Edwards Lifesciences Corporation

Greetings and welcome to the Edwards Life Sciences second quarter 2019 results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mark Wilterding, Vice President, Investor Relations. Thank you. Please begin.

Thank you, Roya. Good afternoon, and thank you for joining us today. Just after the close of regular trading, Edwards Life Sciences released its second quarter 2019 financial results. During today's call, management will discuss the results included in the press release and accompanied financial schedules, and then use the remaining time for Q&A. Our presenters on today's call are Mike Musallam, Chairman and Chief Executive Officer, and Scott Ullam, Chief Financial Officer. Before we begin, I'd like to remind you that today's During today's call, management will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to, financial guidance and expectations for longer-term growth opportunities, regulatory approvals, clinical trials, litigation, reimbursement, competitive matters, and foreign currency fluctuations. These statements speak only as of the date on which they are made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause differences and important product safety information may be found in the press release. Our 2018 annual report on Form 10-K and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. Finally, a quick reminder that when using terms underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they're referring to gap results. Additional information about the use of non-gap measures is included in today's press release and available at edwards.com. With that, I'd like to turn the call over to Mike for his comments.

Thank you, Mark, and welcome to the team. We're pleased to report strong second quarter total adjusted sales of $1.1 billion. representing 14% underlying sales growth with valid strength across all four in TAVR, which reinforces our belief in our project. We continue to aggressively pursue breakthrough technologies. Return drives significant future value. Given our first half performance, we have increased confidence that we will again achieve double sales. Global sales were $678 million, up 18% on an underlying basis. We anticipated growth would accelerate after the first quarter. and our results this quarter exceeded our expectations. ...to exercise price discipline. For the first half of 2019... ...teens, consistent with our guidance from the December Investor Conference. ...high teens, and we estimate that our share of procedures was stable. We believe growth was stimulated by increased... confidence in the therapy following the strong partner three clinical results presented and published in late Q across both high and low volume centers. Nevertheless, based on our continued research, we are increasingly confident that there are many patients who would benefit from TAVR and who are not diagnosed, referred, or treated today. We remain focused on our efforts to increase awareness and diagnosis that they need based on medical guidelines. Patients are continuing to be treated with the Partner 3 low-risk continued access protocol in more than 30 high-volume clinical trials. FDA will approve Sapien 3 and Sapien 3 Ultra for patients at low surgical risk. Laid in Q2, the U.S. Centers for Medicare and Medicaid Services, which we believe better reflects today's practices and the needs of patients. While the NCD did not achieve equipoise requirements and more streamlined patient evaluation process, our meeting suffering from severe aortic stenosis. Outside the U.S., in the second quarter, we estimate total TAVR procedures. We continue to see excellent opportunities for OUS growth at low. In Europe, we estimate that TAVR procedures also grow in the mid-teens on a year-over-year basis, and Edwards growth was comparable. We are continuing our launch of Sapien 3 Ultra System in Europe, which we expect to account for a majority of our TAVR sales in Europe by year-end. ...number of centers and did not contribute meaningfully to this growth. ...adoption driven by Sapien 3 and new centers are being qualified. we remained focused on expanding the availability of TAVR therapy throughout the country, driven by our belief that aortic surgery can help a large elderly population. As we discussed earlier this year, the landmark PARTNER III trial in the low-risk patient population. A highlight was a low 1% risk of death or stroke at one year. Combined with prior aortic stenosis are ideally treated with Edwards Best in Class Sapien III platform. Given the pending approval of our balloon expandable platform, we have made the difficult decision to discontinue the Sentera program. While the Sentera valve has demonstrated excellent clinical outcomes, it is required to optimize deliverability as well as expanding the indications to match Sapien III are significant. By focusing resources on our robust pipeline of next generation balloon expandable technologies and indication expansion trials. We continue to be pleased with the Sapien 3 Ultra Valve performance, and throughout the discipline launch, our confidence has been reinforced by positive clinician feedback. Many clinicians have also expressed a preference for aspects of the Sapien 3 delivery system, and we're working to incorporate those changes to optimize the Sapien 3 Ultra system. We expect physicians to continue to transition from Sapien 3 to Sapien 3 Ultra system around the world. In summary, our year-to-date underlying sales growth in TAVR was 14% and we are raising our full year guidance to around the top end of our previous 11 to 15% range. Although the strategic decisions we made in the quarter resulted in a special charge, these decisions strengthened the execution of our long-term strategy. We are encouraged that the TAVR opportunity remains robust and continue to believe that our TAVR innovations will sustain our strong global leadership position. Turning to transcatheter mitral and tricuspid therapies, or TMTT, second quarter global revenue of $7 million was lifted by the continued rollout of Pascal in Europe. In our early commercial experience, we remained focused on physician training, procedural success, and great outcomes for patients. We're pleased with our progress as well as the positive physician feedback that we're receiving regarding Pascal as a differentiated therapy. We also treated patients commercially with our cardio band, mitral and tricuspid annular reduction therapies, and there have been improvement in supply as we continue transferring production to other Edwards manufacturing sites. As we advance our comprehensive portfolio, we remain focused on developing clinical evidence. We recently presented positive data on our mitral and tricuspid experience with Pascal and Cardioband at the URO-PCR and TBT medical meetings. We're encouraged by the data from the CLAS study of the Pascal system. At six months, patients experienced substantial MR reduction as well as clinically and statistically significant improvements in functional status, exercise capability, and quality of life. Looking ahead in mitral repair, as previously announced, we receive approval of our class 2F pivotal trial for patients with secondary or functional mitral valve disease and plan to initiate enrollment in late 2019. and we continue to enroll in our CLASP 2D pivotal trial to study Pascal in primary or degenerative mitral valve disease. In mitral valve replacement, we're pleased with the ongoing early feasibility study experience in both EVOC and SAPIEN M3 transeptal therapies, and we remain on track to initiate a US pivotal trial of SAPIEN M3 in late 2019. In transcatheter tricuspid repair, we've gained significant clinical experience through our three simultaneous US early feasibility studies for PASCAL, CARDIOBAND, and FORMA. We believe that PASCAL and CARDIOBAND can treat a significant number of patients suffering from tricuspid regurgitation, supporting further optimization of our portfolio. We plan to initiate a pivotal trial using Pascal in the tricuspid position late this year and plan to initiate a second tricuspid pivotal trial with CardioBand in the future. Further, while we have experienced positive clinical outcomes for patients who've been treated with FORMA, we've made the decision to discontinue work on FORMA to support the acceleration of other tricuspid programs. Overall, we remain enthusiastic about the opportunities to treat patients suffering from tricuspid and mitral disease with our transcatheter therapies. We remain on track to achieve our 2019 milestones, including continued enrollment in our class 2D pivotal trial, as well as planning to initiate three additional pivotal trials by late 2019. And you can expect to hear more updates regarding our one-year class study data at the upcoming TCT medical meeting. In summary, we remain confident in achieving approximately $40 million of total TMTT revenue for 2019. We continue to estimate the global TMTT opportunity to reach approximately $3 billion by 2024 and are passionate about bringing a portfolio of solutions for patients in need. In surgical structural heart, sales for the quarter were $218 million and were up 2% on an underlying basis. Growth was lifted by increased adoption of our premium high-value technologies and strength outside the U.S. This was partially offset by lower surgical aortic heart valve procedures in the U.S. as TAVR adoption expanded. Of particular note, the Inspiris Resilia aortic valve continued to grow significantly in all regions with notable usage in more active patients who might otherwise get a mechanical valve. Separately, we now anticipate that our HARPOON system, an echo-guided beating heart microvalve repair therapy, will be commercially available in Europe in late 2019 versus our previous expectation for a mid-2019 launch. The delay in timing reflects what we believe is generally a slower regulatory environment in Europe. We remain enthusiastic about this unique therapy and believe that it will offer the potential for earlier treatment of degenerative mitral valve disease while providing faster recovery and more consistent outcomes for patients. In summary, in surgical structural heart, we remain comfortable with our full-year underlying sales growth range of 1% to 3%. We remain excited about our ability to provide innovative surgical treatment options for more patients and to extend our global leadership in premium surgical structural heart technologies. In critical care, sales for the quarter were $184 million and grew 9% on an underlying basis. All product lines contributed to this performance, boosted by Hemisphere sales primarily in the US and Europe. Hemispheres, our all-in-one monitoring platform, is an important growth driver in 2019 and with the recent Fulmark Acumen Hypotension Index software. This platform is designed to provide greater clarity on a patient's hemodynamic status while introducing a predictive algorithm to improve decision-making. In April, we successfully completed our acquisition of CasMed's Foresight, a non-invasive cerebral oximetry monitoring technology. Sales of CASMED were $5 million in the quarter. Integration is underway to enable the use of Foresight on our Hemisphere platform. This combination will create a unique offering of enhanced recovery tools and predictive analytics capabilities to further strengthen our leadership in smart monitoring. In summary, given the strong first half sales performance, and the momentum from the recent Hemisphere launches, we now expect full-year 2019 underlying sales growth of 8% to 10%, an increase versus our previous 5% to 7% projection. And now I'll turn the call over to Scott.

Thanks a lot, Mike. Our top-line performance this quarter was outstanding, with underlying sales growth of 13.6%, reflecting strength in all four of our product lines across all regions. Particularly strong this quarter was our TAVR sales, which likely benefit... Our adjusted earnings per share in the second quarter of $1... Driven by our strong sales performance, partially offset by higher... This quarter, we made strategic decisions regarding our transcatheter aortic valve portfolio. which resulted in a $46 million special charge, primarily comprised of finished goods inventory. This charge, combined with other adjustments, reduced our gap earnings per share. I mean, our gap and adjusted earnings per share is included with today's release. This is guidance for 2019. For the quarter, our adjusted... ...4.4% in the same period last year. ...product mix, partially offset by investments in our global supply... ...chain expansion. We continue to expect our full-year foreign exchange than originally anticipated at our investor conference. Selling general and administrative expenses in the second quarter were $308 million, or 28.4% of sales. This 12% increase over the prior year was driven by transcatheter structural heart field personnel-related expenses, including expanding the TMTT field organization in Europe, partially offset by the strengthening of the dollar. We continue to expect SG&A, excluding special items, to be between 28% and 29% of sales for the full year 2019. Research and development expenses in the quarter grew 25% over the prior year to $192 million, or 17.7% of sales. This increase was primarily the result of significant investments in our transcatheter structural heart programs, including an increase in clinical research for the Pascal system. For the full year 2019, we continue to expect research and development, excluding special items, to be between 17 and 18 percent of sales. Turning to taxes, our reported tax rate was 10.7 percent for the quarter, or 12.0 percent, excluding the impact of special items. This rate included a 530 basis point benefit, or eight cents, from the accounting for employee stock-based compensation. We continue to expect our full-year 2019 tax rate, excluding special items, to be between 12% and 14%, which reflects the continuing benefit of accounting for employee stock-based compensation. Foreign exchange rates decreased second-quarter sales growth by approximately 2%, or $20 million, compared to the prior year. At current rates, we continue to estimate an approximate $60 million negative impact, or about 1.5%, to full-year 2019 sales compared to the prior year. Foreign exchange rates positively impacted our second quarter gross profit margin by 260 basis points compared to the prior year. Relative to our April guidance, FX

less capital spending of $64 million.

We now on the top of our $800 to $900 million guidance. Our strategy to increase global capacity and increase the and short-term investments of $934 million. Total debt was $594 million. Contrary to the previous presentation, Edwards repurchased 1.4 million shares in the second quarter. The level of outstanding during the second quarter remained level with the prior quarter at $2.1 million. The level of outstanding for 2019 to be between $211 million and $213 million. Turning to our 2019 measurements in 2019, we are increasing the bottom end of our sales guidance ranges for Edwards and for TAVR. For total sales and underlying sales growth around the top end of our previous 9% to 12% range. For TAVR, we now continue to expect TMTT sales of approximately $40 million, and surgical structural heart sales of $810 to $850 million. We now expect critical care sales, including CasMed, around the top end of our previous $700 to $750 million range. We are raising our full-year adjusted earnings per share guidance range to $5.20 to $5.40, up from our previous guidance of $5.10 to $5.35. For the third quarter of 2019, our seasonally lowest quarter. At current foreign exchange rates, we project total sales to be between $1.02 billion and $1.06 billion, and adjusted earnings per share of $1.13 to $1.23. And with that, I'll pass it back to Mike.

Thanks, Scott. We're very pleased with our strong performance in the first half of 2019. As patients and clinicians increasingly understand the significant benefits of transcatheter-based technologies supported by the substantial body of compelling evidence, we remain as optimistic as ever about the long-term growth opportunity. Our foundation of leadership, combined with a robust product pipeline, positions us well for continued success. And with that, I'll turn it back over to Mark.

Thanks, Mike. We're ready to take questions now. In order to allow for broad participation, we ask that you please limit the number of questions to one plus one follow-up. If you have additional questions, please re-enter the queue and management will answer as many questions as possible during the remainder of the call.

Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. And thank you. Our first question comes from the line of Bob Hopkins with Bank of America. Please proceed.

Great, thank you, and congrats on a phenomenal second quarter. I guess the first and obvious question is really on the the TAVR growth acceleration in the quarter, both for yourselves and for the market. Can you just comment on what drove that acceleration? How much do you think that was actually low risk versus some other driver? Thank you.

Yeah, thanks, Bob. You know, there were multiple factors that probably contributed to the growth in Q2, and it's pretty hard for us to isolate each one. I'll remind you, there's been high variability in the past quarter to quarter. It just has not been uncommon in TAVR. Recall the Q1 growth rate was lower than the recent past, and the second quarter here was certainly higher. You look at the first half in total, and it was around 14% back in the mid-teens, but it was quite a difference between quarters, and there could have been some seasonality associated with it. But to add to that, I mean, to be fair, we believe that the growth might have been stimulated globally just by the increased confidence in the therapy following the strong Partner 3 clinical trial results. It could have had, you know, several influences. You know, there was a lot of awareness and publicity. That could have encouraged treatment. It's possible that there's some borderline patients that received TAVR. There was a minor increase and more CAP. But what we were encouraged by in particular, Bob, was that was broad-based growth across the globe, and that even in the U.S., it was in both large and lower-volume centers.

Great. Thanks for that. I just wanted to ask as one follow-up just on Mitral. You're still guiding to approximately $40 million. You know, you need to almost triple your revenue in the back half. So just can you talk, Mike, a little bit about what gives you the confidence that, you know, Pascal can accelerate as much as you're expecting in the back half of the year?

Yeah. So... We weren't really focused on the numbers this quarter. Our early commercial experience, we just stayed focused on physician training, procedural success, and just trying to get great outcomes for patients. The procedures did actually increase quite a bit over Q2, and it's possible that some of the Q1 sales actually was consumed in Q2, but we're pleased with the kind of feedback that we've gotten on Pascal, and we remain confident in achieving the $40 million guidance.

Great. Thank you.

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

Thanks for taking the question. Just two for me. You know, Mike, just thinking about TAVR guidance for the back half of the year, it's It's pretty stable, frankly, with what we saw from a growth perspective in the second quarter. So is that how we should think about the business? Why should we not expect sort of further inflection, or do you expect that after the approval and NCD and then a quick follow-up?

I'm not sure I followed exactly. You're saying why shouldn't it be more? Is that the question, David?

If growth rates, your back half, top out of the range, means back half of the year is consistent with the second quarter. So the question is why do we not see – further inflection, or do you not expect that until we see the approval or NCD?

Yeah, we think it's premature. As you're well aware here, we've decided to discontinue the Sentera program, so that won't be a driver of growth. We know that Boston Scientific is in the process of launching, and we expect that to have some impact. So those are going to be some headwinds, and so we feel pretty good about where we guided things, David.

Okay, that's helpful. And then, Mike, just competition was a big debate this year. So competition in the U.S. from a third entrant, you suggested stable share this quarter. Was there any impact in the second quarter from new entrants? And how should we think about the second half of the year relative to new entrants? Thanks so much.

Yeah, you know, it's always difficult for us to estimate market growth, but we assume that the growth in procedures overall and our growth was quite comparable in As it relates to Boston, it appears that they're executing a discipline launch and that they're focusing on training, and we expect them to get more active in the coming months. But we remain confident in our guidance.

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

Hey, guys. Congrats on a really nice quarter here. Mike, just back on this TAVR, you know, guidance for the back half. I just want to understand that, you know, sequentially we had 800 basis points of acceleration versus 1Q. Your comms did not seem like it was easier. And based on your comments, this was broad-based, right? This was not just a U.S. phenomenon. You saw this across the geographies. Your comments on Europe accelerating, I think that's the first time we've seen Europe, you guys being holding back to mid-teens in a while. And this is all happening before the formal approval, right? So back to, I guess, the question. Turkey was so strong, why shouldn't it accelerate post-E?

that, Vijay, and I can understand how you do that analysis, but we certainly expected Q2 to be stronger. Q1, we think, turned out surprisingly low, and there may be some reasons behind it that we don't fully understand that has to do with seasonality and the way the calendar fell. Q2 turned out to be Lay out the back half of the year, as I said, you know, we would expect to get the approval sometime in Q3. And remember that Q3 is traditionally our slowest seasonal quarter, as it is for our

contribution was in TMTP. Is it being used in mitral? Because I certainly heard about tricuspid and the trial structural area.

Yeah, so the cardio band supply our operators to really get in, get to come down the learning curve and allow... Okay.

Thank you.

Our next... Thanks, guys. Thanks for taking the question, and congrats on the... by the midpoint of the Q2 guidance by about $0.06, but you raise the fiscal... Why is that? And I had one follow-up.

So you're generally right about the math, Larry. This is, by the way, about $0.12 over our investor conference guidance. But effectively, expenses... And so as we look at the second half of the year, we're also expecting expenses to come in higher than we originally expected. Remember, we've got new R&D and SG&A expenses that go along with those.

Thank you. And then, Mike, on Sapien 3 Ultra, do you think the balloon issues are planning to roll out Ultra more aggressively? And can you share your prepared remarks? Thanks for taking the questions.

Yeah, thanks, Larry. Yeah, what we expressed is, you know, we're... ...the valve itself and the way that that valve is performing. But we are... ...those into the ultra system. Ultimately, we... Ultimately, we think that... That will have impact on the balloon issue. The balloon issue, we identified some factors that were associated with that, and actually there's been less of that. We expect that to be a real enhancement in that regard.

on the international market, the pricing dynamics, and I'm just trying to make sure I understand what's going on here.

Procedure growth did pick up in the second quarter. Growth was comparable with the market, so we didn't really see a share shift And, you know, this is true year over year. It's a little difficult to say.

Our team would say that there was... ...of the Continue to Access program in low risk. On what you may think it helps...

please proceed.

Great, and congrats on a nice quarter. I heard you mention comments that the M3 is moving into pivotal trials late in this year. I didn't hear an update on timing for evoke. Can you just give us an update on if you're doing implants and patients in both of those right now and the status for evoke?

Yes, we are doing patients with both systems. We've been really pleased with the feedback on both systems. We have, at this point, decided that we're going to initiate the Sapien M3 clinical trial before the end of the year. One of the reasons that we feel comfortable going first with that is because we have literally thousands of patients in which the Sapien valve has been used in the mitral position. So it gives us an opportunity to start there. But we don't mean to send a signal that we're not excited about the Evoque platform. We also feel great. Sapient M3 is going to go first.

And you gave some good color on what you thought about second quarter and maybe some of the drivers of growth there. But maybe just diving into the international markets a little bit and if you could break out Europe and outside of Europe. You know, this is a market that's been doing low risk for a while. It's been growing mid-teens for an impressive number of years. What is it there that you're seeing in trends that drove the growth this quarter well above the expectations? Was it less competitive pricing? Was it some change in competitive dynamics? Was it some markets doing better than others? Any kind of color you could give would be great. Thanks.

Sure. This was a really remarkably level quarter for us in that we experienced double digit growth really around the globe and that was driven by TAVR. In Europe in particular what we have seen is that the less penetrated countries continue to grow faster than the more penetrated countries but there's still a ways to go. Europe is influenced to some extent by its reimbursement programs and so that's a key element of this but I think you said that there was already low risk in Europe. Actually, there's no low risk approval at the EU level. That will probably come in 2020. But we do think that there was some influence from the Partner 3 data that appeared at the end of Q1, and that that probably had some impact on the treatment of patients in the quarter. Thanks a lot.

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

Hi, this is actually Cecilia. I'm for Jason, and thank you for taking the questions. I just wanted to ask about Japan and the strong TAVR adoption trends you've seen recently just juxtaposed with the current number of qualified centers in the region. And as you look forward, can you talk about the TAVR upside you view here? the legwork necessary to really open up the opportunity? What still needs to be done to increase the total number of qualified centers as well as establish and improve current referral patterns?

Yeah, thank you, Cecilia. Yeah, the growth rate in Japan has been nice, and we've been pleased with that, but we're not pleased at all with the treatment rates in Japan. Given the large elderly population there, we would expect TAVR penetration to be much higher at this stage of the game. And we believe that one of the reasons it's not higher is because it's really been limited in terms of the way their system has allowed centers to start up and that there should be more centers. And the centers that are doing it should probably be doing more procedures. So we still have our work to do to make sure that proper policies are put in place, and we are applying energy to do that. So although Japan is nice, it's still a big opportunity for patients to be treated at a much higher rate.

Okay, great. Thank you. And then just turning to Europe, I realize it's still very early in the process, but could you talk more about your ongoing PASCAL launch in the region and specifically the training programs you're implementing, the learning curve associated with the platform, and adoption trends within centers following initial utilization? And just what types of patients are you seeing the platform be used in initially a center's trial of the device? And where does this expand in your view longer term?

Yeah, thanks. So, you know, early on here, we've really put a premium on making sure that the training was very well done, that we had great procedural success, that patients had great outcomes, and that's been job one for us. It really hasn't been so much about the numbers. We've gotten a lot of great feedback. We saw the number of procedures really accelerate in Q2, and we are indeed adding centers in Europe now. during Q3 and Q4. So you can tell from our projection that we expect to do around $40 million in 2019, and that's going to be primarily from Pascal. So I think it kind of speaks for itself in terms of what we think the adoption rate will be.

Great. Thank you.

Thank you. Our next question comes from the line of Matt Taylor with UBS. Please proceed.

Hi, thanks for taking the question. So the first question I wanted to ask was, you mentioned this difficult decision to discontinue. Tara, I was wondering if you could talk a little bit more about that, as certainly you should have, but you're not going to have a self-expanding option going forward, and What does that do in terms of the additional flexibility?

Thanks a lot, Matt. You're right. A lot of this was headlined, you know, the incredible body of evidence that exists on the SAPIEN platform, and SAPIEN 3 in particular and the way it performed in the Partner 3 data has just given us a lot of confidence, and it's also placed a very high bar in terms of how systems need to perform. And although we are really pleased and excited about Sentera, and there's a number of clinicians are as well, and that valve performed well, the way that valve delivers didn't work as well in all anatomies as we would have liked. So it would have required us to make some enhancements to the delivery system. And at the same time, remember, the Sentera trial that we're involved in now would only give us an intermediate risk indication, and we would have to continue to do trials So when we put that all together and thought about where we're going to apply the resources of our team and how much confidence we have in the existing platform and how excited we are on future platforms, it was a tough decision, but we made it and decided that we're going to focus our resources on the next generations as well as the excitement we have around our existing platforms.

Okay, I understand. And then can you just spend a second on how you've kind of retooled the investments in mitral and tricuspid as kind of a follow-up to that? And where are you accelerating these more? You mentioned the Pascal trial starting in tricuspid later this year. Maybe give us some intel on where you're really trying to accelerate.

Yeah, so a few things. One is Pascal is really kind of going first on the repair side, right? So we were pleased. Now we already had a program that was focused on these primary or degenerative patients, and to be able to launch a pivotal trial for the functional or secondary patients we're excited about because that's a significant group of patients that we're looking forward to treat. On the tricuspid side, after a lot of deliberation, we decided that our first tricuspid trial should be done with PAP. made the tough decision to discontinue the work that we have on form. FDA in terms of what that trial design would look like. And so hopefully that gives you a sense. And at the same time, I think we just explained where we are on the mitral replacement with M3.

Thank you. Our next question comes from the line of Matt Misic with Credit Suisse. Please proceed.

Hi. Thanks for taking the questions, and I'll echo everyone's congrats on the quarter. Mike, if you could. you know, elaborate, maybe it doesn't really sound like it was low-risk patients, you know, that came in, but you've said a few times awareness of and the impact of the partner data. So is it, I mean, is it something like stroke risk or something that stood out or changed the conversation for the, say, the intermediate risk indications or, you know, any kind of color that you can provide on, you know, how does awareness translate into volumes? And then I had one follow-up.

Yeah, thanks very much, Matt. I understand the confusion, and I wish I could point you to one thing that really drove this, and I know this call feels a little bit like a birthday party, but there are a bunch of serious issues in here. We think that there was just plain variability between the first quarter and the second quarter. We believe that all of this... data that was presented at the end of Q1 generated a lot of buzz, a lot of excitement, and that people started moving through the system. We know that people don't move through the system that fast, and so oftentimes we think it could take 90, 120 days, even more, for people to move through it. So, you know, how much could have gotten stimulated and move in Q2 is a question mark. So, you know, again, we don't think it's about CAP. We don't think there were a significant number of low-risk patients that were treated in the quarter. We really think that it was just the stimulation of the overall number of TAVR procedures.

Okay, that's helpful, Collar. I understand it's difficult to pin down, but then a similar question heading into Q3, and again, cap, let's just say not a factor per se. Maybe talk about seasonality. I mean, last year, you're down about $30 million or so sequentially, Q2 to Q3, I think, and maybe what does cause a number to come down the way, say, it would need to come down sequentially in order to hit the guns you've laid out for Q3?

Yeah, it's a good question. So you know that Q3 is a seasonably slow quarter for our customers, and so that kind of goes without saying. It wasn't so long ago. I'll remind you, back in 2016, after we got the approval that Q3 was lower growth, than Q2, and I'm not sure we fully explained exactly why that was the case, but it happened. And so it causes us to just stay thoughtful and moderate about what our expectations are. We expect to have approval, but again, if the approval does come, it's probably likely to come during one of the slowest times of the year. Fair enough. Thank you.

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

Hi, good afternoon, and thanks for taking the questions. Just two questions on low-risk approval. First one is, you know, what gives you the confidence to kind of narrow the guidance range for approval timelines to 3Q? And should we be thinking about, could approval occur in the next week, or should we be thinking later in the quarter, in September? And then just have one follow-up.

Yeah, thanks for the question. Yeah, I understand where you're coming from, Josh. So what happens usually is we go through questions back and forth with FDA, and you can usually tell when the questions are winding down and when they're coming down to the final questions. And so it makes us feel we're pretty close. One of the things that's not clear is whether our approval would come at the same time or whether the FDA might choose to move two competitors at the same time could be a factor. So we're saying based on everything we know, probably Q3, but we just can't be any more specific than that.

Understood. And just in terms of low-risk approval and the label, I think you've been clear you don't expect any kind of exclusion of bicuspid. I just wanted to sanity check that, that that's still your view. But to follow up on top of that is, I mean, could you have a labeling advantage in the early days of low-risk? I mean, it's still enrolling or just started enrolling a couple months. Could you have an advantage in the bicuspid data together? Thanks for taking the questions.

Yeah, thanks.

Yeah, I'll just remind the audience that bicuspid is Raj Makar's data, which was quite encouraging. We feel comfortable that it will be treated in the future much like it is today.

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

Yeah, thanks. Chris on the quarter, guys. So, Mike, just to start off with, how close is Class 2D to completing enrollment? Just trying to get a better sense for the regulatory timeline there.

Yeah, thanks. So we've been enrolling for a while. It's proceeding largely as planned. We're continuing to activate more centers. I don't think we have anything more to share on that. We really haven't laid out what we think it's going to take. This is the first time that we've been engaged in a mitral transcatheter trial just like this. But, you know, it is going largely as we planned.

Okay. And can you talk a little bit more about the tricuspid opportunity? We haven't seen a ton of data yet on these devices in that position, but you guys are moving ahead into two trials. So I suggest you're encouraged by what you're seeing. What types of patients are you looking to treat in these studies? Is there going to be any difference in terms of how you set up the one for Cardioban versus Pascal? Anything you can share there would be helpful.

Yeah, thanks. So... You know, this is really going to be new for these patients. Today they don't have very much options. One of the reasons that we're enthused is because clinicians are enthused and they say, we really could use a transcatheter option to be able to help these patients. As we mentioned earlier on the call, we actually have done three early feasibility studies in the tricuspid position. And even though each of those systems behave differently, we've consistently heard back that patients really get an improvement in their quality of life following that. Now, of course, that's anecdotal. We need to do that in a high-quality fashion. We really have not defined the clinical trial at this point. We're working with FDA at this point. But it's going to be some kind of a trial that actually compares it to medical management, probably. And so it'll be that fundamental. Thanks.

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

Yeah, hi, good afternoon. I wonder if I could maybe get your thoughts on the NCD, the expanded NCD or the updated NCD that came out a few weeks ago. Do you have any thoughts on, you know, what impact that will have on the market? Are you seeing new centers already starting to gear up to start offering TAVR?

Yeah, thanks for the question, Raj. So, yeah, you know, we often think that the primary risk that if faced severe aortic stenosis patients is not the treatment complications, but the risk of not receiving treatment at all. And we really commend CMS for a thoughtful approach that I think really is going to modernize the requirements, and it will be more streamlined for patients. We know that there are a number of centers that are anxious to open TAVR programs. And when we look ahead, we say, yeah, it's reasonable to estimate that approximately 200 new sites could achieve eligibility to initiate a TAVR program by the end of 2020.

And, you know, in that context, what's your sense on, you know, how expansive that will be to procedure volumes versus sort of cannibalizing patients that would have been referred previously?

Yeah, you know, we don't know this for sure, but based on our... Past experience, we think new centers often mean new patients. A pretty significant growth rate between now and then, and we think that's all part of it. The NCD kind of turned out the way we had hoped it would turn out and had planned for it to turn out, so not really outside of our existing guidance.

That's great. Thank you.

Thank you. Our next question comes from the line of Daniel Antifly with SBB Lering. Please proceed.

Hey, good afternoon, guys. Thanks so much for taking the question. Congrats on a really good quarter. And, Mike, I wish it was a birthday party. But anyway, just a quick question on you mentioned that a lot of these patients, or you didn't say a lot, I'm sorry. You mentioned that some of these patients might have been borderline patients. Do you have any sense? of how many patients would be considered borderline. And maybe to answer this question, do you have any better way would be to look at age? Any sense of where the age is creeping right now? Is it still about average age of 80? Is it moving lower? Have you seen in this quarter?

Yeah, thanks, Danielle. I appreciate the favorable comments. You know what? We just don't have anything quantifiable. What we hear back is pretty anecdotal, so I really can't track it for you. The borderline patients we don't think was the majority. We think it was a factor, but we just think that for whatever reason there was an acceleration. So we track what's going on in age, but that generally lags by a quarter or two, so we don't have a really clear handle on that at this time.

Yeah, okay, that's totally fair. And then just a quick follow-up on Europe and following up on Joanne's question around cost and Just wondering what's happening as you have conversations with some of the healthcare systems over in Europe, because some of the feedback I got at PCR was we love Sapien 3, but it's too expensive and we actually can't grow volumes because we're limited by the cost of the valves. They need to get cheaper. They need to get cheaper. What are you hearing? I understand you guys have been very disciplined about price, but not even as it relates to competition, but just from a volume perspective and patient access in Europe, and how might you address that longer term?

Yeah, thanks, Danielle. Yeah, we think some of the health care systems in Europe aren't fully prepared to pay for the quality and value that goes along with therapies like Tabard. Actually, I think when you compare with the value that it adds to the system, what it would cost to add a quality year of life and so forth, TAVR compares wonderfully with so many other therapies. We need to do a better job of influencing the policymakers about the importance of this therapy, and that's really what's key for us. We can understand why physicians are in a tough place. They have to live within the existing reimbursement system. But we think in some cases they don't fully reflect the value of the technology. That's our job to do.

Thank you so much.

Thank you. Our last question will come from the line of Tito Chickering with Deutsche Bank. Please proceed.

Good afternoon. Thanks for taking my questions and fitting me in until the end of this call. A couple questions. The first one, can you refresh us on the number of centers in the U.S. that are using Ultra? What is the reorder rate for the centers on Ultra versus Sapien 3? And how quickly are they converting into 100% Ultra?

So, I don't know the number of Ultra in the U.S. It's a small number. We were further along in Europe. We didn't give a projection of how far we were going to be overall. We did say that we thought it would account for the majority of procedures in Europe before the end of the year, and that ultimately we think that the Ultra system will replace Sapien III in all geographies.

Okay, and then two housekeeping questions. What impact does a discontinuing center have on your gross margins? And as you shift more valves into Ultra in Europe, how should we think about how that impacts your gross margins as you need to ramp up to production lines to full capacity?

So you're saying how is our gross margin impacted by the switch to Ultra from Sapien 3? Yep. Is that? Yeah. Yeah. Thank you. We think that's pretty negligible. Sentera would have been a more expensive system to make, but Ultra is comparable to the Sapien 3. Great. Thanks so much.

Sure.

All right. Well, thank you, everybody, for your continued interest in Edwards. Scott, Mark, and I welcome any additional questions by telephone. And with that, now back to you, Mark.

Thanks, Scott, and thank you all for joining us on today's call. Reconciliations between GAAP and non-GAAP numbers mentioned during the call, which include underlying sales and growth rates, as well as amounts adjusted for special items, are included in today's press release and can be found in the investor relations section of the website at edwards.com. If you missed any portion of today's call, replay will be available for 72 hours. To access this, please dial 877-660-6853 or 201-612-7415 and use the conference ID number 1369-1682. Additionally, an audio replay will be available on the investor relations section of the Edwards Life Sciences website. Thank you.

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