Greetings, and welcome to the Edwards Lifesciences Third Quarter 2018 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. I will now turn the conference over to your host, David Erickson, Vice President, Investor Relations. Thank you. Please begin.

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2018 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 Scott Ullem, CFO. Before we begin, I’d like to remind you that during today’s call we will be making forward-looking statements that are based on estimates, assumptions and projections. These statements include but aren’t limited to financial guidance, expectations for product opportunities, clinical trials, litigation, new product approvals, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in our press release, our 2017 Annual Report on Form 10-K and our other SEC filings, all of which are available on our website at Edwards.com. Also, a quick reminder that when we use the terms underlying, organic and adjusted, we are referring to non-GAAP financial measures. Otherwise, we are referring to our GAAP results. Additional information about our use of non-GAAP measures is included in today’s press release and our website. And now, I’ll turn the call over to Mike Mussallem. Mike?

Thank you, David. We’re pleased to report strong third quarter adjusted sales of $921 million, or a 11% growth on an underlying basis consistent with our expectations, driven by a remarkable portfolio of innovative technologies. Year-to-date, underlying sales growth was 10%, and it was consistent with our full-year guidance of 10% to 11%. And even with the backdrop of a tough fourth quarter comparison, we expect 2018 to be a year of strong financial performance, while also aggressively investing in our future. Looking forward, based on recent learnings, we have increased confidence that our innovative lifesaving therapies can benefit many more patients whose structural heart disease is deadly and undertreated today. In transcatheter heart valve therapy, global third quarter sales were $558 million. Underlying sales were up 12.7% compared to the prior year, which reflects continued impressive organic growth. We estimate global TAVR procedures continued to grow robustly in the mid-teens. Our worldwide sales grew at a lower rate due to a modest year-over-year share decline outside the U.S. and lower royalty revenues. Globally, our average selling price remained stable. In the U.S., total procedures for the third quarter grew in the mid-teens versus the prior year, and our growth was comparable. Growth was highest in newer and smaller centers, where this therapy is increasingly accessible to a broader population of aortic stenosis patients. Based on our continued research, we are increasingly confident that there are many patients who would benefit from TAVR who are not diagnosed or treated today. We’re continuing our efforts to increase awareness, improve diagnosis and help patients receive the care specified in medical guidelines. Late in the third quarter, we began enrolling our limited Continued Access Protocol, or CAP, for our U.S. PARTNER 3 trial, which have a minimal impact on this quarter’s results. And…

Thank you, Mike. I’m pleased to report another quarter of double-digit underlying sales growth. Adjusted sales were $921 million, up 11% over 2017. These results were in line with our expectations in our typical third quarter seasonality. Consistent with our practice in the prior two quarters, adjusted sales exclude a sales return reserve related to our conversion to a consignment inventory model for surgical valves in the United States, which was $14 million this quarter. We still expect to complete the conversion by year-end and now estimate the conversion will impact sales by approximately $80 million to $90 million this year. Adjusted earnings per share was $1.07 and GAAP earnings per share was $1.06. Adjusted EPS growth was 27%, which benefited from a lower tax rate, driven by U.S. tax reform and solid growth and operating income. Adjusted earnings per share was $0.02 higher this quarter than it would have been if the excess tax benefit was as we estimated in our guidance last quarter. For the quarter, our adjusted gross profit margin was 75.5%, compared to 74.4% in the same period last year. This improvement primarily reflects the benefit of a more profitable product mix and the absence of last year’s expenses associated with Hurricane Maria in Puerto Rico. These benefits were partially offset by continued investments and manufacturing capacity. We continue to expect our full-year 2018 gross profit margin, excluding special items to be between 74% and 76%. Turning to selling, general and administrative expenses. Third quarter expenses increased 10% over the prior year to $270 million, or 29.7% of sales. This increase was driven by personnel related expenses. The ratio of SG&A as a percentage of sales would have been 40 basis points lower if you exclude the impact of the HVT consignment conversion. We continue to…

Thanks, Scott. We remain confident in our outlook for continued strong sales growth and are passionate about helping more patients around the world. We continue to focus on driving organic growth with leading innovative technologies, while aggressively investing in our future. Our foundation of leadership, coupled with our robust product pipeline positions us well for continued longer-term success and greater shareholder value, as we pursue multibillion market opportunities. And with that, I’ll turn it back over to David.

Thank you, Mike. Before we open it for questions, I would like to remind you to mark your calendars for the evening of Tuesday December 4th, and the morning of Wednesday December 5th, when we will be hosting our 2018 Investor Conference at our corporate headquarters here in Irvine, California. This event will include discussions with key opinion leaders, updates on our latest technologies and views on longer-term market potential, as well as our outlook for 2019. More information will be available in the coming weeks. We’re ready to take questions now. In order to allow broad participation, we ask that you please limit the number of questions. If you have additional questions, please reenter the queue and we’ll answer as many as we can during the remainder of the call. Operator, please go ahead.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] And thank you. Our first question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.

Good afternoon, guys. Thanks for taking the question. One on 2019 legal question. So Mike and Scott, I know you won’t provide 2019 guidance until the Investor Conference in December. But you’ve always been helpful in providing some puts and takes looking at the following year. I think consensus is modeling about 10% revenue growth next year, which is similar to the underlying sales growth you’re getting to this year. It does seem like there’s more tailwinds in 2019 than 2018, which should help and the Street’s modeling about 12% EPS growth. So is there anything you would call out there? And I had one follow-up.

Yes, Larry. You’ve kind of answered your own question. We’re not in a position to provide 2019 guidance until we get to the Investor Conference. But I mean, if we just want to think big picture, our TAVR business is healthy, and we continue to expect mid-teens growth in that marketplace through 2021 and beyond for that matter. And we know AS is dramatically undertreated. And when you couple that with this comprehensive TMTT portfolio with some very nice mid to longer-term growth opportunities, we think it provides a very positive backdrop. We’re committed to win in that space and we’ve been aggressively invested. And we just have continued confidence in our innovation strategy. So we’ll get into the numbers later, Larry. but I think we have nothing specific to share at this time.

Okay, I understand. So Mike, let me push my luck a little bit and ask a legal question. I spoke with an investor today, he said, “I love what Edwards is doing in transcatheter heart valves, and I’d like to buy this stock.” But frankly, I’m concerned Boston could potentially enjoy in both SAPIEN 3 and Ultra in Germany any day. And I know you’re appealing those decisions, but in the meantime, Boston does have that option. So Mike, if you were speaking to that investor, how would you relay his or her concern? Thanks for taking the questions.

Well, I think big picture, you know that Boston Scientific has initiated litigation and involves a number of patents in multiple countries and is likely to yield a number of court actions over an extended period of time. The recent developments have not changed our view that Boston’s patents are invalid and we’re confident in our leading intellectual property position.

Got it. Thank you for taking the questions.

Sure.

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

Hi, Mike, thanks for taking the question. I wanted to go back to Larry’s question about puts and takes. What we’ve seen thus far in 2018 and frankly for the last 18 months are trials that would suggest that the low-risk opportunity for you in TAVR is meaningful and could be material to growth rates for the marketplace. The LRT trial from Washington Hospital Center comes to mind recently. And there are other puts and takes obviously with some of your product launches and seemingly perhaps having more impact on 2019 and 2018. So I guess, if we just stick with the market growth rates and sort of your share trends, both in the United States and Europe, would you anticipate that the goings on with respect to trials and low-risk over the next six to 12 months, as well as new market entrants, Boston in the United States, sort of offset by your product launches would create an environment, where market growth rates are still strong, maybe commensurate with what we’ve seen this year and you can maintain share over that time?

Yes. Thanks, Jason, it’s a good question. As I said, we continue to be confident about the long-term growth prospects for TAVR. But as you correctly surmised, I think, this data that’s going to come out related to the low-risk indication has the potential to be some kind of a catalyst. As we said before probably not a step function, but a net positive to a market that’s already growing quite nicely. As we’ve talked before, our pricing has been quite stable. And so the question comes back to share, but it’s share of a rapidly growing market and we’re pretty confident in our position. I mean, it’s absolutely true that we’re going to have new competition, but at the same time 2019 is going to the first year that we have real impacts from our Ultra valve and CENTERA.

Okay, it’s helpful. And then on the mitral side, Mike, you were asked several questions at the TCT meeting about COAPT. And I’m wondering with the benefit of an extra month or so since that trial was presented? If you have any different or augmented perspective on how COAPT may or may not change the landscape in mitral? And maybe more specifically how fast these trials enroll, whether it would be your PASCAL study uptick in Europe of Cardioband and PASCAL? And then also on the replacement side, what COAPT may or may not do with respect to excitement around our clinical trial enrollment in those studies if you have a couple going on I know?

Yes. Thanks, Jason. As you correctly pointed out, we’ve got quite a bit going on in the mitral space and we’re excited about the new developments. The results of COAPT clearly demonstrated the importance of reducing mitral regurgitation. And it does reinforce our confidence in our strategy to try and address this opportunity that’s very large. We’re just- we’re enthusiastic about the transcatheter therapies to help patients that are suffering in these areas. So we feel good about it. It can’t hurt enrollment, that’s for sure. It should facilitate that, both on the PASCAL side and our other clinical trials that we have ahead.

Thanks, Mike.

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

Good afternoon. Mike, just two questions for you. First, just on Cardioband. In my sense as you reiterated sort of the $15 million contribution at TCT. So could you just talk about when the decision on manufacturing was reached? Should we assume basically zero revenue for Cardioband in the fourth quarter? And as you think about next year, you talked about scaling up manufacturing. Is $15 million a better way thinking about 2019, or is that sort of conservative relative to how you see the manufacturing scale-up next year? And then I have a quick follow-up.

Yes. Well, thanks, David. You’re right, we’re more and more optimistic about being able to scale-up Cardioband and now we expect that to change. We fell short of our goals of our current supply base and also the acquired facility. And so we’ve already begun this process to begin the transition to other facilities. As I mentioned in prepared remarks, we expect the supply constraints to progressively improve throughout 2019, and we’d expect the manufacturing transition probably to finish by the end of the year. So it’s premature for us to be able to actually estimate numbers, David, but hopefully that gives you a sense of the direction and the rationale why.

Hey, David, it’s Scott. I just add. In terms of contributions to Q4, it’s not going to be zero, but it’s probably going to look something more like what we did in Q3, maybe $1 million or somewhere in that range.

Okay, that’s helpful. And then Mike, the – obviously, the biggest update in this call was the decision to move forward with the U.S. pivotal for PASCAL. So, can you just talk about the decision in the company and move forward on primary MR, and what the structure of that trial is going to look like? Thanks so much.

Yes. So the – this trial, what we call the trial class is one where we’re going to be studying primary mitral regurgitation. It’s going to be a two to one randomization versus MitraClip and it’s going to be by – for patients that are deemed inoperable by the local heart team. So the same way the MitraClip is labeled today. It will be a non-inferiority study around 300 patients at 50 centers primary endpoint MR grade reduction and then secondary endpoint of major adverse events.

Okay. Thanks so much.

Sure.

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

Good afternoon, and thank you, guys. I wanted to start with a question on pricing. I think, you guys mentioned in your prepared comments that the global pricing dynamic for TAVR has been stable. But I’m interested in sort what went on in the quarter competitively? I think that’s been a topic of interest all year long. It seems like your competitors are still pretty active in fighting for market share in various ways. So I’d be interested in if you could put some color on what’s going on in pricing? What’s assumed in the rest of the year for your guidance on that topic? Thank you.

Yes. Isaac, thanks. Yes, you’re right. We did mention in prepared remarks that global average selling price remains stable, and we would expect that condition to continue in 2018. That’s been very steady for sometime to come. I know that we had some conversations last quarter about some aggressive pricing that we saw in Europe. We probably, although there continues to be a significant difference between Edwards pricing and our competitors. That’s probably sell down a little bit. And we look from a share perspective to believe that it’s probably stabilized versus the quarter before. So I don’t know if that helps get an extra question.

Yes, sure. That’s helpful. And then just a follow-up on your comments for the MEDCAC panel outcome. There has been obviously a lot of debate about, if that – how the NCD gets updated? What that means for the marketplace in TAVR overall? I’m just trying to make sure I understand your reasoning as to why you don’t think you’ve got a lot of meaningful impact, at least, initially and how you think that will play out over time? Thank you.

Yes, it’s a good question. I think big picture, CMS is taking a look at our what’s going on in TAVR from a reimbursement perspective and consider that a success. So although the NCD needs updating and it will be updated. We don’t expect right now for it – for whatever happens to have a significant impact on the TAVR opportunity. Now, of course, depending on what they decide, it could have some influence up or down. But we’re just trying to share with you that when we do our own modeling, we’re kind of modeling no significant change.

Understood. Thank you.

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

Hey, guys, thanks for taking my question. So maybe I wanted to start one with the 2019 drivers, obviously, given where we are in the year, I think, all eyes are turned to 2019. When I think about the negatives, right, Mike, the – obviously, you have pricing pressure ongoing in Europe and you have a new competitor coming into the U.S. at some point, possibly mid of next year. But on the other side, you have low-risk approval Cardioband ramping up and PASCAL launching. I don’t think you commented on the timing of PASCAL launch and we’re just assuming mid of 2019, and the base case seems to be one offsets the other. Is that any reason why TAVR growth in 2019 could be below 2018 levels that you could think of?

Yes. So I appreciate the fact that you’re looking at the negative, so we look at the future and we’re pretty positive about it. The pricing pressure in Europe is something that we’ve dealt with for a long time. That’s been there and we’re excited about having new products in the future. And although we won’t have a big impact on Q4, it will have impact going forward. The U.S. approval has been somewhat inevitable that there was going to be that competition that we kind of fully accounted for that. We’re going to be excited about bringing CENTERA and Ultra to the U.S. as well. In terms of the upside on TMTT and some of those, we’re not prepared yet to talk about when we’re going to launch PASCAL in terms of what time of the year, but it’s going to be positive. But you also have to remember that THV, the aortic business is a much larger business and has more influence on our near-term – probably our 2019 sales.

And that’s helpful, Mike. And then maybe one if I could on the Cardioband, the active trials. I think, there are some debate post – COAPT, whether it needs to be designed and we’ve spoken to some people. And I just, the feedback seems to be the Cardioband or the annuloplasty patient population is very different from the clip [ph] patient population. If that thesis or assumption is true, then you may not need to redesign the Cardioband trial, you could do a device versus a drug trial. So I guess, I want to know, one, if the Street is thinking annuloplasty Cardioband is dead, how right or how wrong is the Street on those assumptions and – versus the trial design does it need to be changed? Any comments, I think, would be helpful.

So, we – the big picture for us, we continue to get a positive feedback and our belief is that annular reduction that’s provided by Cardioband could be a really important for first-line therapy. Again, it’s going to require some advancements on our part, but we continue to feel strongly about that. In terms of the future implications of the active trial, post-COAPT, we are assessing the implications of clinical trial design based on what was learned in that. And we hope that we’re going to have more to share with you about that when we get to our Investor Conference in December.

Thanks, guys.

Sure.

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

Hi, good afternoon. I wonder if I could maybe just dig a little bit on Europe. I think, you mentioned that, that you you did see some share loss early in the year, but it’s stable at this point. I’m curious if you can confirm that, and really anything you can give us just in terms of the dynamics in Europe as we sit here today?

Yes. I think, as we indicated last quarter, we felt like we experienced some share loss and so we continue. That share loss has happened, and so it continues to be reflected in our year-over-year growth rates. What we’re saying is sequentially share seemed to stabilize from our perspective. So this was – so we’re saying, we didn’t see it as a continued trend that continued into the third quarter. Does that get at your question, Raj?

It does. Yes, it doesn’t. And I’m curious if there’s anything more you can offer in terms of where that was? Was it specific accounts or why you did experience a share loss and why you don’t expect it’s going to get any worse even in Europe?

Yes. I don’t know that I’m able to do that. I mean, this is a pretty vast kind of – a lot of countries, a lot of moving parts here. I think it’s just generally true. Even when we think back to what happened in Q2, it’s not like it’s widespread. It doesn’t take a lot of procedures to change the actual results in transcatheter heart valves.

Okay, fair. Maybe just from my follow-up. Just you mentioned that you’re not going to look at more of a measured rollout for Ultra in Europe. And I’m curious why that is? If there’s something about that valve, you think you need to go a bit slower now as you roll that out?

Yes. Well, it’s a good question. So we learned with experience that Ultra system is different from SAPIEN 3. And we wanted to ensure that we had – that we ensured our own high-performance through training. Remember, we took steps out of the procedure with Ultra amounting to valve on the balloon rather than alignment in the aorta, the Excel sheet is an improvement, but it also benefits from additional training. So we just wanted to make sure that we maintain this very high level of performance as we roll this out knowing that it’s a different valve and that became apparent to us through our own experience.

Okay. Thank you.

Thank you. Our next question comes from the line of Bob Hopkins with Bank Of America Merrill Lynch. Please proceed.

Thanks very much and good afternoon.

Good afternoon.

I just want to ask a couple of questions, Mike, on PASCAL. First of all, can you just give us a sense as to the first time that you’ll see data from any PASCAL trial. I assume the first data would be from the European study. So when will we see some of that data?

Yes. We would guess that it would be mid-next year when data will really be available on PASCAL.

Okay. And then also, Mike, maybe this is my misunderstanding. But I’m just curious about your U.S. PASCAL trial strategy focusing on primary MR. What’s the strategy for focusing on secondary MR, which is obviously the bigger market opportunity and the one that create all the attention at TCT. So what’s the strategy on secondary?

Yes, I mean, obviously, it’s on our radar screen. We don’t have anything specific to report at this point. I will probably have more to say about that when we get to the Investor Conference, Bob. But you’re right, that’s an important patient population as well. But we didn’t want to hold up on getting – moving forward with our existing trial.

Got it. Thanks very much.

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

Good afternoon, Mike. Let me come back to your comments on the – now the controlled launch for both the new TAVR and CENTERA and Ultra. Is this the new norm using going forward we should generally assume? And it makes sense, I get it, to release more slowly. And maybe you could help us understand what controlled means? Does it mean to receptors? Does it mean that it will take you six months to sort of get your sea legs as it were, or no, this is a process that it could take a couple of years. Can you help us better frame and the thinking behind all that?

Yes, I don’t know it’s the new norm. We certainly feel responsible. We are going to customers and offering systems that we think are improvements over systems that already have some very high performance. So you know the way that SAPIEN 3 is performed in big data sets. And so we feel the obligation to make sure that the next generations of systems whether it’s CENTERA or Ultra, continue to perform at least at that level or better. And so we just want to make sure that we invest the time to do that. For the most part, I expect this training to be done by our clinical specialists. It’s not like we’re going to start reproctoring patients again, but we do feel like we want people to slowdown and recognize, hey, there’s a number of advancements in these systems, let’s really focus on them, understand them well, so that you get great performance right from first patient.

All right. And maybe a question for Scott. Scott, you highlighted that capacity investments in anticipation of growth in new products. Maybe talk about what that – how long that spending is going to go on? When you think that’s completed? And how that affects, if at all, the ramp for these new products?

All right. So we’ve been investing and increasing our capacity now for a couple of years. And remember, we were supply constrained, and so we had some catching up to do just to support THV. Now we’re ramping up to also support an expansion in TMTT. And so we’ve been making investments in our existing facilities in the U.S. and outside of the U.S. And as you know, we’re working on building a new facility in Costa Rica and just announced a plan earlier this year to put a facility in Ireland. And so I think that spending and investment is going to continue for a number of years down the road. You’ve seen it reflected in our higher capital expenditure investments. We’d probably be over $200 million this year. And the result is going to be that we will be able to satisfy the needs for really addressing these large untapped markets and years ahead.

Thanks, Scott. Thanks, Mike.

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

Hi, good afternoon. Hey, Mike, I know you don’t want to give guidance for 2019. But as I think about what I’m hearing on this call a slower rollout of SAPIEN Ultra in 2019 and hopefully some positive benefits later in the year from PARTNER 3. So should one assume, as we build our models for 2019, kind of a slower first-half and a stronger second-half? And I know the comps are going to be a little bit easier as well. So maybe some color on kind of how we should think about 20109 and U.S. TAVR ramp? Thanks.

Yes, thanks. I think, you’ve got the right idea. I do think you should more think of ramp rather than step function in 2019. And you’re right, whether it’s the way we roll out new products or the way the products – or the way that physicians and the rest of the marketplace absorb the low risk data. We think this is going to happen in a gradual fashion rather than sort of a jump. So yes, I think it’s reasonable to think about that. Remember, the low risk approval itself doesn’t come until late in 2019.

Okay. And then just as my follow-up, just to clarify PASCAL in Europe. Can you just remind us where you are in enrolling that trial? And can you give us some specifics as to when in 2019 you think you’ll be launching in Europe? Thanks.

Yes. We’ve resisted giving specifics on 2019. We’re right on track on that trial, so we’re continuing to enroll patients. And so that it’s right where we want it to be and so we expect to be launching in 2019. But at the Investor Conference, we may have more detail for you, Glenn.

Okay. Can I sneak in one more for Scott. Scott, can you give us just ballpark for next year where the tax rate is? We’re modeling an uptick, but is it 200, 300 bps, anything in the ballpark for the tax rate next year would be helpful? Thanks.

Yes, we’re reluctant to do that at this point. And I can say that it’s a lot lower than we would have expected at the beginning of this year. As you know, we’re looking at the lower-end of a 13% to 16% rate for the full-year 2018, but I’m reluctant to get into any more than. Keep in mind, one of the big influences on our tax rate is this excess tax benefit that we received from the premium on employee stock-based, performance-based options. And so that’s a variable that we’ll be able to estimate a little bit better maybe when we get to the Investor Conference in December.

Okay, great. Thanks, Scott.

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

Good afternoon, and thanks for taking my question, Mike. You’ve had some commercial experience with CENTERA in Europe. And just given all the discussions about pricing, are you seeing that the customer appeal of CENTERA is up to your expectations?

Yes. I mean, our experience has been that the customers who have tried CENTERA really like it. It’s feature-rich and we frankly sense a lot of excitement. And so the early feedback has been very strong on that system. And even the early feedback in the U.S. is quite positive for those people that are in the trial.

And my follow-up is on COAPT. I mean, I listened to your comments today from last quarter. And you explicitly said, you don’t expect – people dare to hope for a mortality benefit, but you got both mortality and a rehospitalization benefit and in a very convincing way. And before you’d said, this market be $3 billion in 2025. Actually, we’ll be thinking about it now that we actually have that very important clinical proof-of-concept?

Yes. I know you’re right about that, we have shown confidence and this being, as we said, our $1 billion and our $3 billion projections in the past and we haven’t backed off on that and here’s the COAPT trial that is very impressive and I think even surprised us. So we’re thinking about that deeply, Bruce. We don’t have anything to share at this point. I mean, we would be able to get people with you in terms of mitral models when we get to the Investor Conference. I guess, we’re starting to feel a little bit like a broken record, but we’re in the process of studying that now.

Thanks very much.

Sure.

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

Good evening, and thank you for taking my question. One of the things that investors frequently ask us is, how much or how many of the low-risk patient pool has been already penetrated with sort of the shifting labeling of STS as not necessarily the metric for defining low versus intermediate-risk. There’s sort of segues into the OG shocks [ph] can low-risk really help them next year? How would you respond to that?

Yes. We don’t think there has been any significant penetration of this low risk group. We believe that our customers largely stay on label and it’s because it’s backed up by the NCD. And again, the NCD is very clear about what will be paid for and the stakes are quite high to go off-base from that perspective. Having said that, the whole designation of risk categorization by various patient groups, I think, it’s going to become an obsolete notion once PARTNER 3 is out there. The – there’s not going to be this question of, gee, how risky is it for patients to go through surgery? We believe that we’re going to have a trial that demonstrates that TAVR is substantially equivalent to surgery for all patients at this point, at least, the groups that have been studied and it’s going to be more about anatomy that it is about risk. So we think the conversation is going to change. I think we believe it’s going to be helpful to have that PARTNER 3 data, probably the last really big transcatheter aortic valves study done in patients with severe aortic stenosis and symptoms.

And my second question has to do with product timelines. I’m sure we’ll get a full update in December. But can you give us an update on where you are with FORMA. If memory serves, you’ve paused to that clinical trial or product development? Thank you.

Yes, thanks. So we had some procedural learnings as we rolled out FORMA, and that led to system enhancements. And we resumed treating patients on a compassionate basis with the new FORMA system and we’re pleased with that. But it’s still early experience with the revised system.

Thank you.

Sure.

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

Thanks. Mike, first on Cardioband. I just wanted to confirm that this is an issue with the facility and not with the product. Is the fix here really just the location change or are there things you need to tweak about the product design itself to make it more manufacturable?

Yes. No, we’re really talking about fixing comply – supply constraints, Chris. If your question is, is there an issue with the performance or with the demand? I mean that we believe that the demand has been there. We’re – we’ve got a lot of suppliers on that system. There has been a lot of integration into the Edwards system and this has been significantly. But recall, we’re always innovating and we’re going to improve the system over time. But the supply constraints that I’m talking about are not related to some overall performance shortcoming, but just our ability to supply at the level that we’d like to at the quality level we want to.

Yes. And just to clarify, not talking about clinical performance, but just the manufacturability of the product itself, it’s too hard to make or is it just a problem with where it was being made?

Yes. So, when you get into these kind of things, of course, we have many, many suppliers in that system. They wouldn’t be typical Edward suppliers and they’re also in a very small facility in Israel that’s not very typical to what Edwards would employ. We just feel like we need to make migration of both – some of the suppliers in the manufacturing facility itself. So that we feel confident, both in boosting the near-term and fortifying the supply and also being able to scale us for our long-term expectations.

That’s helpful. And then just quickly on Critical Care, can you talk a little bit about how you frame the opportunity for HemoSphere? The business grew 15% this quarter, that’s something that you should get noticed a little bit. Should we be thinking about that as a very short-term upgrade cycle you’re going through right now, or could double-digit growth in that business actually be sustainable for a while?

Yes. I mean, we’re really pleased with what’s going on in Critical Care. And you’re right, HemoSphere has been very popular with customers and these early adopters have really boosted our sales growth rate. Now we did get a little bit help this year for some group purchasing organization contract. The HemoSphere has been the one that’s really driven this. It’s part of what we’re benefiting from is a capital replacement cycle as it replaces our existing monitors. Overall, we’re not deep into that replacement cycle at this point. It’s hard for us to predict what this is going to look like. And so, yes, it’s tough to say exactly what it’s going to mean for the future growth rates. I wouldn’t automatically anticipate that we’re going to maintain a growth rate like we just enjoyed in the third quarter.

Thanks.

Thank you. Our next question comes from the line of Robbie Marcus with JPMorgan. Please proceed.

Thanks for taking the question. Scott, maybe some financial housekeeping questions here. Gross margin came in better than expected. Maybe you could help us with the drivers there or hedges included in that? And how we think about FX, both for the balance of the year on the top and bottom line and what your latest count is into 2019?

Sure. As it turns out, gross margin came in right about where we expected, and I think that was a little bit above where someone on the Street, but it was right where we thought it was going to be. It was up over 100 basis points versus the 74.4% in the third quarter 2017 and reflected benefit from improved mix, which we’ve been seeing consistently with the growth of THV, and it also reflected the benefits of not having the recurring expenses that we experienced from Hurricane Maria last year. That is offset a little bit by manufacturing capacity investments that we talked about earlier.

And where FX stands for top and bottom line for this year and next year current rates?

So for FX, we continue to expect that for the full-year, we’ll see about a 1% benefit to sales, or $30 million. At the gross profit line, we’re largely insulated, by the time we get down EPS, it’s about $0.01 benefit in the third quarter. But the gross profit line, it’s tough to predict what the impact is going to be from these hedge outcomes that we realized during the course of the year.

Okay, thanks. And maybe as a follow-up, I haven’t heard any update on Harpoon lately. Maybe you could just give us the way the status of that program? Thanks.

Sure. Last time we talked about it. We said that we are examining the root cause of some of the complications we saw earlier. We haven’t completed that analysis. So we will report to you as soon as we have that completed. We’re hopeful that that’s not going to go on too much longer.

Thank you.

Sure.

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

Hey, good afternoon, guys. Thanks so much for taking the question. Mike, I just have two questions for you. One on U.S. and one on ex-U.S. and litigation. So first on U.S. This is a market that presumably or potentially could be going from two players to four sometime over the next, call it, 18 to 24 months. And I know I’ve asked this before. But just how are you feeling about the sustainability of the pricing environment, particularly in the context of what we’re seeing happen in Europe? And then I just have one follow-up on litigation.

Sure. We have a lot of experience selling heart valves in the U.S. and we wonder whether THV is going to be a lot different than that. It’s a pretty heavy lift to be able to get our product approved in the U.S. market. And we think largely our competitors are disciplined pricers, especially with all the work that’s necessary and clinical investment necessary to come to the U.S. market. So we’re not overly concerned. We – in our long-term models, we model a modest price decline, but we don’t think there’s going to be anything that’s dramatic. For the most part, when we do our own pricing, we do some discounting based on volume, right?

Okay.

Yes.

Okay, got it. And then just last question here for me. Appreciating that you’re not going to necessarily comment on the ongoing litigation. But let’s just assume, I understand that Ultra is certainly advanced. But I’m curious about how you feel about your competitive positioning for SAPIEN 3 with or without the advance of Ultra. I guess, I am trying to get it assuming Ultra does get enjoined. It feels to me like there’s no reason to think there should be any significant shift in market share for SAPIEN 3 from here. But tell me if you think I’m thinking about that wrong?

Yes. I mean, we’re really pleased. I think, SAPIEN 3 has clearly demonstrated that it is best-in-class performance, and there’s an awful lot of data that supports that. Our efforts in Ultra was to able to do that and do it even better and be able to have some advantages for physicians and patients that go along with that. So we’re very proud of the SAPIEN 3 platform and feel good about where it stands.

Thank you so much.

Thank you. Our final question today comes from the line of Kristen Stewart with Barclays. Please proceed.

Hey, guys, thanks for taking the question. Sorry for my voice little under further. I just wanted to circle back just in terms of thinking about kind of the P&L. And just kind of generally your philosophy on how you think about – I know you’re not giving guidance. I assume you will give explicit guidance at the Analyst Day. But how do you feel about at this stage and ramping up to support things like mitral and tricuspid, R&D came in a bit heavier this quarter. Is this kind of a new sort of a run rate maybe we should think about 16 or 17 or may be closer to 17 on ongoing rate? And then whether or not there’s additional investments that need to be made from a sales and marketing perspective that’s not really being reflected this year?

Yes. Thanks, Kristen. Maybe I’ll make a few comments and then let Scott jump in and add additional color. So, big picture, we’re aggressive investors in R&D and we see rich opportunities. We’ve been aggressive, not only in our current portfolio, but also in the new portfolio associated with transcatheter mitral and tricuspid. I think, our R&D as a percent of sales always looks seasonably high in the third quarter. Remember, we – this is our – for at least our company, this is our lowest seasonal quarter. So ratios tend to be a bit deceiving. But nonetheless, we’re going to stay aggressive investors in the space.

I just add. We had the benefit of this tax reform in 2018, and so we end up being able to invest even more aggressively and advance some of these programs that we’ve had on deck to really accelerate to ultimately commercialization. And so we’ve been fortunate to be able to fund these programs and to continue to invest for long-term top line organic growth.

Okay. And then, Scott, just a follow-up on the kind of topic of tax, I think, this kind of came up before. But if I look at kind of the year-to-date run rate for the adjusted tax line, how much of that is just related to employee stock compensation? I guess, this quarter was 490. Is that consistent with both full year-to-date and kind of thinking forward to next year, I know you didn’t make comments. But is that something that you typically start out of the year, assuming no benefit?

Yes, this is – it’s really hard to estimate, because as you know, exercises tend to go up when the stock price performs well, and then the tax benefit is even greater, the higher stock price is, so you get this double benefit. The reverse also happens. And so if the stock is not as mobile on the upside, then there may not be as many exercises and the value of those exercise does not flow through to the same degree of the tax rate. So this year, we’ve – this quarter, we’ve realized an effective adjusted tax rate of about 13.5%. You mentioned before 490 basis points of that was for – from the excess tax benefit. But we’ll think more about it and try to give you our call when we get to the Investor Conference for 2019. But this is one that’s tricky. It’s one of the reason why we’ve also started talking about our operating profits and our operating margins just because the bottom line is more volatile as a result of this new accounting practice.

Okay, that makes sense. Thanks very much, guys.

Okay. Well, thanks all for your continued interest in Edwards. Scott, David and I welcome any additional questions by telephone. And with that, I’ll turn it back over to David.

Thank you for joining us on today’s call. Reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying sales and growth rates and amounts adjusted for special items, are included in today’s press release and can also be found in the Investor Relations section of our website at edwards.com. If you have missed any portions of today’s call, the telephonic replay will be available for 72 hours. And you can access this by dialing 877-660-6853 or 201-612-7415 and use the conference number 136-834-34. Additionally, an audio replay will be available on the Investor relations section of our website. Thank you very much.

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