David Erickson - VP, IR Mike Mussallem - Chairman & CEO Scott Ullem - CFO

Mike Weinstein - JPMorgan David Lewis - Morgan Stanley Larry Biegelsen - Wells Fargo Bob Hopkins - Bank of America Merrill Lynch Chris Pasquale - Guggenheim Securities Matt Miksic - UBS Securities Jason Mills - Canaccord Genuity Raj Denhoy - Jefferies Isaac Ro - Goldman Sachs Bruce Nudell - SunTrust Robinson Humphrey Josh Jennings - Cowen & Company Kristen Stewart - Deutsche Bank John Gillings - JMP Securities

Greetings, and welcome to the Edwards Lifesciences Third Quarter 2017 Earnings 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 would now like to turn the conference over to your host, David Erickson, Vice President, Investor Relations. Thank you, sir. Please begin.

Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2017 financial results. During today's call, we'll discuss the results included in the press release and the 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 and current expectations for new product approvals, benefits and launches, clinical and regulatory timelines, competitive matters, trends in therapy adoption 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 2016 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 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 on our website. Now I'll turn the call over to Mike Mussallem. Mike?

Thank you, David. We're pleased to report strong third quarter performance that continue to deliver double-digit overall organic growth, driven by robust sales our innovative therapies. Total sales grew 13% on an underlying basis, which was in line with our expectations. Sales were lifted by strong global growth in TAVR and are consistent with our projection of a plus $5 billion market opportunity by 2021. We continue to aggressively pursue breakthrough structural heart therapies with the potential to drive significant future growth and help an even broader group of patients. Before we get into the product line results, I'd like to say a few words about the impact from recent natural disasters in the Caribbean and the U.S. Edwards has significant operations in Puerto Rico and the Dominican Republic, which are the principal manufacturing locations for our Critical Care products. Our Puerto Rico facilities sustained some flooding, which temporarily affected manufacturing operations there, until we resumed full production a couple of weeks ago. None of our heart valve manufacturing is conducted in those areas. Most importantly, all of our employees have been accounted for and are safe. And although a number have reported significant damage to their homes and loss of personal belongings, Edwards and our employees across the globe are generously making contributions in support of our people there. I was able to personally visit the area recently and was very inspired by our employees' resolve and eagerness to return to work so they can continue to help patients. While a number of the procedures in Houston and Florida were postponed during the hurricanes, fortunately, we believe a substantial number of these patients have since been treated. The majority of these affected hospitals have resumed normal operations, and we estimate the total impact on our third quarter sales was a couple of million dollars. Turning to Transcatheter Heart Valve Therapy; adjusted global sales were $498 million, up 20% on an underlying basis over the prior year, including the anticipated adjustment for the consumption of stocking inventory in Germany. Growth was driven by continued strong therapy adoption, both inside and outside the U.S. Globally, our average selling price remained stable. In the U.S., transcatheter heart valve sales for the quarter were $312 million, representing 20% growth versus the prior year. We estimate that the procedure growth in the U.S. was about the same. These results were consistent with our expectations and the typical seasonal slowdown. Strong adoption continued to fuel an increase in procedures broadly across our network of hospitals, led by our best-in-class SAPIEN 3 valve. We continue to be encouraged by the strong international adoption of TAVR, particularly where overall therapy penetration is still relatively low. Outside the U.S., our underlying growth rate was an impressive 21%, with a strong contribution from Japan, where TAVR was introduced more recently. We estimate procedure growth in Europe was in the low teens compared to last year, with Edwards growth about the same. We estimate our competitive position this quarter remained unchanged. Consistent with our previous comments, our results reflected little benefit from a competitor's product recall earlier this year and others were the primary beneficiaries. Growth in European countries with lower TAVR adoption rates continue to outpace countries where the therapy is more established. Turning to our near-term product pipeline, we risk -- we recently introduced our CE Mark pending SAPIEN 3 Ultra System at the PCR London Valves meeting. The system features advancements designed to help TAVR heart teams simplify procedures, save time and reduce the chance of complications. The Ultra System also adds a taller outer skirt on the valve, which is designed to further improve its outstanding performance. We expect to initiate a launch in Europe by the end of the year and plan to introduce this system in the U.S. in late 2018. At the London Valves Conference, excellent six-month clinical data results were presented on our CENTERA system, continuing the positive trends seen in the 30-day data presented earlier this year. We expect to launch this premium self-expanding valve system in Europe by year-end, and we'll use that experience to inform our U.S. and global plans. Enrollment in our PARTNER III low-risk trial was progressing and our goal remains to have this randomized trial enrolled around year-end. And as a reminder, our groundbreaking EARLY-TAVR Trial, the first of its kind to study severe aortic stenosis patients without diagnosed symptoms, continues to enroll. In summary, we expect our full year THVT underlying sales growth to be around the midpoint of our previous 20% to 25% guidance. This reflects significantly better results than our original sales guidance of 15% to 20%. Turning to Surgical Heart Valve Therapy. Sales for the quarter was $196 million and were up 2% on an underlying basis, consistent with our expectations. Growth was driven by strong performance of our INTUITY Elite valve system and the solid growth in our core products outside the U.S. This growth was partially offset by the continuing shift from our surgical aortic valves to SAPIEN 3 valves in the U.S. and Europe. Our INTUITY valve was recently approved for Medicare's new tech add-on payment effective October 1 of this year. This recognized INTUITY as the new technology that provide substantial clinical improvement over conventional valves. We believe many hospitals will be helped by this add-on payment over the next year, and this should simplify adoption of this rapid-deployment valve that shortens minimally invasive and complex procedures. Our INSPIRIS RESILIA aortic valve has been launched in Europe, and we're looking forward to launching this platform globally. Our newest surgical valve features RESILIA tissue and is designed for potential future valve-in-valve procedures. We believe this offers an ideal platform for active patients and patients seeking alternatives to mechanical valves, which carry the risks associated with blood thinners. We continue to plan for a 2018 launch in the U.S. and Europe. In summary, surgical heart valves, we continue to expect full year underlying sales growth of 3% to 4%. In Critical Care, sales for the quarter were $145 million, and grew 5% on an underlying basis. This performance was driven by a solid growth of our core products and our Enhanced Surgical Recovery Program, particularly in the U.S. and Asia Pacific. We expect the global launch of HemoSphere, our next-generation advance monitoring platform, to be a significant contributor to our longer-term success. While sales were minimal this quarter, the launch is expected to continue to ramp into 2018. HemoSphere is designed to provide greater clarity on a patient's hemodynamic status to enable clinicians to make timely, potentially life-saving decisions. This system is modular and designed and we plan to add enhanced surgical recovery capabilities to this all-in-one platform in the future. We are in the process of introducing our acumen software suite with our new FloTrac IQ smart disposables in Europe. This is a low blood pressure or hypotension probability indicator to alert physicians in advance of this dangerous condition. In summary, we continue to expect full year underlying sales growth in Critical Care to be at the high end of 5% to 7%. Turning to our structural heart programs. We are enthusiastic about the opportunities in our transcatheter therapies to treat patients suffering from tricuspid and mitral disease. Today, I will cover some select updates, and you can expect additional updates at next week's TCT Medical Conference and a more complete overview of our portfolio at our investor conference in December. Physician enthusiasm continues to be strong around tricuspid therapy. At TCT, we expect updates on Cardioband in the tricuspid position and our FORMA system. During the quarter, we are pleased to begin treating U.S. patients in the Cardioband mitral IDE trial called the ACTIVE trial. In Europe, we recorded approximately $1 million in commercial sales this quarter, which are reported in the THVT product line. We continue to believe that the annular reduction provided by Cardioband can be an important first-line repair therapy for many mitral patients. We've begun treating patients in the CE Mark trial called CLASP for our PASCAL transcatheter mitral repair program and are actively expanding this trial into multiple centers. We continue to treat patients and incorporate learnings with our Edwards CardiAQ mitral valve replacement system. We have decided to sharpen our focus based on our recent clinical experience and now plan to commercialize the valve system that incorporates a number of significant enhancements. This system features several important advantages, including a smaller profile to enhance transseptal delivery via the femoral vein, rather than between the ribs. We believe this strategy accelerates our progress to achieve our goal to introduce a true transcatheter therapy that stimulates adoptions and serves a much broader group of patients. We are refining our CE Mark timing and will provide an update on our investor conference. This change has financial implications, which Scott will discuss in a few minutes. Overall, while still early, we remain excited about our portfolio of transcatheter mitral and tricuspid offerings. We are aggressively investing in R&D, operations and commercial infrastructure to support these emerging therapies with significant upside potential. Separately, clinical data collection remains on track for Harpoon Medical minimally invasive chordal repair system. Edwards has an option to acquire this technology, and we expect to make a decision by the end of the year. And before I turn it over to Scott, following a thorough analysis of our global supply chain, we recently made a decision to close our small heart valve plant in Switzerland and absorb these operations into our evolving global network. We plan to support the impacted employees and appreciate their dedicated service. We expect to wind down operations in early 2018 and are recognizing a $10 million charge this quarter. And now I'll turn the call over to Scott.

Thank you, Mike. I am pleased to report another quarter of double-digit underlying sales growth, which generated strong earnings per share growth. Adjusted sales were $838 million, up 13% over 2016. These results were consistent with our expectations and the typical seasonal slowdown. In addition, adjusted sales include $17 million of Germany de-stocking sales. We continue to expect 2017 to be an excellent year with underlying sales growth above our original expectation of 10% to 14%. Our operating margin expanded over 2016 and is on track to achieve attractive levels this year. Adjusted earnings per share growth was 24%. Adjusted EPS was $0.84, and GAAP EPS was $0.79, which includes the $10 million charge related to closing our small manufacturing plant in Switzerland that Mike discussed, as well as other customary adjustments consistent with prior quarters. As we previously discussed, forecasting earnings per share is less because of the new accounting for stock-based compensation. Adjusted earnings per share would have been $0.88 this quarter, based on the excess tax benefit we estimated in our guidance last quarter. For the quarter, our gross profit margin was 74% compared to 72.8% in the same period last year. This improvement primarily reflects the benefit of a more profitable business mix, led by growing sales of TAVR, as well as a favorable comparison of supply chain expenses. Partially offsetting these benefits were expenses associated with flooding from Hurricane Maria in Puerto Rico and the planned closure of our manufacturing plant in Switzerland. We continue to expand our full year 2017 gross profit margin, excluding special items, to be at the midpoint of 74% and 76%. Going forward, this is a good near-term modeling assumption, anticipating mix improvements, offset by planned capacity improvements. We'll discuss those expectations at our investor conference in December. Turning to selling, general and administrative expenses. Third quarter expenses increased 7% over the prior year to $245 million or 29.8% of sales. This increase was driven by personnel and sales related expenses, primarily in support of our transcatheter heart valve therapy product line. We continue to expect full year SG&A, excluding special items, to be between 28% and 29% of sales for the full year. Research and development investments in the quarter increased 26% over the prior year to $143 million or 17.4% of sales. This increase was primarily the result of continued investments in our transcatheter valve programs. We continue to expect R&D, excluding special items, to be between 16% and 17% of sales for the full year. During the third quarter, we recorded a $17 million net reduction in the fair value of our contingent consideration liabilities. This reduction was primarily the result of the cardiac plants Mike mentioned earlier, which reduced the likelihood of a European regulatory milestone payment. Our reported tax rate for the quarter was 19.7%, down from 23.7% in the prior year period. This quarter's rate benefited 350 basis points from the new accounting for employee stock-based compensation. However, as I mentioned earlier, this benefit was lower than we estimated in our guidance last quarter. We continue to expect our full year tax rate, excluding special items, to be between 17% and 19%. Foreign exchange rates increased third quarter sales growth by 0.4% compared to the prior year. At current rates, we now expect de minimis impact to full year 2017 sales compared to the prior year. Free cash flow generated during the quarter was $269 million. We define this as cash flow from operating activities of $311 million, less capital investments of $42 million. Our capital spending reflects investments we are making to increase valve manufacturing capacity. Turning to the balance sheet. At the end of the quarter, we had cash, cash equivalents and short-term investments of $1.4 billion. Total debt was approximately $1 billion. Average shares outstanding during the quarter were 216 million, which is consistent with our assumption for the fourth quarter and full year. Now turning to our 2017 guidance. For 2017, we are reaffirming all of our full year sales guidance ranges. For Transcatheter Heart Valve Therapy, we continue to expect sales at the high end of $1.7 billion to $2.0 billion. For Surgical Heart Valve Therapy, we expect sales of $780 million to $810 million. And for Critical Care, we expect the sales at the high end of $560 million to $600 million. For total Edwards, we continue to expect sales at the high end of our $3.2 billion to $3.4 billion range. We also remain confident in our full year guidance for adjusted earnings per share to be between $3.65 and $3.85. Lastly, we continue to expect free cash flow, excluding special items, to exceed the top end of our -- $625 million and $675 million range. For the fourth quarter 2017, at current foreign exchange rates, we project adjusted sales to be between $855 million and $895 million, and adjusted earnings per share to be between $0.84 and $0.94. And with that, I'll hand it back to Mike.

Thank you, Scott. We're very pleased with performance achieved across all our product lines and believe our future remains bright. Our innovative TAVR therapies continue to deliver value to patients, and our transcatheter mitral and tricuspid valve technologies continue to represent exciting opportunities for breakthrough therapies. Overall, we're confident that our important innovations will result in a continued strong outlook as we deliver valuable solutions for the patients we serve. And with that, I'll turn the call back over to David.

Thank you, Mike. Before we open it up for questions, I'd like to remind you about two upcoming events. First, there is an informal Q&A with Dr. David Cohen at TCT in Denver next Tuesday. If you haven't RSVP-ed, please do so this week. Second is our 2017 Investor Conference on Thursday, December 7, in New York, which will include updates on our latest technologies, as well as our outlook for 2018. More information about this event 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 re-enter 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 Mike Weinstein from JPMorgan. Please proceed.

Thank you very much. I appreciate you taking the question. So, let me just touch first on the TAVR business. So, the TAVR business grew on underlying basis, 20%, 21% this quarter, 25% in the first nine months of the year and the midpoint guidance for the 20%, 25% range for the year would seem to imply about 16% growth in the fourth quarter. So, I guess one is that, is that, right? Is that what you meant to imply? Two, can you just talk about your view of the TAVR market this quarter? Obviously, the U.S. market -- U.S. business was down sequentially, which was a little bit below The Street's expectations, but the OUS business was stronger. And just how should we think about TAVR market growth clearly over the next, let's call it, 1.5 years before we potentially get to a readout on PARTNER III and how you think about the market growth for the next big catalyst? Thanks.

Yeah, thanks, Mike, appreciate the question. Yeah, the math that you did around the remainder of the year sounds like it's pretty close. That was the signal that we're trying to send. And yeah, it is a correct observation that the sales growth during the course of the year is lower in the second half than it was in the first half. We're really pleased -- we were surprised a high level of sales growth in the first half, it was extraordinary from our perspective. Remember, we went into the year thinking far less. And the second half of the year has kind of turned out the way that we expected. Remember, this is a long-term growth platform. We're very pleased that this many years after the introduction, we're still growing strong. We think it's particularly remarkable outside the U.S. where we started introducing in Europe 10 years ago to be growing at 20% OUS is something that we think is pretty impressive. But broadly, we have a long-term view. We projected that we think that this market opportunity will be more than $5 billion by 2021, and we think that the results that we're putting up this year, including the way we expect was in line with that. So yeah, I don't expect that we're going to have the heavy 60% growth rates that we had just a year ago and that we're going to settle into something that's more moderate. We'll give specific guidance at our investor conference in December, but I think the way that you characterized it is accurate.

Okay. And then Scott, it's probably been several quarters since you guys haven't reported a quarter and then raised guidance for the full year. Could you just maybe try and tease out some of the different moving parts that you're running through in your prepared commentary? Obviously, the hurricanes had some impact on the business, but can you just kind of run through some other items you think may be holding back earnings in the third and fourth quarter? Thanks.

Yes. So, we feel really good about where we are year-to-date. And we're glad that we had a third quarter that met our expectations. It's pretty lofty expectations, as Mike said, a lot higher than we originally expected to be end of the year. So, I don't think anything is really holding back our continued growth. I think that there will be some changes in the fourth quarter around gross margin. We'll get a little bit less help from FX, which will impact earnings per share. But that's in our guidance. I'm not sure it's really noteworthy. Beyond that, fourth quarter is looking pretty much the way we thought it would earlier this year, and we think we're off to -- we think we're on the right path.

Okay. I’ll let some other jump in. Thank you, guys.

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

Thanks, and good afternoon. Mike, I just want to start with a couple of product questions and maybe a quick follow-up. On CardiAQ, I appreciate the update. Can you just give us a general sense of this sort of reformulation of the product? What rough sense would have in terms of the delay and then the CE mark trial or assuming we stopped and you restart it. Should we be thinking more of a six-month delay to restarting that trial or 12-month? And for the December Analyst Day, is there a chance we get an update on the next-generation SAPIEN platform? And then I have a quick follow-up.

Yeah. Thanks, David. We're not prepared to lay out specific CE mark timing. We should be prepared to do that when we get to the investor conference, David. The bigger point that we wanted to do today was to share with you the change of strategy in which we felt it was appropriate to implement these significant enhancements that we think are going to be really meaningful that it's important for us to jump back. Overall, I think it actually is going to collapse our time to success, the time to long-term success, although it might delay for sales, but we think that's going to be -- this is going to be a good trade-off in the eyes of investors. In terms of next-generation SAPIEN valve, I don't that we're going to get into details on that for competitive reasons. We're really pleased that we're going to be launching both the Ultra System and CENTERA here before year-end, and we think there will be a lot of customer excitement around that. And as you correctly identified, we are working on next-generation systems that could be even more exciting, but we're probably not ready to share that yet.

And then Mike, just want to come back to the U. S. market dynamics again. Obviously, you try to quantify what the hurricane impact was and it seems sort of minimal, but given the fact that other companies that have reported so far, their earnings have actually shown some rather weak U.S. utilization numbers and each quarter for Edwards in the U.S. market has not been particularly predictive of, let's say, the next quarter from a sequential growth perspective. Is there anything from a share perspective or utilization in certain accounts or the rate in which accounts came on board here in the third quarter that surprise you in any way? Thanks so much.

Yeah. Thanks, David. I think that, that share positions have continued to be pretty consistent, pretty stable, both inside and outside the U.S. compared to a quarter ago. So probably not a lot of news from that perspective. The competitive dynamics probably haven't changed quite as much as we thought they might that could still be in our future. In particular, that -- we noted that the exit of Lotus from the marketplace probably didn't help us very much. It may have helped our competitors, but I don't know that there's a lot of other dynamics that are going on. We feel like the market is still growing nicely and that we're pretty much growing in line with market growth.

Great. Thank you very much.

Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.

Good afternoon. Thanks for taking the question. Let me ask the ubiquitous 2018 question maybe a different way it sounds like Mike based on your recent comments in September, public comment you expect the TAVR and the critical-care business to grow at a similar rate next year as 2017. I guess, the question is, are you willing to talk a little bit about the contribution from mitral and tricuspid next year and big picture should we think about 2018 as a transition year before we see the low-risk data at ACC presumably in early 2019? And on the P&L it sounds like you plan to invest in a dedicated mitral and tricuspid sales force next year in Europe, which will I don't have set any leverage in the P&L is that fair? Thanks for taking the question.

Yeah, thanks, Larry. So, a few things. First of all, as you've correctly pointed out we're not ready to share specific guidance for 2018. You all know quite a bit about our critical-care business and our heart valve business and our transcatheter aortic business, and all those businesses have some pretty clear trajectories and I think we've been clear in terms of what we think is possible. We think they're both -- they're all going to be really nice growers and maintain their leadership. So that's that. In terms of transcatheter, mitral, and tricuspid, I don't expect 2018 to be much of a sales year. I think it's going to be a really important year in terms of us making progress toward key milestones, creating value, sort of crack the code on what's most important and laying evidence in place, so it'll be an important year, but not one that probably is going to drive sales growth. We're more focused on what kind of growth will those platforms will provide some time out, more in the mid to long term. So, you should think about it from that perspective. In terms of investments, we're always thoughtful about that. Of course, some investments are going to need to be made in advance, and, you know, we were spending pretty aggressively in R&D field resources we'll try and be thoughtful on that and try not to get too far ahead of ourselves although some of that will be advanced investment. So, I don't think you should see an overall dominant affect from that in the 2018 plan.

Thanks for taking the questions, guys.

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

Hi, thanks and good afternoon. So just first of all just a clarifying question on the TAVR business and THV sales in the quarter because of the what happened in Germany I think there's maybe a little bit of confusion so just to be clear in the third quarter your worldwide THV sales adjusted for Germany were $498 million and that compares to on an apples-to-apples basis $510 million in the second quarter. Is that right?

So, Bob, its Scott. Yeah, the $498 million is adjusted for $17 million of Germany stocking, and relative to the second quarter 510 – hold on one second let me just make sure we're giving you the apples-to-apples number. Yeah, so it's $510 million also adding back the consumption of sales, stocking sales in Germany.

Okay. And then just, Mike, to clarify your comments on the U.S. market, because obviously that one change this quarter was your competitor did get approval for intermediate risk, so you think that you basically held share despite that approval and that the market growth rate will be around this 20% level?

Yeah, thanks, Bob. Yeah, we think that this has been pretty consistent that there wasn't a big change in share. It's hard -- it's always tough to estimate because, you know, we report out of cycle with each other. But our best estimate is that we're probably growing in line with the market and we basically factored those approvals into our guidance.

Okay. And then maybe one quick comment on Japan, that's a clear bright spot in the quarter, how sustainable is that growth in your view. Just give us a sense of market dynamics in Japan currently?

Yeah, the adoption in that country is still early they're continue to go add centers as we had expected and we continue to believe that right now they're primarily just treating high-risk patients, so the opportunity for expansion is still significant there. Hard for us to quantify, but we could talk about that one more in December as well.

Great. Thank you very much.

Sure.

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

Thanks. Mike, just a couple for you to start on the mitral program and it's been hard to tell, obviously, this year from the revenue piece of what's going on with Cardioband but you guys along the way have been making some investments to lay the foundation there. Can you just give us an update at this point of what's your European transcatheter mitral sales organization looks like how many people have you actually added this year?

Yeah, I'm not sure the exact numbers, Chris, but yeah, we have been adding people to the Cardioband organization in Europe. Maybe one of the things that's not apparent here is we believe that Cardioband not only applicable in the mitral position but also in the tricuspid position. So, in addition to our field resources and, well, all of our resources for that matter supporting Cardioband mitral cases they're also supporting Cardioband tricuspid cases and we think Cardiobond could be an important contributor there. We don't get any sales credit, no commercial cases for the tricuspid cases those are still commercial at this time. So, we've ramped up. There's probably maybe a few more resources, but basically where we want to be right now that sort of leveling out here in the fourth quarter.

Okay. And then one for Scott just following up on Larry's question about the potential to drive operating leverage next year and I know we'll get into this in a lot more detail in December. But it seems like you guys have been in investment mode of one form every year for the last several years. Are you trying to signal that you're thinking about 2018 differently from what we've seen the last couple in terms of the level of investment that's required and therefore the potential for operating leverage, or is it just shifting to new priorities as they come along?

No, we are going to continue to invest aggressively in the business especially around research and development. We've made a lot of progress over the last two years just in leveraging SG&A as we've gotten more global. We’ve continue to drive that SG&A is a percentage of sales ratio down. We're looking for opportunities to continue to get more efficient. That said, we're going to invest as Mike said in field resources to support our transcatheter mitral and tricuspid therapies, but I think overall our operating margin continues to look very favorable. It's improved over the last couple of years and it's an area of focus, but, again, primary focus at Edwards is driving top-line organic growth.

Thanks.

Thank you. Our next question comes from the line of Matt Miksic with UBS. Please proceed. Matt Miksic, your line is now live. Please proceed.

Thanks so much. Yeah, I’m sorry to again mute there. Thank you for taking my question. So, I had one, Mike, and many questions here on the U.S. growth and one thing that you did mention, I don't think was -- some of the comments you made in the first half of the year was kind of surprised in terms of performance of the smaller, newer centers entering the market and expanding geographically in the U.S. I just want to get a sense if you had any comment or color on what that look like in Q3?

Yeah. We continue to have new centers joined. We probably have, I don't know, maybe a dozen new centers joined in the quarter. So, we were probably in excess now of 550 centers and we do get contribution from those. And so, we're actually seeing a contribution across the board from large centers to small. It seems as though when new centers come in, that they unlocked a group of patients that maybe weren't being seen by the centers that were already present. Maybe because people were their own networks or they just did weren't insider referral pattern that found them into a TAVR Center. So, we are getting a contribution from that. But as you can imagine, the numbers are getting large. And so, this is validates for us the under treatment that's going on in TAVR and gives us confidence that this is going to have -- quite a bit of a runway in front of us.

And just to follow-on to that is from a follow-up on the market I think, there's a perception that we have an immediate risk of this last indication and now it's going to be too early 2019 before we get another catalyst in terms of data. But entering the intermediate-risk market, didn't substantially expand the number of patients it can be treated in the U.S. I'd love to get your sense as to, may not be another clinical catalyst for TAVR until early 2019, but where are you in terms of -- do you feel like penetration or is this something we would expect to quickly get through this number of patients or is this a group of patients that you expect to be kind of growing into over the next two to three years?

Yeah. Thanks, Matt. Yeah, we've tried to talk about this before. We really believe that there's a dramatic under-penetration of patients. So, when we looked at severe aortic stenosis patients in 2016 with symptoms, we felt that less than 20% were being treated. And so, we have a big opportunity. And even, though we have the intermediate risk approval it takes time for clinical practice to change it takes time for the guidelines to change it takes time for referral patterns to change and that's been happening. And overall, we're pleased we've seen some nice growth. But we're not coming close to the full potential that was unlocked with that indication let alone what's still in front of us. So, we continue to have work on that. So TAVR's still underutilized. The new data on – that we continually present. I think is very helpful in terms of making the argument and we've got some data actually coming up at the upcoming TCT where they're going to highlight the economics which will be interesting to see how contemporary economics compare to the economics that were last measured within the PARTNER trial.

Thanks for the color.

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

Hi. Thanks for taking the question. Mike, can you hear about okay? I am on a cell phone.

Yeah, Jason. Hear you fine.

Super. So, start with mitral. I'm sure you've had a chance to take a look at least of course you look at intrepid Medtronic announced first patient enrollment. Perhaps, interest in your comments, just supposing the inclusion, exclusion criteria and as far as you've have a chance to really evaluate one versus the other to Cardioband and your broader thoughts on moving towards commercialization of products in the United States for a functional mitral regurgitation? And sort of how those algorithms will play out? I know it's probably hard to discern at this point, but just interested in what you learned or what observations are coming out of the commencement of both of those trials?

Yeah. Thanks, Jason. Yeah, I'm not sure going deep into the inclusion or exclusion criteria or deep into trial design is all that insightful. But I think the portfolios themselves and the strategies are more interesting. We're going to drill deep on that when we get to our investor conference. But broadly, you can see that our competitors feel comfortable moving forward with a transapical system and we have chosen a different tack here. We really believe that transapical is going to be necessary to unlock this. And so that's going to be important. We also think that repair is going to play an important role in mitral therapies and we're pursuing a couple of technologies very aggressively there. We'll talk about exactly how that might all come together. But in the near-term, mitral is primarily a repair marketplace, and we have – there has to be some pretty impressive data presented to make the case that replacement technologies are ready to unseat them. And so, what we stay focused on is the really the long-term in terms of being able to treat the most patients with therapies and really cause the practice of medicine to change. Right now, these mitral patients just do not get treated. Surgery is not considered an interesting alternative. And until we have catheter-based technologies, which are safe and effective, it's not going to change. And we do think it's going to be a toolbox, which is why we have a full portfolio. And we are feeling very good about what we're able to see. We're on steep learning curves, so we're gathering a lot of experience with all of our systems, and that's informing our strategy. So, we'll try and paint ad more comprehensive picture when we're together in December, but maybe that's a good starter.

It is. Thanks Mike. I’ll look forward to that. And then as a follow-up, on the TAVR side, going back to Mike's question initially start the call, it looks like fourth quarter sort of in that mid to high teens range, 16%, 17% but what was interesting in this quarter as you pointed out U.S. business grew a little bit slower perhaps than you may be expected in the OUS business outperformed. Do you expect that trend to hold in the fourth quarter? Do you think that U.S. will reaccelerate and perhaps grow a little bit faster than international markets? And then Scott just as a squeak-in for you gross margins your guidance seems to be prior we’re going to see a step up in the fourth quarter and I want to make sure I got that right. Thanks, guys.

Yeah, thanks Jason. I may have sent an inappropriate signal, if I suggest that that the U.S. was below our expectations. It was right in line with our expectations. Remember when our surprise was early in the year, when we projected what we thought would happen across the TAVR world in 2017, we originally had a projection of 15% to 20% growth and that was based on growth both inside and outside the U.S. Do I think the U.S. will get slower? Well, I think there's a lot of large numbers where some of that is probably going to be likely. One of the things that is impressive is that the OUS where penetration is low is continuing to be strong, but I don't expect any certainly big dramatic changes, Jason, if that's what you're asking.

And, Jason, it's Scott. Regarding fourth quarter and gross margins actually we think that the gross margins may be under pressure in Q4 versus Q3 if foreign currencies stay at their current levels. We had a little bit of benefit from FX in the third quarter and at current rates we would probably not see that same benefit.

Okay. I'll get back in queue. Thanks, guys.

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

Hi. Good afternoon. Wonder if I could just ask if there's any additional color you can give us on the PASCAL trial, the CLASP trial I think you told us today, where is that in terms of enrollment and when do you expect to get that product approved in Europe?

Yeah. Thanks, Raj. One of the things that I might call your attention to, I don't know if you noticed that there actually was a Lancet article that was published in August about our early feasibility results in PASCAL. This had, I think it was, about a 23-patient experience and it was really a feasibility study and it walked away with a conclusion that there was impress with the high rate of technical success and the reduction of mitral regurgitation. And so, the fact that such a new technology would gain that kind of profile we think we were pleased with and we think that's relatively noteworthy and so we're today engaged in this. We think that there -- well, you should expect that there's going to be a presentation at TCT, so I think if that same Lancet group that you're going to see six-month results at TCT and you're going to see -- we'll share more about this. The trial itself is on ClinicalTrials.gov, it's more than a 100-patient trial with I think a six-month primary end point, so maybe you can certainly refer to what's on that website to give you a little more information.

I guess the question is more, you know, as we think about the opportunity for that product, right I mean, as you know Mike is doing several $100 million in Europe and you think about potentially getting on the market next year, is that maybe too aggressive a timeline and if when you do get there, what are your thoughts or expectations around what you can do in that market?

Well, I think the time line sounds aggressive. I mean, obviously, we're going to move as fast as we responsively can move. But I wouldn't be penciling anything in at 2018 at this point. We're very optimistic about the product line. We think it is -- it's one that users are going to like. We've gotten some nice feedback at this point. But it's still early in the evolution and I think it's one that we're a little bit more data. That will be interesting to see what's discussed at TCT next week.

Okay. Fair enough. And maybe I'll ask one on surgical valves, don't get asked that very often. But in terms of the new technology add-on payment for INTUITY, any thoughts around what that can due to growth for that product adoption of that product in the United States?

Yeah. We're really pleased that we got the new technology. We think it's going to have a positive impact. It went into effect October 1 of this year, and it's going to help hospitals, remember, when hospitals try to adopt these new technologies, often, it's really burden on their cost system. So, for Medicare patients, this helps defray some of that. And so, what it allows people to do is to get involved with an innovation like INTUITY and we think that it's going to provide, hopefully, some longer-term impact because they're going to have a chance to experience the product and have we think some very positive results associated with it and want to continue.

That's helpful. Thank you.

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

Good morning, guys. Thanks. First question was on the U.S. TAVR market, specifically with regards to OR capacity. Just curious if you could share with us you said you have visibility what percentage over portion of ORs you guys have out there active today or your approach theatrical limit in terms of the procedures they handle for TAVR? And I'm wondering if you think to the extent this that's an issue you'll see any alleviation of those capacity constraints on a timely fashion? Just trying to figure out if demand side here is starting to hit limiting items? Thank you.

Thanks, Isaac. I appreciate the question. And we’ve been asked that before. We continue to feel the same way. We just don't see this capacity as an issue as it relates to the TAVR. We see places where within an existing system, they're able to do six or even seven TAVRs in a day, so it's remarkable the way we are able to expand the capacity. And the bigger question is their ability to add teams, and hospitals can be pretty resourceful. I think they find – most hospitals find that they're able to be profitable and they will make the addition teams. So far, capacity is not really been an issue for us.

Okay. Thanks. And then maybe just a follow-up on the competitive landscape as we look into 2018 and beyond, what's your best guess when you think about how lot of your U.S. customers behave in terms of how they're going to think about maintaining the training required for multiple platforms? Is there sort of rule of thumb here you can share with us regards to whether or not two or three or more platforms start to become problematic from a training perspective and just kind of curious what that means, if whether or not that would change in the event that pricing were to become more aggressive from some of the new entrants?

Yeah. We think, typically, most hospitals like to have more than one system on the shelf. Either because of a anatomical reasons or just competitive reasons, they like to have more than one. But we find that typically, they will have -- we call it a workhorse product or one valve that they're going to go most of the time, they get very comfortable with it, they have good outcomes. We think that will continue to be the case and that will be the primary dynamics you will experience. I think it will be unusual to see three or four systems on hospital shelf for the exact reasons you've mentioned.

Understood. Thank you.

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

Hi. Good afternoon. Mike, I had a question about the fourth quarter. Are you just basically assuming that the U.S. market decelerates below 20%?

It's tough to know. It's probably that's the case. There may be a little bit of share in there, but it's probably moving in that direction over time. So we don't expect that there's going to be a big share shift necessarily in the quarter. So, I would expect the market to grow probably in line with our expectations. So, I don't know, the 15% to 20% range is probably moving in that direction.

Okay, perfect. And then just changing gears to PARTNER III. What's the average age in that trial of the patients? And also, is there an update in there to really allow for aggressive use in younger tricuspid patients?

Yeah. So unfortunately, we're not able to see the age or -- and I'm not supposed to see the age of these patients. This data set this up and opened up yet, so I don't have that. I can't really share the characteristics of it. The PARTNER III study should support indication expansion for -- with no particular age limit. So, I don't know that it is going to be important. In terms of bicuspid, I don't know if I have a really clear answer for you. We're running a registry just for that group of patients hopefully, we get some insight into that.

Thanks so much.

Thank you. Our next question comes from the line of Josh Jennings with Cowen & Company. Please proceed.

Thanks. Good evening. I was hoping to ask about the SAPIEN 3 Ultra valve files and when -- what should we expect to see data. And with the added features of taller outer skirt, how low should we think about the PBL rate going from SAPIEN 3 Ultra?

Yeah. So, we're excited about getting the SAPIEN 3 Ultra out there. It's -- will have a CE Mark, and so you'll see the data ultimately following the CE Mark. So, I'd imagine may be mid-next year look at some of that in. In terms of its performance, it's got a couple of features and that's current that good really improve the performance. taller skirt we should make it -- we should get little better acute results. And then the skirt is also made of a different material, which should promote tissue in growth, and so we're hopeful that, that has some improvement on long-term results. So, we're optimistic about this valve platform. But again, I think it's one of those things that you start seeing it may be a middle of next year and then we'll certainly be following it over time.

Great. And it sounds like the U.S. approval will be in front of potential low-risk approval. I wanted to ask about the low risk indication with the trial enrollment completion slated for the end of this year, are you expecting to have a Continued Access Program ongoing in 2018?

Okay. So first, -- yeah, we would expect that we would be able to get the Ultra valve into the U.S. because it should be a PMA supplement we would hope that by the end of 2018, that we'd get there. I don't know if we've made a decision on continued access. I wouldn't necessarily count on that. So, it's probably too soon. We – I'm certain will be in discussions with FDA about it. But right now, I don't have any good answer for you or clear one.

Understood. Thanks for the answers.

Sure.

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

Hi. Thanks for taking the question. I was wondering Scott, if you could go to the gross margin for this current quarter. And can you quantify what the impact of Puerto Rico was or just cost from the hurricanes? And maybe just compare quarter-to-quarter what some of the puts and takes are? And that have a follow-up after that.

Sure, Kristen. So, Hurricane Maria, about 40 basis points. But let me take you through the whole gross margin profile. But it was pretty much as we expected it would turn out like, excluding special events. So, we ended at about 120 basis points higher than third quarter 2016. 220 basis points higher, driven by mix and about 140 basis points FX of about 0.5 point in supply chain and manufacturing benefits year-over-year of about 30 basis points. It was offset by Maria which you talked about before the closure of our Swiss facility and accelerating some depreciation on those assets is about 20 basis points. And then other items, about 40 basis points. So overall, it's pretty much like we expected. It turned into earnings per share of $0.88, excluding the actual excess tax benefit versus what we had expected. So, we expected a higher ETB than we thought would achieve, which is why our EPS looks like $0.84, but the way we're thinking about it modeling it, it's more like $0.88.

Okay. Perfect. And then Mike, just regarding CENTERA, I know that you said you're going to use the experience early on what to guide your use, but what exactly are you looking for? You guys know the transcatheter valve market very well at this stage, so what are going to be some of the milestones that you be looking at and considering in order to determine what exactly will be definitive, I guess, to inform whether or not you'll pursue I guess, and expanded launch of CENTERA in Europe or a launch in the United States?

Yeah. We're also – it's going to be interesting, Kristen, for us to observe the particular the behavior of physicians when they have CENTERA in their hands. CENTERA has a lot of advantages associated with it. Some of those physicians that are probably use self-expanding systems are probably spending much less at this point. So, we're going to have a chance to see just how they feel about an improved system that maybe has a higher price than the systems that they're using today and we look forward to that feedback and that's going to teach us a lot about what we need to think about for the future.

So, it's just mainly a cost, I guess, differential in your mind?

They're probably use of cost differential, but that's not really driving us what we're really interested here in is seeing whether – the value framework for CENTERA is the way that we believe it will be. We think physicians are going to be pleased with it and are going to prefer CENTERA, but would really like to see that improving clinical practice.

Okay. All right. Thanks for taking my questions. I appreciate it.

Thank you. Our next question comes from the line of John Gillings with JMP Securities. Please proceed.

Hey thanks guys. Just one from me tonight big -picture one on the mitral segment. So, given that we're in the early stages of developing treatments for mitral disease and you've got what's shaping up to be a pretty robust portfolio of mitral products. Can you help us understand the extent to which there's cross-pollination of ideas between these teams and how that's shaping Edwards' overall approach to mitral disease, product development and, you know, maybe if that portfolio view had any impact on the decision to make some of the changes to the CardiAQ valve? Thanks.

Yeah. Thanks. Inside Edwards, we've decided to organize our transcatheter mitral and tricuspid programs into a team that works together, so even though there are dedicated teams for each of these technologies, they share a lot of learning. Certainly, there's a lot of commonality and sharing across the clinical team across the regulatory team across the operations and supply chain team that actually goes throughout the organization. The management team sit together and they talk about their progress and their set-backs. It is very much does inform our strategy. So, yeah, it's a key opportunity that we have by having this portfolio of products that we're able to learn from each other. So, we think it's going to pay off. Actually, we think it will be a key success factor for Edwards in the long run and we're using that insight to actually shape our strategy today. Again, you'll get a chance to hear more of that. We feel like it's a little tough to do on a quarterly conference call, but we'll be able to get into it a little deeper at our Investor Conference in December.

Perfect. Thanks, guys.

Thank you.

Okay. Well, thank you for your continued interest in Edwards. Scott and David and I welcome any additional questions by telephone. And 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 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 missed any portion of today's call, the telephonic replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and use conference number 13670702. I’ll repeat all those numbers for you, 877-660-6853 or 201-612-7415 and the conference number is 13670702. In addition, 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.