David Erickson - Vice President of Investor Relations Mike Mussallem - Chairman of the Board, Chief Executive Officer Scott Ullem - Chief Financial Officer, Corporate Vice President

Larry Biegelsen - Wells Fargo Securities David Roman - Goldman Sachs Brooks West - Piper Jaffray Mike Weinstein - JPMorgan David Lewis - Morgan Stanley Jason Mills - Canaccord Genuity Joanne Wuensch - BMO Capital Markets Raj Denhoy - Jefferies Danielle Antalffy - Leerink Swann Glenn Navarro - RBC Suraj Kalia - Northland Securities Bob Hopkins - Bank of America Matt Taylor - Barclays Kristen Stewart - Deutsche Bank

Greetings and welcome to the Edwards Lifesciences Corporation second quarter 2015 earnings conference call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference to your host, Mr. David Erickson, Vice President of 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 second quarter 2015 financial results. During today's call, we will 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 would 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 and current expectations for clinical, regulatory and commercial matters as well as future product strategies. 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 may be found in our press release, our 2014 Annual Report on Form 10-K 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 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 and on our website. Now I will turn the call over to Mike Mussallem. Mike?

Thank you, David. We are very pleased to report strong second quarter performance, led by underlying sales growth of 18%. Significant global TAVR therapy adoption drove our results which was also boosted by contributions from our surgical valve and critical care product lines. During the quarter, we are also pleased to receive U.S. approval of SAPIEN 3, our next generation transcatheter valve, which has demonstrated improved outcomes for high-risk patients suffering from severe, symptomatic aortic stenosis. In THV, underlying global sales grew 42%. Impressive procedure growth resulted in strong sales of our innovative, market-leading products in the U.S. and internationally. Globally, average selling prices remain stable. In the U.S., underlying THV sales for the quarter were $149 million, which includes a boost from royalty and grew 62% versus the prior year. Our performance was driven by strong procedure growth and as expected clinical sales from our SAPIEN 3 continued access program. Stocking and consignment had a minimal impact. In mid-June we received the FDA approval for our next-generation SAPIEN 3 valve with its Commander delivery system for high risk patients in the U.S. Commercial sales of our most advanced transcatheter heart valve began earlier this month and clinical demand has been very strong. Given the earlier than anticipated approval, we are ramping up supply and continue to expect our rollout to be completed by year-end. Training physicians to use SAPIEN 3 is a fairly straightforward process that involves a focus program designed to ensure excellent patient outcomes. Even though SAPIEN 3 has superior results, we have not instituted price increases, so that as this therapy becomes more efficient providers, payors and ultimately patients benefit. The U.S. procedure growth has continued to be robust this quarter. Starting in the third quarter, the launch of our next-generation product should help expand therapy adoption and partially mitigate the tougher prior year comparisons. Expanding the indication to treat intermediate risk patients remains a key focus. As a reminder, we will reach the one-year endpoint for SAPIEN 3 and the two-year endpoint for SAPIEN XT about the same time around be around year-end. Assuming a positive trial and an expedited FDA review, we plan for a late 2016 approval with a minimal contribution to sales next year. Additionally, we will seek to extend the SAPIEN 3 intermediate risk continued access program until the approval. Outside the U.S., THV sales grew 25% on an underlying basis during the quarter, once again driven by strong procedure growth broadly across most countries in Europe and continued progress in Japan. Average selling prices remained stable. In Japan, our sales continue to grow sequentially. Reimbursement for our 20 and 29 mm SAPIEN XT valves was approved in the second quarter, which will help broaden the population of patients who can benefit from this technology. In Europe, we estimate overall therapy adoption grew more than 25%. Even as competitive pressures increase, our growth rate increased roughly in line. We believe demand remains strong us patients are continuing to come off the sidelines. This was driven by growing therapy awareness, an increasing trend of physicians referring more patients to TAVR, continued positive data and favorable clinical experience. At the recent EuroPCR conference, one year SAPIEN 3 data for high-risk patients was presented. This multicenter, nonrandomized study of 150 patients demonstrated our best survival and lower stroke rates for these patients at one year. Also presented were 30 day outcomes for intermediate risk patients treated transfemorally with SAPIEN 3, which demonstrated very low mortality and stroke rates and no severe paravalvular leaks. The SAPIEN 3 clinical data presented over the past few months at most major medical meetings represent the largest, most definitive data in the industry with more than 1,800 patients treated. The excellent outcomes have been consistent across our studies and geographies and we remain confident in the future expansion of this therapy. In summary, we are committed to leadership in TAVR even as competition increases. Starting in the third quarter, prior year comparisons will get tougher, but the launch of next-generation products should help expand therapy adoption. We are very encouraged by the strength of THV in the first half of 2015. Given this performance in the early U.S. approval of SAPIEN 3, we now expect our underlying sales growth in 2015 to be in the 25% to 35% range. Turning to surgical heart valve therapy product group. TOTAL sales this quarter were $204 million, up 3.5% on an underlying basis. Growth was driven by global surgical heart valve unit growth, partially offset by the ongoing exit of previously announced non-strategic products. A favorable product mix also contributed to a higher overall ASP. Globally, underlying surgical valve unit growth was led by sales of our premium valves across all major regions. INTUITY Elite drove sales growth in Europe and China's solid performance continued to lead growth in the rest of the world. In the U.S., we experienced strong growth in both aortic and mitral units, driven by our premium magna products. Our activities in support of U.S. approval for Edwards INTUITY Elite remains on track and we expect the launch in 2016. In summary, we are pleased with the strength of our premium products in our surgical heart valve product group and based on our first half performance tempered by the continued exit of non-strategic products, we now expect underlying sales growth to be at the high end of the 1% to 3% range for 2015. Turning to critical care product group. Total sales for the quarter were $131 million and grew 1.3% on an underlying basis. Outside the U.S., sales continued to be strong in China, but we await a final reimbursement decision for ClearSight in Japan. As the leader in hemodynamic monitoring, our enhanced surgical recovery program continues to gain momentum. ESR's focus on reducing patient complications and hospital lengths of stay continues to resonate strongly with clinicians and represents a large global underpenetrated opportunity. Overall in critical care, we are pleased with the continuing adoption of ESR products, which are expected to grow double digits this year. And even though this quarter's results were impacted by a tough prior-year comparison, we are reiterating our underlying sales growth guidance of 2% to 4% for 2015. Now to update you on our transcatheter mitral valve programs. In May, we announced the temporary pause in FORTIS enrollment due to the observation of valve thrombosis in some patients. We have been working closely with the heart teams involved in the clinical program and recently completed a review of the patients who have received FORTIS. Based on our findings, we have incorporated protocol revisions related to patient selection, post procedural drug regimens and enhanced imaging surveillance following the procedures. We have received FDA approval to move forward with our early feasibility study and we plan to discuss our updated TMVR strategy at a later date. As previously announced, earlier this month we signed an agreement to acquire CardiAQ Valve Technologies, a privately held developer of transcatheter mitral valve replacement system for up to $400 million. While we remain pleased with the significant progress made by the FORTIS program, we were attracted to CardiAQ because of their unique technology, including a differentiated attachment approach and a single valve with multiple delivery systems. We were also encouraged by their recent clinical progress. From a regulatory standpoint, they have made considerable progress, including FDA approval to initiate an early feasibility study of up to 20 patients and they also expect to start a CE Mark study in Europe in the near future. We believe the acquisition and integration will further advance our development of a transformational therapy for patients with mitral valve disease who aren't well served today. The experiences and technologies of Edwards and CardiAQ are complementary and this combination should enable more advancements for patients in the future. We are excited to invite their team to joining Edwards upon closing the acquisition and we are proud of the progress made by our FORTIS team and the combination of these talented employees is very helpful for the development of future structural heart disease technologies. We will share our updated TMVR plans following completion of the acquisition. And now I will turn the call over to Scott.

Thanks, Mike. We achieved non-GAAP diluted earnings per share this quarter of the $1.13, which compares to 2014 non-GAAP diluted earnings per share or $0.88. This increase was driven primarily by our THV sales performance. As a reminder, last year our GAAP results included the large litigation settlement. As I mentioned last quarter, Edwards' earnings are subject to a significant impact as a result of the large movements in currencies. However, unlike some other companies in our sector, our 2015 earnings will be largely insulated as a result of our current foreign currency hedging strategy. If rates remain at current levels, it's important to understand that our company will ultimately realize a significant negative foreign exchange impact on earnings in 2016. This quarter, our non-GAAP sales were $622 million, reflecting 18% underlying growth as compared to last year. The strengthening of the U.S. dollar continued to have a significant negative impact on reported sales. At constant currency rates, sales would been approximately $50 million higher. U.S. THV's non-GAAP sales this quarter of $149 million adds back a $5 million reserve relating to the launch of SAPIEN 3. Recall that accounting rules require that we record a reserve against sales of valves that we forecast will be exchanged for next-generation products in the future and require that we reverse this reserve when we ship the replacement products. In order to be transparent and to improve comparability of our quarterly THV sales, we are providing the impact of this reserve, including supplemental information our website. In addition, we recorded a separate write-off for the cost of SAPIEN XT products that will not be sold. The combined impact of the SAPIEN XT sales reserve and inventory write-off reduced our GAAP earnings per share by $0.10 in the second quarter and has been added back in our non-GAAP results. I will now cover the details behind our results, including guidance for the remainder of the year. For the quarter, our gross profit margin was 74.3%, which included the items just discussed relating to the U.S. launch of SAPIEN 3. In the second quarter, gross margin would have been approximately two percentage points higher without the new product launched impact. Now comparing to last year, favorable product mix boosted margins about 1.5 percentage points. Foreign exchange also contributed about three percentage points, which was substantially offset by multiple investments in our operations, including cost of improving our manufacturing processes. If FX rates remain at current levels, we now expect our full-year gross profit rate to be between 76% and 77%, excluding special items. As a reminder for 2016, at current rates, as favorable hedge positions roll off, we do not expect to realize the same positive contributions to gross profit we are experiencing in 2015. Second quarter selling, general and administrative expenses decreased 1% over the prior year to $214 million or 34.7% of sales. This decrease was driven by the favorable FX impact on our expenses outside the U.S. We now expect SG&A excluding special items, to be at the low end of the 35% to 36% range of sales for the full year. Research and development expenses in the quarter increased 9% to $97 million or 15.8% of sales. This increase was primarily a result of continued investments in our aortic and mitral valve programs. We now expect our R&D investments, including the impact from the pending CardiAQ acquisition to be at the high end of 15% to 16% of sales for the full year. Net interest expense for the quarter was $2 million, down from $3 million in the prior year. This reduction was driven by increased interest income from higher investment balances and higher yields. For the full year, we expect net interest expense to be approximately $10 million. Our reported tax rate for the quarter was 20.7%, which benefited from an improved country income mix and the impact of the THV inventory write-off. We continue to expect our full-year tax rate, excluding the impact of special items, to be between 21% to 23%. The tax rate for the first three quarters should be higher than the fourth based on our assumption of a fourth quarter renewal of the federal Research and Development Tax Credit. Compared to our February guidance, foreign exchange rates had a negligible impact on earnings per share. At current rates, we continue to estimate at approximately $190 million negative impact to full year 2015 sales. The resulting impact to 2015 earnings should be mitigated by our FX hedges. Free cash flow generated during the quarter was $152 million. We define this as cash flow from operating activities of $170 million, less capital spending of $18 million. At the end of the quarter, we had cash and cash equivalents and short-term investments of approximately $1.4 billion. Total debt was approximately $600 million. We plan to fund the pending CardiAQ acquisition using our existing cash. During the quarter, we repurchased approximately 580,000 shares for $79 million. We continue to estimate diluted shares outstanding for the full year to be at the high end of our previous range of 109 million to 111 million shares. Now turning to our 2015 guidance. For transcatheter heart valve therapy, due to the strong second quarter performance and earlier than expected SAPIEN 3 approval in the U.S., we now expect sales to be at or slightly above the high end of our original guidance of $1 billion to $1.1 billion. We continue to expect sales for surgical heart valves at the lower end of our $780 million to $820 million range and for critical care at the lower end of our $520 million to $570 million range. We continue to expect total sales of between $2.3 and $2 billion. Given the first outperformance of transcatheter heart valves and the earlier approval of SAPIEN 3 in the U.S., we are raising our full year diluted earnings per share guidance to between $4.30 and $4.40, excluding special items. This guidance includes the expected impact of the pending CardiAQ acquisition. For the full-year 2015, we expect free cash flow, excluding special items, to be at the high end of our previous range of $375 million to $425 million. For the third quarter 2015, which is typically our seasonally lowest quarter, at current foreign exchange rates we project total sales to be between $580 million and $620 million and diluted earnings per share, excluding special items, to be between $0.92 and $1. And with that, I will hand it back to Mike.

Thanks, Scott. In conclusion, our strong year-to-date progress reinforces our leadership position and places Edwards on a path to exceed our earlier financial expectations as greater number of patients are served by transcatheter therapies. And we believe we are poised for continued growth as we remain committed to our strategy of transforming patient care with innovative technologies. And with that, I will turn it back over to David.

Thank you, Mike. Before we open it up for questions, I would encourage you to mark your calendars for the evening of Tuesday, December 8 and Wednesday, December 9 when we will be hosting our 2015 Investor Conference at our corporate headquarters in Irvine, California. This event will include updates on our latest technologies as well as our outlook for 2016. More information will be available in the next couple of months. In order to allow a broad participation in our Q&A, we ask that you please limit the number of questions. If you have additional questions, please reenter the queue and we will answer as many as we can during the remainder of the hour. Operator, we are ready for questions, please.

[Operator Instructions]. Our first question comes from the line of Larry Biegelsen from Wells Fargo Securities. Please proceed with your question.

Good afternoon. Thanks for taking the questions and congratulations on another strong quarter. Guys, let me just start off with the guidance. You raised the transcatheter heart valve guidance to 25% to 35%, but you have kept the $2.3 billion to $2.5 billion range for total sales. Is it safe to say you expect to come in towards the high end of that range? And had one follow-up. Thanks.

Hi, Larry, it's Scott. Thanks for the question. The $2.3 billion to $2.5 billion range is still the right number to assume. Again, there is FX running through the dollar range and the underlying growth rate range is the one that we raised for THV.

Okay. Got it. And Mike, when do you think we will have visibility on the low risk regulatory pathways in the U.S.? Thanks for taking the questions, guys.

Larry, right now, we have got all of our focus on the intermediate risk approval. You know we are long-term planners and so we are always looking ahead at things like low risk and this is an item that has much discussion. But at this point, I think it is premature to say that we have a strategy. We will let you know. We will obviously keep you posted on that. But again, given the importance, we are really focused on the intermediate risk right now.

All right. Thanks for taking the questions, guys.

Our next question comes from the line of David Roman from Goldman Sachs. Please proceed with your question.

Thank you. Good evening, everybody. I wanted to just start with the U.S. TAVI visits. Can you help us dissect in a little bit more detail the drivers of the sequential increase versus the first quarter? How much of that came from overall market activity potentially stimulated by some of the data at ACC versus the SAPIEN 3 cap versus any other factors that you think are worth calling out.

Thanks, David. We had signaled that the continued access program was going to help us. That may have added something in the $10 million range to the quarter, but I think your other observations are the bigger one. The ACC data was presented toward the end of Q1 and that really had some significant, probably have some impact in the quarter. It's always tough for us to predict quarter-to-quarter changes but we just continue to see strong market adoption, broadly the same trends that we have seen before. The awareness is still growing and just confirms that there is more of these untreated patients out there. I think even the SAPIEN XT technology still it was driving growth. The hospital economics, we believe, are getting better. We see them adding capacity. And I don't know, maybe these new entrants are actually stimulating some growth as well.

Okay. That's helpful. So as you look forward and you think about the impact of SAPIEN 3, in your prepared remarks you talked about that being an important step in therapy adoption. Can you maybe compare the importance of the SAPIEN 3 launch relative to XT? The importance of XT versus the base SAPIEN product? And whether we should expect a material change in market adoption that we did, that we saw last year occur on a go forward basis?

Yes. Thanks, David. You are asking a really tough question. Frankly it's very difficult for us to predict the future. But going back to your point, we saw in Europe that when SAPIEN 3 was introduced that there was a step up in therapy adoption. And that that was meaningful. We think it's very possible that that's going to happen in the U.S. Clinician demand is very high. And you can see we obviously upped our estimate for transcatheter heart valve sales in the back half and some of it is because of SAPIEN 3 and that's going to, we think, is largely going to be market growth. Now at the same time, the competition is increasing and there is also an approval that our competitor got, so that's going to work against the other way.

Understood. Maybe just a quick financial one for Scott. On the dilution from CardiAQ, you brought it up in the R&D line associated with brain to the high end of the range, where else is that showed in the P&L and are you willing to quantify the total annualized dilution on an EPS basis?

Well, first of all, the acquisition hasn't closed yet. And so it depends on when the acquisition is going to close, but it will really show up in the P&L principally on the R&D line and the net impact to earnings per share is probably somewhere in the neighborhood of $0.02 or $0.03 per quarter.

Thanks for the questions, David. But we really would like to ask all callers to try and stick to a couple questions.

Just one last note. The CardiAQ impact is all baked into our guidance as well.

Got it. Thank you.

Our next question comes from the line of Brooks West from Piper Jaffray. Please proceed with your question.

Hi guys. Thanks for taking the question. Just quick, did you give Japan revenues or the Medtronic royalty for the quarter?

We did not give either one of those. If you recall back, just on the Medtronic royalties, we had a partial quarter. You remember the minimum is running around $10 million. I think we have probably on the order $5 million last year. So we had about $5 million bump this year. We just said Japan stepped up sequentially.

Okay. And then, Mike, on the mitral program, now you have got two replacement technologies. You have talked about actually developing a portfolio there, may be thinking about repair and other products. Could you just update us on where you are now with that thought process?

Yes. We think very broadly about structural heart disease and particularly about the mitral valve. And I think we have been pretty open in the past to say that we don't think that there is just going to be one solution for all patients. There probably will be some combination of replacement and repair technologies that will make sense and we really have a strategic imperative for ourselves to be a leader in this space. So we continue to work very closely at repair technologies in addition to replacement ones. And we have some internal programs, but I think that's all we have shared at this point.

Okay. Thanks so much.

Our next question comes from the line of Mike Weinstein from JPMorgan. Please proceed with your question.

Thanks, guys. So if I look at the quarter, there is really kind of two story lines. The first one is, one you were touching on earlier, which is the U.S. market accelerating again on the back of ACC and now you have got SAPIEN 3 to add to it. The other storyline is, obviously that Europe continues to do better than we were all expecting and it continues to show a very strong growth. Can you maybe help us with a little bit light on that? Can you just talk maybe about the growth in different parts of Europe and where growth maybe faster today versus other geographies? So if you can give us a sense of what's Germany growing at, in your view, not you but the market versus say southern Europe, that type of commentary?

Yes. Thanks, Mike. I think what we have tried to indicate here is, we have really nice results in Europe and that's been because the market has been growing. And it does impress us that the market is continuing to grow at this kind of rate. I wish I could tell you that it's one country, Mike, but it really isn't. It's all the countries involved. When a country is as largest Germany, you can imagine it has to grow otherwise the rest of Europe doesn't growth at that rate. So yes, Germany is growing. But no, Germany is not the fastest growing country in Europe. There's several others that are growing faster and all the big countries and the small countries are all showing pretty significant growth. We can go back to the reasons, but it's going to be the ones we have talked about in the past, awareness, clinical, favorable clinical outcomes, the advanced technologies clearly seem to accelerate things and people are seeing good results.

Okay. And Mike, one follow-up. So on the back of CardiAQ and that acquisition, can you just talk a little bit about how you are feeling about one, your balance sheet and two, deploying capital in acquisitions such as what you saw to do it, which is basically you think you are more bets in here with TMVR but your appetite to place bets in other areas as well.

Yes. Thanks. We are fortunate to have a strong balance sheet and we like that. We think the most important use of our cash is to be able to drive growth in our business and we stay on the outlook. We have a very active program. We call it, our discovery of resources that are out there looking at what's exciting, particularly in the field of structural heart disease. And so we are out there aggressively looking at it. We have got quite a bit going on inside the company, but we will not hesitate to do something like CardiAQ if we see something that we think is attractive and can be meaningful for these structural heart disease patients.

Just the one follow-up. So should we expect there to be more deals over the next, basically balance of the year? Or is this a one-off?

Mike, I don't know what to tell you. We look at those very carefully. It's not like we automatically have a number of deals that we are trying to hit some number, some artificial number. This is based on our assessment of what makes sense. If we saw something good, we would do it and if we don't see anything attractive, we won't do it. And it's that simple. We need to let others go, Mike. So thank you.

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

Good afternoon. Just two quick questions. I guess, first for Scott. This is an encouraging SG&A quarter. I think SG&A was down on an absolute basis for the first time in 10 years. I kind of stopped counting. So the guidance seems conservative but it also suggests the quarter is probably not an anomaly. So are we starting to see the evidence of more pronounced leverage in the model, Scott?

Well, keep in mind, the reason the dollar amount of SG&A was down was principally because of FX. So we are translating our oUS SG&A at lower rates and that helps. But it also came in exactly, we were pretty close to actually to where we thought it was going to be. And I think our guidance for the year is still the right kind of guidance. Longer-term, absolutely we are really looking at SG&A in particular, as an area where we can get leverage out of the P&L as our business continues to grow.

Okay. That's a tough one. And then Mike, I wondered if you could help us put the mitral acquisition of a CardiAQ in perspective? I kind of go back to you bought PVT. Obviously, PVT was early, but they were the clear leader in the marketplace and we have sort of a different dynamic here with the acquisition you made recently. Can you help us understand the similarities and differences between how you look at PVT versus CardiAQ?

Yes. It's a great question, David. Just to contrast, back in the early days, we were pretty proud of our own transcatheter aortic program at the time when we bought it. Even though I think now people look back and say wow, PVT was the leading program. If you ask our internal team, they were pretty proud of what we were doing then as well. So these are always tough cultural moves when you go ahead and do something outside that you have going inside. In the case of CardiAQ, there is a couple of things that we really like. We like their design. We like the fact that it was a different approach than FORTIS, so it gives us another option for how to attach the mitral valve. We also were really attracted to the idea that they had a single valve with multiple delivery systems. We think this can be very helpful when you are going through these long regulatory process and generating clinical data. Once you have that valve data, it oftentimes can be relevant regardless of the delivery approach. And so that's very attractive to us. So those were some of the driving forces behind it. We think the combination of the two companies is a good one. It really is powerful and we like putting it together what it could mean for these patients.

And Mike, just a related question to that. Is it too early to decide whether transapical or transcatheter sort of the approach? Do you see these as different technologies for different patient populations? Or is transapical versus transcatheter point just a hedge? Or is it just too early to know?

Well, I don't know. I think our experience in transcatheter aortic valve replacements is if you ask patients or doctors, they probably prefer a transfemoral approach over a transapical approach. Transapical has advantages because it's direct and you can have a surgeon really driving it. But in terms of the potential morbidity that's associated with it, it's still is sort of some flavor of surgery. So we think, if you actually could get to a transfemoral transseptal delivery that would be considered least invasive and preferred if you could deliver it. Now that's technically very challenging and it's one of the hurdles to clear.

Thank you very much.

Thank you.

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

Hi Mike. Thanks for taking the question. Congrats on another great quarter. I go back to something, Mike, you said with respect to the U.S. TAVI market that's driving the market and perhaps driving your growth as well in terms of the centers adding capacity. Could you give us more granularity on what you mean by that in terms of what they need to do or what they are doing to add capacity and sort of that how that progresses over the course of the next couple of years to drive key growth in market?

Yes. Thanks Jason. Yes. I mean we have gotten this question in the past and your assumption is correct. The growth is coming from existing centers. Yes, we added some centers, but that really isn't the driving force behind it. We find that particularly as the new technology gets introduced and the clinicians get more experienced, they are able to do procedures faster and still have a very high level of quality. And that just adds capacity to the system. That's probably the single biggest fact. So in the same time frame that they used to do one procedure, now maybe they are doing one-and-a-half or two. And so you really get a lift. And we wonder what SAPIEN 3 will do. Our experience says that that tends to be a case that goes a little faster even than XT. So it probably introduces some capacity into the system.

That's helpful. As a follow-up to that, what if anything, is happening with respect to the referral development in this market over the last year? We have seen obviously a big bump and just wondering if your centers, you are co-opting with your centers to do more on that front?

Yes. Thanks Jason. Yes, I would say most of that is being driven at the center level. We try and be helpful to them, but a lot of it is their own initiative and their own drive and we are consistently impressed with the heart teams that are out there educating their referral base and know that process just doesn't happen overnight. But I think we are seeing the effects of their commitment.

Thanks. And one last one, in Europe. Could you talk about whether or not you are seeing in the registry data in your experiences there any risk creep or talk about the penetration of the intermediate risk patient population in Europe and what's going on with respect to just what bandwidth is left in Europe on the TAVI front. I will get back in queue. Thanks, Mike.

Okay. Thanks, Jason. And again, guys. I know everybody has questions. We would like the people to hold it to two. So the contemporary data sets continue to show that the average age is above 80 and that these patients have numerous risk factors. So high-risk patients are being treated based on their EuroSCORE as well as their physician judgment that are taken into account. And so they kind of use a combination of age and frailty and comorbidities in Europe, when they are making these decisions. We just continue to see patients come off the sidelines and I guess the other indicator, Jason, is that our surgical heart valve business continues to grow very nicely. So we don't think it really is cannibalization of surgery.

Thank you.

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

Good afternoon and thanks for taking the question. Can you give us an idea a little bit of what's happening in the competitive land front in Europe? You have briefly touched on that but is there is anything else you can add to that? And then as a second question and I apologize if I missed this, the mechanics of launching SAPIEN 3 in the United States and expectations for that? Thank you.

Okay. Thanks, Joanne. Yes, in Europe we are clearly seeing a competition increase. I would say, Edwards broadly, probably has a share gain versus last year. But we probably have taken some impact on a sequential quarter. We have Medtronic Evolut R is out there and they are gaming a little bit of attraction. We see the BSX Lotus Valve that is going to have some new sizes later in the year. They have probably gained a little share. A little bit of Symetis. So we are seeing all the players probably step up a little bit. The market share of the five smaller players probably has bumped up over the 10% level, Joanne. So it's something like that. We are continuing, in the eyes of our people, to drive a substantial price premium, maybe in the neighborhood of 20% in Europe. So that's that. On the ramp of SAPIEN 3 in the U.S., what we have said basically is that we will be ramping up. The approval clearly came earlier than we thought. We have gotten it launched at this point. So we are off and running. We are pleased of doing that. But we are having to walk through our accounts. We have a pretty high level of confidence that we are going to have completed here before the end of the year. And so far things are tracking right on our plans.

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

Thanks. Just really had one question to follow-up on mitral and CardiAQ. How much or how important is it for you in the mitral space as it develops it feet first onto the European market? And how important did the companies, CE Mark trial, the approval of the CE Mark trial factor into your acquisition?

Well, I mean the short answer is, we have long-term aspirations to be the leader. We prefer to go first. We feel like we have a chance to have more influence and voice in the way that the regulators evaluate the technology and the way they view it. And also get a chance to be close partner with the clinicians that are engaged. So we like going early in that. That's a valuable factor to us, strategically.

And then when you think about that trial, I know you are going to disclose more once the deal closes, but what do you envision that trial looking like and what will initial approval in Europe look like the label for the mitral valve?

Yes. I am probably not going to help you very much, Raj, with that. Unfortunately, the way this has turned out, we announced this here before we actually have closed the transaction. And so we are just not in a position today to give detailed guidance on what it is going to mean until after the transaction closes and we get a chance to integrate those teams. You can imagine, the approach we are going to take is, we are going to try and move quickly, but we are also going to put a lot of focus on having high quality clinical studies. And so those will be factors that we will work through very carefully. But when we have something a little bit more definitive, we will be will be sharing that with you.

Our next question comes from the line of Danielle Antalffy from Leerink Swann. Please proceed with your question.

Thanks so much for taking the question. Good afternoon, guys. Just a follow-up on the capacity question, because we are getting this question a lot as we move into intermediate risk patients. Is there a natural ceiling at some point to the ability for these centers to add capacity? What's the next step of adding capacity? Do they have to have cath labs? Hire more another interventional cardiologist? How do you envision this unfolding as we ramp volumes into intermediate risk patients and the hospital's ability to absorb that incremental volume? And would Europe be a good proxy, because you talked to some of these high volume centers in Europe and they seem to be able to do it? But I guess I get the whole, they can do the procedure faster, but I mean, there is only so many procedures ultimately one physician can do a day. So I was just wondering how to think about that as we add intermediate risk in the coming years?

Yes. Thanks, Danielle. They are good questions. In the short term, we have seen in the past that hospitals have a tough time immediately responding to a capacity increase. That's why we think rarely in these kind rollouts, will we see a step function. They are more likely to be ramps. I think we believe that hospitals can overcome those capacity constraints. And there is a number ways that they do it. One is the procedures just take less time. So maybe in the same day when they use to get two procedures or three procedures done, they are getting four or five done. So you get a real boost on that. They can add additional teams. Sometimes actually the teams don't have to be quite as big as they used to be in the past as experience is gained. And so, we find that the SAPIEN 3 centers have a chance to really have a substantial capacity increase compared to XT. And so that's probably the single biggest factor, Danielle.

Okay. That's helpful. Thanks. And I was wondering if you could give any color on what you are seeing exiting the quarter, from a competitive environment here in the U.S., SAPIEN 3 versus Medtronic also got Evolut R approval. Any market share shifts? How do we think about the better U.S. performance? Was it faster market growth, some market share shift back in favor of Edwards, a little bit of both? Any perspective there would be great.

Yes. Just to recap. We didn't have any SAPIEN 3 in Q2. And that's just started here in Q3. And I have tried to describe the ramp the best I could. In terms of Evolut R, they appear to be ramping as well. We don't see a real aggressive step function there. And so they are also ramping up in the quarter. There is nothing particularly noteworthy to share there, Danielle, I don't know that the competitive dynamic has been the real driver in terms of our own goals.

Our next question comes from the line of Glenn Navarro from RBC. Please proceed with your question.

Hi. Good afternoon, guys. First question for Scott. Scott, you mentioned the FX impact qualitatively for 2016. But I was hoping you could help us a little bit more in terms of how we should model out 2016 with respect to the FX impact? Thanks.

It's a little early for us to give you much advice other than what we said last quarter, where there is a 200 to 250 basis points range of foreign exchange hedging contracts that are flowing through the P&L this year. And so that maybe the guideline for what may flow through the P&L next year, although again, we have got contracts that will mature. We are putting them on every month. They go about a year out. So it's tough to be more predictive than that.

And is that purely in the gross margin?

It's purely in the gross margin. It flows straight to the bottom line.

Okay. Great. And then just quickly in terms of data releases. SAPIEN 3 one-year data, perhaps when do we see that data and the PARTNER 2A intermediate, we are assuming ACC of next year, is that a reasonable assumption? Thanks.

Yes. So the SAPIEN 3 one-year is, I would say, the high risk cohort. It's probably likely around TCT. We think that would be pretty good. I would say, your assumption about ACC for the P2A intermediate risk is probably a decent and safe assumption. But again, we are speculating. We don't have complete control over that.

Our next question comes from the line of Suraj Kalia from Northland Securities. Please proceed with your question.

Gentlemen, congratulations on a nice quarter.

Thank you.

So Mike, first of all, let me start out with Europe on the intermediate risk side. Mike, can you parse out in Europe, what does intermediate risk growth looks like for SAPIEN 3? I know it's buried within the overall numbers. Just kind of give us an idea about where it is directionally and how much more legroom it has?

Yes. Again the indication in Europe is still high risk. And that's also the indication in the U.S. Longer-term, you have a pretty good understanding probably of what would drive intermediate risk in the U.S. and you know that largely is also going to be controlled by the NCD. And we wouldn't be surprised of that same data set for intermediate risk patients have some impact in Europe. Now having said that, what's surprising, so I call your attention to is that these intermediate risk patients, they are pretty elderly patients. We are continuing to see them at age greater than 80 and all that intermediate risk is in the assumptions that we gave when we gave market size. Now I agree, things have changed since last year, but last year at the December Investor Conference, we said, hey we think it's going to be more than $3 billion market by 2019. And that included our assumptions for intermediate risk at the time.

And there is no indication creep for intermediate risk in Europe, is what you are saying?

No. I wouldn't call it indication creep. I tried to address it somewhat before. I think that when physicians assess, they are clearly looking at high risk patients, but they also integrate physician judgment and age and frailty and comorbidities when they do it. They are not sort of slaves to the EuroSCORE, if you will, because the definition of risk seems to be changing. Remember, that was a broad surgical definition. And now that TAVR is here, they are probably reassessing how they think about risk.

Our next question comes from the line of Bob Hopkins from Bank of America. Please proceed with your question.

Thanks. Great. Just two quick questions. First Mike, any update on your long-term thinking on either the number of centers that you think can have a robust TAVR program long-term? Or how you just size the global TAVR market long-term?

Yes. Thanks, Bob. Yes, I will start with the easier one, probably and then even that is difficult to assess. Probably in the U.S., we think we are probably converging on a number that looks something like 400 centers that could meet the NCD based on the way that it exists today. Our latest update on how big we think the overall market is that it's larger than $3 billion by 2019. We watch that obviously very carefully and constantly update things but probably won't have an updated look at that until we get to our Investor Conference in December.

Okay. Fair enough. And then the second question also kind of a quick one. Your oUS TAVR revenues sequentially has been flat for three quarters. Now obviously some of that is FX. So could you just give us a little sense, especially relative to your comments that pricing has been stable? Can you give us a sense just over the last three quarters about your implant volume trends? Just want to get a sense for true underlying volume growth over the last couple of trends given that currency is distorting what we see with revenues?

Yes. Thanks, Bob. Yes, what you are saying here, clearly when you say it's not going up, you are seeing the impact of foreign exchange, which was dramatic on currencies like the Euro and the Yen. In fact, an I think we tried pretty much to report what the growth rates are. For example, in Europe, we said, hey, we believe procedure growth was around 25% and we grew somewhere in line with that. And I think that probably wasn't much different last quarter or the quarter before. So we have been probably clocking along at that 20% to 25% in Europe. And Japan is coming off a very small base. The growth rate is even higher. But probably your better benchmark is what's happening in Europe.

Okay. I will follow-up. Thank you.

Our next question comes from the line of Matt Taylor from Barclays. Please proceed with your question.

Hi. Thanks for taking the question. I actually wanted to ask that question in kind of a different way. You talk a lot about the U.S. centers, but can you talk about what you see outside the U.S., in Europe, the rest of world, Japan, in terms of the ability to add centers? And any expectation there for center adds or the ultimate addressable market in terms of centers?

Yes. Thanks for your question, Matt. Japan is still ramping. So that's still going up there. I would say relatively immature. They are only a little bit more of a year into it. And I think it's going to probably take several years before they really max out. So there will be centers that get added there. And even the centers that are added are not near their capacity. In Europe, probably most of the centers exist. I know it must be in the 350 plus range of centers that exists in Europe and I think the big ones are already in place. The emerging markets are a big opportunity in the future. Again there really, it's not approved yet in China. Just approved here in the last quarter or so in India. So those big, emerging markets are just at the very front end of it. And we probably don't have enough intelligence to say how fast that's really going to take off.

Thanks. And one quick follow-up. You mentioned in the questions today that you thought you are at about a 20% premium to some of the competitors in Europe. Does that apply across the board? And are you seeing competitors use price? Clearly you have some clinical advantages to that.

Yes. I think, basically our reports are coming from our field team and they basically are saying yes, it clearly is across-the-board and it's probably at least 20%, sometimes even more than that. And yes, you will see the difference that people will sometimes try and compensate for the difference in clinical results with price. And so it happens, but our pricing has stayed pretty stable.

Great. Thank you.

Our next question comes from the line of Kristen Stewart from Deutsche Bank. Please proceed with your question.

Hi. Thanks for taking the question. Scott, I was wondering, you had mentioned the remediation costs being a headwind on the gross margin this year. Is that something that we should think about as going away for 2016, potentially offsetting the impact of the hedges going away?

Thanks, Kristen. There have been significant manufacturing related expenses flowing to the P&L and a lot of those will continue to flow through in 2016. There were some, I will call it one-time expenses, this quarter. It was a minor part of the overall increase in manufacturing expenses. So there is going to be a fair bit that flows into 2016.

Okay. And I guess how much do we expect this year? I guess any idea on how to think about that for next year? Is it half? Is it a quarter? Or just too early to tell?

It's too early to really get in detail. What I can tell you it some of the one-timers in the second quarter are really relating to ramping up production. And so as we are trying to get transition over to SAPIEN 3, there are incremental expenses relating to training or occurring some over time. And then we have got ongoing investments or manufacturing quality systems. So again, some of that is going to be one-time, but a good chunk of it is, probably more than half I would say, if going to flow into 2016.

Okay. And then a last question. Just wanted to clarify. Mike I think you had said for the SAPIEN 3 high-risk or intermediate risk rather, did you say that that would be at TCT or no? Just wanted to clarify.

Yes. We said likely that we would see at TCT. But it's too early to say. But yes, that's our thought. We are talking about SAPIEN 3 high risk, right, that's in the PARTNER 2 trial.

SAPIEN 3 high risk. All right. So the SAPIEN 3 intermediate risk would still be at ACC along with the two year follow-up with SAPIEN XT in immediate?

More likely the intermediate risk, that's right, would be at ACC. But again, too early for us to be definitive.

Okay. Perfect. Thank you.

Sure.

There are no further questions in queue. I would like to hand the call back over to management for closing comments.

Okay. Thank you all for your continued interest in Edwards. Scott and David and I welcome any additional questions by telephone. With that, 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 conference number 13613570. Those numbers again, 877-660-6853 or 201-612-7415 and the conference number is 13613570. Additionally, an audio replay will be available on the Investor Relations section of our website. Thank you very much.

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