisse. Please proceed with your question. Bruce Nudell – Credit Suisse: Good morning -- good afternoon, I'm sorry. It's cocktail hour actually.

It's not that late, Bruce. Bruce Nudell – Credit Suisse: Yes. I was expecting you're clinking glasses. Anyway, Mike and Tom, just looking at Europe, when you look at the sluggishness of the European national health services, it's really not about clinical efficacy like in the case of Belgium, it was really more about money, about the cost of the procedure. I mean, just looking forward, do we really need to anticipate significant reductions in price to kind of unlock the potential of those national health services other than Germany, in Europe?

We don't expect that Bruce. We think, you know, we don't have a plan to reduce our pricing. The only way the people earn that really is with volume discounts. And we think actually transcatheter heart valves offer a very good value, and we work hard to build that case and we have more and more evidence all the time that I think supports that premise. Bruce Nudell – Credit Suisse: Okay. And then just turning to the US, in the trial, you had a bunch of unstable patients or marginally stable patients who mapped the good DRGs and very well-paying institution by and large, the teaching institutions on the coast. And as this technology disseminates to less well-paid institutions and as you wind up with perhaps some more clinically stable commercial cohort, even though they fit within the bounds of PARTNER IA and IB, do we have to anticipate some accommodation for the less well-reimbursed institutions so that they could participate?

Yeah. Overall, Bruce, I know that there, anecdotally, there's a number of cases that are different out there, but we believe broadly that the reimbursement is pretty fair and there is a not a big difference between what we're seeing commercially and what we saw in the PARTNER trial in terms of the severity mix. The majority of patients are still mapping to the higher DRGs and just the overall position impacts the hospital. You just got to remember the hospitals for the most part are very proud to be in the trial. They do an awful lot of media outreach to do it. It sends you a signal about how they feel about being in this technology. So we don't see it as a major barrier for adoption. Bruce Nudell – Credit Suisse: Thanks so much.

You bet.

Thank you. Our next question comes from the line of Kristen Stewart of Deutsche Bank. Please proceed with your question. Kristen Stewart – Deutsche Bank: Hi. Thanks for taking the question, and congrats on the approval today.

Thank you. Kristen Stewart – Deutsche Bank: Mike, I was just wondering, obviously your cash is building and I know you guys have always been active repurchasers of the stock, what I guess is your feeling just looking ahead towards what to do with the cash. Would you be at all inclined to start thinking about perhaps returning some to the shareholders through the form of a dividend or are you keeping the cash building with the I guess ultimate aim to go out and do acquisitions?

Yeah, Kristen, we haven't changed our view on this. We don't have any plans to begin initiating a dividend. We feel like that we can invest that cash and get real good returns for shareholders by driving the growth. You can see the kind of way we use it, just look at the recent BMEYE acquisition which we think is a great addition to the company, and I think that's more likely what you see as use of cash along with of course share repurchases.

And we have the authorization, the current authorizations over $400 million at this point and I think available cash is like $600 million. So, a good portion of that already authorized. Kristen Stewart – Deutsche Bank: Okay. And then just kind of, I guess, with the approval today, have you guys had, I assume you got the chance to look the [payable] on the indications. Is there anything in there that gives you any more, or maybe not, any concerns at all as it relates to CMS reimbursement since it specifies that it has to be in line with actual label?

Yeah, thanks, Kristen. Yeah, we had a good hour to go through that. I'm just joking. The Cohort A label actual is as expected. This is just what we thought. The STS greater than 8%, also judged by the heart team, the risk of mortality greater than 15% if they went through surgery, that's very consistent with what we expected. Kristen Stewart – Deutsche Bank: So the actual label does include a specific STS score?

It does. It has an STS grade of 8% or the heart team deems a greater than 15% estimated mortality if they went through open-heart surgery. Kristen Stewart – Deutsche Bank: Okay. Perfect. And then just real quickly one last one, sorry. You had mentioned just the structural heart criteria and how that was I guess somewhat constraining for some hospitals. Is that a criteria, is there any efforts to kind of get that changed? Or having that in there now does that change your view just kind of going forward in terms of the number of centers or just kind of the near-term outlook for valves?

Yeah. No, I don't know that it's going to change imminently. I think people are trying to understand it. Just to get into the detail a little bit, it asks for either 100 structural heart disease procedures lifetime or 30 left-sided structural heart disease. And that's something that centers are trying to interpret. There's a little bit of lack of clarity on, gee, do I have to be the primary operator or what if I just participated in it? And so those kind of pieces of clarification will help centers work through that. But I think now that they know what the requirement is, it causes hospitals that are motivated to go and try and fulfill the requirement. So I don't see it as a major issue. Kristen Stewart – Deutsche Bank: Okay. Perfect. Thanks, and congrats again.

Thanks.

Thank you. Our next question comes from the line of Michael Weinstein of JPMorgan. Please proceed with your question. Michael Weinstein – J.P. Morgan: Thanks. The first question is, you put out the press release a week ago, Monday, and then you put out a release today, and you did change your TAVI guidance for the balance of the year. You had been for US sales you said the low end of the $240 million to $260 million and today you said $230 million to $240 million, and then you lowered basically your OUS assumption as well. So, could you just talk about what changed your mind and what changed in your view on the business for the fourth quarter from a week and a half ago to today?

Sure, Mike, happy to talk about it. Yeah, when we issued that press release, I think it was 11 days ago, we were under the impression that we were going to have a Cohort A approval really any day. And with that in mind, we had guidance that basically said that we’d hit the low end of the range of $240 million in the US. Given that it came here on the 19th, we estimated it cost us approximately $5 million worth of sales in the quarter. So we thought it was in the best interest of, we being accurate with shareholders, to change our guidance. And so that’s why you’re finding the midpoint of the guidance moved about $5 million both in the US and on a global basis. Michael Weinstein – J.P. Morgan: Okay. But it looks like you lowered the OUS as well.

No. The OUS is just -- is very much consistent with the change in the US. We really only tried to move the midpoint $5 million, Mike. Michael Weinstein – J.P. Morgan: Okay. So let me ask just a couple of other follow-ups here from some earlier comments. So the consignment assumption, Mike, is mid-single-digit contribution and then maybe you pick up another $4 million sequentially in your clinical trial revenue. So basically if we're trying to bridge that third quarter to fourth quarter, maybe there is $9 million of incremental revenues between consignment and clinical trials. Was I understanding that right?

Yeah. We think we’re going to get a boost in clinical trials where it goes back to the level of Q2. So that's, you know, you’d figure that’s $3 million, $4 million. We're not trying to suggest that we get much of a boost out of net stocking. Actually we’ll get less of a boost out of net stocking in the fourth quarter than we’ve got even in the third quarter because consignment is going to start eating into that. Michael Weinstein – J.P. Morgan: Okay. And then just two commentaries. One, you talked early on about you increased your sales reserves by $3 million to better reflect current product return patterns. Can you maybe just explain that in terms of what geographies changed your return assumptions on and why are customers returning products? And then the second thing you said that kind of caught my attention was that the weakness in Europe was related to budget cuts into the fiscal yearends, but most countries are December, a couple of couple of the other countries already had the fiscal years closed, Spain -- well, if I just go through it, Germany, Spain, France were all December; Italy is June 30; UK is March 31. So, with all those countries still looking at their fiscal yearends that I mentioned in December, does Europe get worse in the fourth quarter?

So let me answer your second question and I'll let Tom get into the question about the adjustment. No, we don't anticipate things to get worse necessarily in the fourth quarter. The accounts that we think have slowed down or stopped continue to be slowed down or stopped. It's not that it's that variable. And so we sincerely especially saw this in South in Italy and Spain where literally the procedures just stopped. And so that's what we experienced and that's what we expect to continue into the fourth quarter. And Tom can get in the significant --

Yeah, Mike, in regards to the reserve adjustment it was strictly Europe and keep in mind that we're introducing the new technologies. And what we do on a regular basis is just look at the return pattern and so forth and the exploration on product that's anticipated to expire in the future and we periodically have to adjust that. Now, not always in the same direction; we're hopeful that we'll have systems improvements that will probably bring this back shortly over time. But it's all and managing what's in the field, with the consignment inventory and the various different releases of product. Michael Weinstein – J.P. Morgan: Okay. Thank you, guys.

You're welcome.

Thank you. Our next question comes from the line of Bob Hopkins of Bank of America. Please proceed with your question. Bob Hopkins – Bank of America Merrill Lynch: Thanks. Can you hear me okay?

Yeah.

Just right. Bob Hopkins – Bank of America Merrill Lynch: Great, great. I know it's late here on a Friday, so I'll be real quick. If you look at the change in your US TAVI guidance midpoint to midpoint, sort of the new midpoint to the old midpoint, it's about $15 million or roughly 500 surgeries. Mike, I was wondering if you could, as best you can, break that down for us, because I think Europe is an issue people understand, but this is really just the third quarter of the US TAVI launch and you are reducing guidance. And I just wondered if you could break down that 500 surgeries for us into as many as buckets as you feel comfortable, just so we can have a best understanding of what you feel what happened.

Yeah. It's pretty simple, Bob. Really it’s the same thing that causes the changed guidance earlier in the year. It's just -- it's a later approval of Cohort A. Cohort A is very much a ramp. And so we train centers and we bring that up. And every time that gets delayed, it pushes out the largest part of the ramp. And that's really the lion's share of it, Bob. Bob Hopkins – Bank of America Merrill Lynch: From a US perspective, so the lion's share of those 500 shares you think are all the transapical delay?

Yeah, I didn't say 500. We've been giving our guidance in terms of dollars, but that's really what the change of guidance is about, right. Bob Hopkins – Bank of America Merrill Lynch: Okay. And then just one quick question for Tom just back on gross margin. I wanted to understand, in terms of the Q4 guidance there, how much of benefit are you going to get in the Q4 from FX if any?

In the margin? It diminishes. I don't know that I have it right in front of me at this point. I know it's a little bit less. And what you have is you come out to the same results but with less benefit from FX and a bit better on the product mix. But I'm sorry, I don't have that exact number in front of me. Bob Hopkins – Bank of America Merrill Lynch: Just because in Q3, if you eliminate the FX portion, you are down at 72.4. And so, sequentially, you being comfortable with 75. Is all of sort of 250-basis-point improvement just a function of better to have your results in the US?

Yeah. Remember, what I tried to break out, Bob, was the fact that of 350 basis points that's FX, a lot of it's what occurred last year. So we had a negative result last year that's no longer there. So, of the FX, you'd say 100 is actually happening in the current year. So if you were to back that off, you'd say, if it wasn’t an FX benefit, then without that, you'd be probably at around 74. Bob Hopkins – Bank of America Merrill Lynch: Got it. Thank you.

So there is some -- and keep in mind, there is some coming in Q4 also, so, that's different. Okay. Bob Hopkins – Bank of America Merrill Lynch: Appreciate it. Thanks.

You bet.

Thank you. Our next question comes from the line of Tom Gunderson of Piper Jaffray. Please proceed with your question. Tom Gunderson – Piper Jaffray: Hi, good afternoon. I'll just ask one for Mike. Mike, on the surgical heart valve side, I think we've hit TAVI enough here, on the surgical heart valve side, we've talked in the past about a halo effect that happened in Europe. We've yet to see that surface in the US. Is it too early or are we being too simple to think that just because it happened in Europe, it will happen in the United States?

It's a good question, Tom, and thanks for that. We do see a few cases where that is, but really hasn’t been very substantial so far. We think with the Cohort A approval, we have more chance of seeing that sunshine come. So we're looking forward of demonstrating that going ahead. We will see. Tom Gunderson – Piper Jaffray: Okay. Thanks.

Sure.

Thank you. Our next question comes from the line of David Lewis of Morgan Stanley. Please proceed with your question. David Lewis – Morgan Stanley: Good afternoon.

Hey, David. David Lewis – Morgan Stanley: Hey, Mike, you've talked a lot about what you think the difference in guidance was, and you think the majority of that was just sort of the push-out in Cohort A. But we have heard throughout the quarter a lot of talk about sort of non-femoral access. I wonder, could you give us a sense of right now what you think the percent of non-femoral access and how big the lack of reimbursement or difficulty in non-femoral access has been throughout the quarter?

Yeah. We probably estimated that we'd get, I don't know, maybe $3 million to $5 million worth of non-femoral access sales in the third quarter. So if that helps you estimate it, we -- that's what we would have thought. The combination of -- blended [bottom], we got Cohort A actually a little bit sooner, but probably the bulk of that was the fact that there was no reimbursement in place for these non-TF cases. David Lewis – Morgan Stanley: Okay, that's quite fair. And then, Mike, you were very clear on transapical reimbursement for Cohort B and what you expected there from the societies and timing. So it may be an obvious question because the final NCD was a little different from proposed, but is it your assumption that Cohort A reimbursement is immediately in place based on the final NCD will not require any update or amendment?

That's exactly our assumption, is that the reimbursement is immediately in place. David Lewis – Morgan Stanley: Okay. Thank you very much.

You're welcome. Thanks, David.

Thank you. Our next question comes from the line of Danielle Antalffy of Leerink Swann. Please proceed with your question. Danielle Antalffy – Leerink Swann: Hi, good afternoon, guys. Thanks for taking the question. Mike, I just wanted to touch on the comment you made about TA procedures declining in Europe. I was actually at the London Valve Conference and there were a quite a few discussions on cost effectiveness data and support around TA and the fact that the cost effectiveness data there is not as compelling as it is for TF, no surprise there of course. But just wondering if you think that had any impact on the procedural declines in Europe?

Well, I don't know. It's a good question whether that has some kind of impact. I think broadly there is a TF-first approach which is being adopted, and cost may be an element of that, but there's also a feeling that it's improved outcomes for patients. The cost efficiency that we saw related to TA most -- especially the PARTNER-related data, that was generated very early on, and probably not a fair and accurate depiction of what’s going on with transapical today. I think those folks that do it and do it well and practice at it feel that they get better results than what was seen in those early results, and even the continued access data we think generates improved results from what happened in the United States. Danielle Antalffy – Leerink Swann: Okay, great. Any sense of timelines for seeing more cost data around TA?

I don’t know that we have any specific, for example, randomized data coming from TA, although this is such a highly-studied field, I wouldn’t be surprised if we see at least center-based data that gets generated from time-to-time. Danielle Antalffy – Leerink Swann: Okay, great. Thanks so much.

Sure, Danielle.

Thank you. Our next question comes from the line of Joanne Wuensch of BMO Capital Markets. Please proceed with your question. Joanne Wuensch – BMO Capital Markets: Thank you very much for taking my question. I want to shift back to TA in the United States. When you think about what will be happening or procedures that are done in the next quarter, what percentage of those are you thinking that will be TA versus TS? And when we have this conversion a year from now, how do you think that will shake out?

Yeah. It’s a little tough to estimate, Joanne -- thank you for the question -- because there is a ramp that goes on. Our estimate is that probably there's 20% to 30% of the patients that would otherwise qualify that can’t get a SAPIEN valve because their femorals are too small. So we think that would certainly turn on some alternate access. But exactly how fast that ramp comes up is not clear, so it will be something probably short of that. I do think it’s going to increase. Whether it ends up exactly at Europe’s level is a good question. That’s probably a reasonable surrogate. You can see that that has been changing over time as transfemoral first seems to be gaining favor. Joanne Wuensch – BMO Capital Markets: But following up on Danielle’s question, do you need specific economic data for the TA in the United States in order to help drive that penetration here?

My belief is just based on what we see on a regular basis, that there's an urgent patient need for it. That's the key driver. People that are in either a non-operable situation or in high-risk surgical, if their femoral arteries are too small, there's not much alternative. And although economics are a factor, it's not an overwhelming factor. There is others just that are more human that become involved. Joanne Wuensch – BMO Capital Markets: Terrific. Thanks.

Sure.

Thank you. And our next question comes from the line of Rajeev Jashnani of UBS. Please proceed with your question. Mr. Jashnani, your line is now live.

Okay. Well -- there it is. Okay. Rajeev Jashnani – UBS: I apologize. Sorry. Sorry to drag this out a little bit longer. My question had to do with just your thoughts on the US surgically ineligible population. I think there's been a discussion on some of the other factors that are going to help out in the fourth quarter, the clinical units and Cohort 1A. But I know there's not perfect visibility on surgically ineligible patients, but maybe you just put into context what you've learned after seeing 3Q and what you're thinking about that opportunity is as of this point.

Yeah. We don't have a clear data on the number. It's a very vocal group because they're not eligible for surgery and they don't have an alternative and don't have femoral access, and so we know it's a high-profile group. But we don't have clear visibility of just how many there are. We think it's sizable, and I gave you an estimate of what we thought might have happened in the third quarter from that group. So maybe it gives you some kind of sense of what we might expect in the fourth. Rajeev Jashnani – UBS: Okay. Thank you.

Sure. Thanks, everyone, particularly on this long day. Thanks for your continued interest in Edwards. Tom and David and I welcome any additional questions by telephone and may see many of you next week at the PCT. Back to you, David.

Thank you for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying growth rates, sales results excluding currency impacts and amounts adjusted for special items, are included in today's press release and can also be found in the Investor Relations section of our website at edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415, and use passcode 401685. I'll repeat those numbers for you, 877-660-6853 or 201-612-7415 and the passcode is 401685. Additionally, an audio replay will be archived on the Investor Relations section of our website. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.