Edwards Lifesciences Corporation

Greetings. Welcome to the Edwards Life Sciences fourth quarter 2019 results conference call. At this time all participants are in the listen only mode. A question and answer session will follow the presentation. If anyone should require operator assistance during the conference, press star zero on your telephone keypad. Please note this conference call is being recorded. I will now turn the conference over to our host, Mark Wilterling, Vice President of Investor Relations. Thank you. You may begin.

Thanks, Diego. Good afternoon and thank you all for joining us. With me on today's call are Mike Musallem, Chairman and Chief Executive Officer, and Scott Ullam, Chief Financial Officer. Just after the close of regular trading, Edwards Life Sciences released its fourth quarter 2019 financial results. During today's call, management will discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q&A. Please note that 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 were 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 these differences, and important safety information may be found in the press release, our 2018 annual report on Form 10K, 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 are referring to GAAP measures. Reconciliation between GAAP and non-GAAP measures mentioned during the call are included in today's press release. With that, I'd like to turn the call over to Mike Musolum for his comments. Mike?

Thank you, Mark. 2019 was a year of major milestones and significant investments for Edwards. Ground-breaking Partner 3 clinical trial results demonstrated superiority of our Sapien 3 valve technology and led to U.S. regulatory approval for patients at low surgical risk. We also initiated our European Introduction of PASCAL, an important early addition to our portfolio of transcatheter mitral and tricuspid therapies, or TMTT. We extended our leadership position in surgical heart valves and implemented valuable additions to our smart monitoring technology and critical care with the growth of Hemisphere and the addition of CasMed. Most importantly, in 2019, even more patients benefited from Edwards' lifesaving technologies than ever before. I'd like to touch on several full-year financial highlights before I get into the quarterly details. Underlying sales increased 15% in 2019 to $4.3 billion, including double-digit organic growth in each region. Excluding special items, we were able to achieve 19% growth in earnings per share while increasing R&D by 21%. The significant increase in R&D investments this year helped fuel important breakthrough innovations to strengthen our longer-term outlook. As you heard at our investor conference last month, we are as convinced as ever about the tremendous opportunity to enhance patients' lives through the treatment of life-threatening conditions and bringing significant value to the health care system. Now turning to our quarterly results. We're pleased to report strong fourth quarter underlying sales growth of 19%. Our sales growth this quarter was significantly higher than we expected, led by transcatheter aortic valve replacement, or TAVR. Now let's take a closer look at TAVR. Full year 2019 global sales of $2.7 billion increased 21% on an underlying basis over the prior year, significantly exceeding our original guidance of 11 to 15% growth. Stronger than expected 2019 growth was lifted by increased awareness of the benefits of TAVR therapy with Sapien 3 following the strong Partner 3 clinical results presented and published in the first quarter of the year. The U.S. national coverage determination released late in the second quarter also resulted in improved access for more patients suffering from severe aortic stenosis. In the fourth quarter global TAVR sales were $763 million, an increase of approximately 30% on an underlying basis with impressive strength in the U.S. We estimated global TAVR procedure growth was comparable with our growth in the fourth quarter. Globally average selling prices were stable and we maintained our discipline pricing strategy. In the U.S. we estimate total TAVR procedures grew approximately 40% on a year over year basis and that Edwards growth was comparable. Stronger than expected growth in the fourth quarter continued to be driven by the step up in TAVR treatments following the strong Partner 3 evidence that led to the recent FDA indication expansion for our Sapien 3 and Sapien 3 Ultra systems. Fourth quarter growth was broad based across more than 700 centers in the U.S. Outside the U.S. in the teens on a year over year basis and Edwards growth was comparable. I'm particularly gratified to see the meaningful impact that our dedicated employees are having on helping so many patients around the world. In Europe Edwards growth was in the mid teens and we estimate our competitive position was stable. We continue to be encouraged by the strong adoption of TAVR especially in countries where therapy penetration is still low. It is also worth highlighting that in the fourth quarter Edwards became the first company to receive CE mark in Europe for the treatment of patients diagnosed with severe aortic stenosis who are at low risk for open heart surgery. Lastly the rollout of Sapien 3 Ultra is well underway in the U.S. and Europe. Early clinician feedback on the Ultra valve related to improved paravalve leak performance has been outstanding. We feel this is a significant step forward especially for low risk patients. In summary based on our momentum in TAVR we now expect our 2020 underlying sales growth to be around the top of the 12 to 15 percent range that we shared at our investor conference. As previously noted while we expect this healthy trend to continue we expect the growth rates will be lower as the year progresses and we annualize the stepped up procedure growth following the partner 3 presentation. We continue to believe this large global opportunity will exceed $7 billion by 2024 which implies a compounded annual growth rate in the low double digit range. Turning to TMTT we are on track to achieve all of the milestones discussed at our recent investor conference including executing four pivotal studies. We continue to invest aggressively in our portfolio and you can expect to hear important updates at medical meetings this year. In addition we are pleased to announce that the Evoque Tri-Cuspid replacement valve system has recently received FDA approval for an early feasibility study and a breakthrough device designation, a program intended to help patients receive more timely access to designated medical technologies. Full year 2019 sales of $28 million came in below our original guidance of approximately $40 million as we continue to execute a disciplined introduction and premium pricing strategy of Pascal which moderated European site activation. Fourth quarter revenue of $7 million was negatively impacted by the voluntary Pascal field corrective action completed in the quarter. Importantly we are able to minimize disruption to physicians and patients in need. Despite the slowdown of our launch cadence, Pascal acute clinical outcomes are excellent and physician feedback is positive. As we expand the rollout we will remain focused on procedural success and differentiated patient outcomes. To further update our transcatheter mitral therapies we continue to enroll patients in the CLASP 2D pivotal trial study of mitral valve repair with Pascal in degenerative mitral disease and are on track to complete enrollment by the end of the year. In addition we are also enrolling our CLASP 2F pivotal trial for patients with functional mitral disease. In mitral replacement we continue to gain experience with Sapient M3 and EVOKE and anticipate enrollment in our M3 pivotal trial to begin in the second quarter. Early clinical evidence with both these low profile transfemerally delivered technologies has been encouraging. Turning to transcatheter tricuspid therapies, we are committed to providing solutions for patients with poor prognosis and very few treatment options. We have initiated enrollment in our CLASP 2TR pivotal trial to study Pascal in patients with symptomatic severe tricuspid regurgitation. As mentioned we have made meaningful progress on our EVOKE tricuspid replacement program and in addition we are continuing to gain experience with our Cardioband tricuspid system in select sites as we develop our next generation technology. In summary we remain committed to all of the milestones outlined in our recent investor conference and continue to expect TMTT sales of $50-70 million for 2020. We are optimistic that the global TMTT opportunity will grow to approximately $3 billion by 2024 and are passionate about bringing our portfolio of solutions to these life threatening diseases. In surgical structural heart, full year 2019 global sales of $842 million increased .5% on an underlying basis over the prior year in line with our original guidance of 1-3%. Fourth quarter sales of $205 million declined 3% on an underlying basis reflecting lower surgical aortic valve procedures in the U.S. as TAVR adoption stepped up partially offset by our continued strong adoption of our premium high value technologies. Despite the fourth quarter headwinds our innovative in spherus valve continued to be a growth driver in the quarter as it has been throughout the year. We remain encouraged by the actions of our focused team as taken to advance leadership as the partner of choice for surgeons. Our surgical portfolio strategy also positions Edwards to generate sustained growth through innovation. We are pleased to confirm that late in the fourth quarter we received European regulatory approval for our Harpoon beating heart mitral valve repair system and are in the process of beginning our commercial launch. Harpoon offers the potential for earlier treatment of degenerative mitral valve disease with faster recovery and more consistent outcomes for surgical patients. In summary, in surgical heart we continue to expect full year 2020 underlying sales growth of 0-3%. We anticipate that surgical aortic valve procedure headwinds experienced in the fourth quarter will continue into 2020 with a return to positive growth expected later in the year as we anniversary the 2019 step up in TAVR growth. Even as TAVR adoption expands we are 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 full year 2019 global sales of $740 million increased 9% on an underlying basis over the prior year exceeding our original guidance of -7% growth. Hemisphere our -in-one monitoring platform grew faster than expected in 2019 following the global launch of that platform with our flow track sensor and our acumen hypotension prediction index software. Fourth quarter critical care sales of $199 million increased 8% on an underlying basis driven by strong demand for hemisphere and continued growth in smart recovery. Growth in the quarter was led by sales in the US. In line with our commitment to enhance our broad portfolio sensors we initiated the commercial launch of foresight, our cerebral oximetry technology on hemisphere in the fourth quarter. As discussed at our recent investor conference the integration of a full range of technologies on hemisphere creates a unique offering of enhanced recovery tools and predictive analytic capabilities to further strengthen our leadership in hemodynamic monitoring. In summary we continue to expect 2020 underlying sales growth of -9% and we remain excited about our pipeline of innovative critical care products. And now I'll turn the call over

to Scott. Scott Thank you Mike. I am pleased to report that our strong finish to the year enabled us to broadly exceed our financial guidance for 2019. So today I'll provide a wrap up of 2019 including detailed results from the fourth quarter as well as provide an update on guidance for the first quarter and full year of 2020. For the full year 2019 sales increased 15% on an underlying basis to $4.3 billion. Adjust earnings for share grew 19% to $5.57 and we generated $1.1 billion of adjusted free cash flow. We were pleased to generate strong margins during 2019 while still investing aggressively for profitable future organic sales growth. With the repeal of the medical device excise tax at the end of 2019 we will be able to continue our aggressive research and development investments, fund a growing field clinical organization to support patient care and strengthen our global supply chain. Sales in the fourth quarter grew 19% on an underlying basis and adjusted earnings for share grew 25% to $1.46 versus the prior year. This reflects positive operating results partially offset by our decision to accelerate strategic spending in the fourth quarter to drive therapy awareness as well as one time costs associated with migrating cardio band production from Israel to Ireland. Gap earnings per share was $1.32 which included a $41 million or 19 cents per share non-cash impairment of cardio band intangible assets that we referenced at last month's investor conference. A full reconciliation between our gap and adjusted earnings per share for these and other items is included with today's release. I will now cover the details of our results and then discuss guidance for 2020. For the fourth quarter our adjusted gross profit margin was .8% compared to .1% in the same period last year. This reduction was driven by spending in support of the new European medical device regulations and the migration from our cardio band facility in Israel partially offset by the benefit of a more profitable product mix. We continue to expect our 2020 adjusted gross profit margin to be between 76 and 77%. Our rate should be lifted primarily by an improved product mix offset by lower foreign exchange hedge gains and capacity investments. Selling general and administrative expenses in the fourth quarter were $347 million or .6% of sales compared to $288 million in the prior year. This 21% increase reflects additions we have made in field clinical personnel to support TAVR cases in the U.S. and TMTT in Europe as well as the previously mentioned accelerated actions related to disease awareness and therapy adoption. We continue to expect SG&A excluding special items to be between 28 and 29% of sales for the full year 2020. Research and development expenses in the quarter grew 19% to $194 million or .5% of sales. This increase was primarily the result of continued investments in our transcatheter structural heart programs including spending on clinical trials. For the full year 2020 we continue to expect R&D as a percentage of sales to be between 17 and 18% as we invest in developing new technologies and generating evidence to expand indications for TAVR and TMTT. Turning to taxes, our reported tax rate this quarter was .2% or .3% excluding the impact of special items. Stock appreciation drove a 450 basis point benefit this quarter from the accounting for employee stock-based compensation. We continue to expect our full year rate in 2020 to be between 12 and 14% including an estimated benefit of 5 percentage points from stock-based compensation accounting. Foreign exchange rates decreased fourth quarter sales growth by 40 basis points or $4 million compared to the prior year. At current rates we now expect an approximate $25 million negative impact or about half a percent to full year 2020 sales compared to 2019. Foreign exchange rates positively impacted our fourth quarter gross profit margin by 30 basis points compared to the prior year. Relative to our October guidance, FX rates positively impacted earnings per share by about a penny reflecting our effective currency hedging program. Free cash flow for the fourth quarter was $328 million. We define this as cash flow from operating activities of $399 million less capital spending of $71 million. For the full year 2019 adjusted free cash flow was $1.1 billion a 35% increase over 2018. Turning to our balance sheet, at the end of the year we had cash, cash equivalents and short-term investments of $1.5 billion. Total debt was $594 million. Average shares outstanding during the quarter remained relatively constant at $212.6 million. We continue to expect average diluted shares outstanding for 2020 to be between $212 and $214 million. Before turning the call back over to Mike, I'll finish with updated financial guidance for 2020. Momentum in TAVR sales has been stronger than we expected at the time of our investor conference. As a result, we now expect higher sales in 2020, which would result in higher underlying full year growth rates. We now expect the TAVR underlying full year sales growth rate to be around the top of our 12 to 15% range. And for the total company, full year underlying sales growth rate around the top of our 10 to 12% range. We continue to expect sales growth rates to decline as the year progresses as a result of higher prior year comparisons. For TAVR, we are raising the bottom end of our range and now expect sales of $3.0 to $3.2 billion versus our previous range of $2.9 to $3.2 billion. We continue to expect surgical structural heart sales of $820 to $860 million, critical care sales of $780 to $820 million, and TMTT sales of $50 to $70 million. We are raising the bottom end of our guidance range and now expect sales for total Edwards of $4.6 to $5.0 billion versus our previous range of $4.5 to $5 billion. For full year 2020, we now expect adjusted earnings per share of $6.15 to $6.40 versus our previous guidance of $6.05 to $6.30. For the first quarter of 2020, we project total sales to be between $1.15 and $1.15 billion, $5.5 billion and $1.2 billion, and adjusted earnings per share of $1.49 to $1.59. With that, I will pass it back to Mike. Thanks, Scott.

In conclusion, we are very proud of the significant progress we made in 2019, advancing new transformative therapies and delivering strong financial performance. We expect continued growth and progress in 2020. We are enthusiastic about the continued expansion of transcatheter-based therapies for the many structural heart patients still in need, which positions us well for longer-term success. Edwards is fortunate to have a strong leadership position focused on serving patients who today have few treatment options for longer and better lives. We believe our patient-focused innovation strategy can transform care and bring value to patients, health care systems, and shareholders. This year will mark the 20th anniversary of Edwards Life Sciences as a public company. In acknowledgement of this milestone, we will host our annual investor conference at the New York Stock Exchange on December 10th. We will share more details on that event as we get closer. And with that, let me turn it back over to Mark.

Thank you, Mike. We are 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 participants as possible during the remainder of the call. Thank you.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star followed by the number two if you would 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. Our first question comes from Bob Hopkins with Bank of America. Merrill Lynch, please state your question.

Thank you, and good afternoon, and congrats on a remarkable 2019. Mike, if okay, I'd like to start out with you. Just sort of an obvious question here. Any more detail you can provide on the US tower upside that you experienced in Q4, kind of where it came from? Did you have a big pickup in the number of new centers and growth in those new centers? Just any further comments on the US upside in tower would be great.

Yeah, thanks, Bob. I think it feels like it was a continuation of the momentum that we started to feel in the third quarter. It was broad across all segments. As we mentioned, there are more than 700 sites at this point, but we saw that growth, whether it was in new sites or some of our mature sites that are quite large centers. We think that it came across the risk spectrum, and it wasn't just low-risk patients coming into it, that indeed it was patients of all-risk profile. Even though there was clearly a switch from surgery to tower in a number of cases, we think the predominant effect was new patients coming off the sideline for treatment.

Okay, interesting. Then I also want to ask, one quick one on TMTT. Just wondering if you could give us an update on the litigation on Pascal. Just specifically, Abbott has said that there could be a ruling on injunction in Germany for Pascal in early March. I was wondering if you could just kind of confirm that timeline and any other milestones in the first half of the year on litigation.

Thanks. Well, as you know, Bob, this litigation is playing out in several countries over an extended period of time, so there's going to be a lot of stories. In fact, there was a recently completed trial in the UK, and there's a decision that's pending on that, probably sometime in Q1. In Germany, there's going to be a couple of hearings. I think the first one to start in March with results to follow. I think there's a possibility for a US hearing beyond that.

Thank you. Our next question comes from David Lewis with Morgan Stanley. Please, the question.

Good afternoon. Just two for me. First, Mike, just thinking about the XUS growth rate, there was a difference between procedure growth and consequential growth in the quarter of about five points. Was there any particular driver accounting for that? Was it Japan's stocking maybe in the third quarter? And then a quick follow-up.

You know what? I'm not sure that I'm tracking with you on the difference in the numbers, David, so maybe you're seeing something that I'm not, but I can make some general comments anyway. Although we did see a little bit of stocking of Japan in the third quarter, it was minor by comparison. And we'd say generally, OUS, that the procedure growth in the market and our growth was pretty comparable. It's hard for us to be exact in predicting that, but we think that they're pretty close to each other. And there really was an appreciable difference in ASP either.

Okay, that's really helpful. And then, Mike, I guess the dynamic a lot of investors are focused on is you're clearly seeing TAVR acceleration probably slightly ahead of plan, but yet your SAVR guidance is unchanged. Can you just share with us how you think we're seeing this very significant acceleration and momentum in the US TAVR business, but yet we're not seeing the degradation in the SAVR business. I think many people would have expected. Thanks so much.

Yeah, thanks, David. Well, if you were to ask the folks in the surgical business, they would say they're feeling what's going on right now. But again, we think that there is kind of a step up in procedures in TAVR. And we think the bulk of that step up is new patients coming off the sideline as opposed to switching from surgery. Hard to quantify that, you know, is it two-thirds, I don't know. But it's something that probably feels closer to that from our perspective. So, although we're going to feel it or we're feeling it today in surgical, we feel like we rebound from that as we kind of anniversary this surge in growth.

Thank you. Our next question comes from Raj Denhoi with Jeffreys. Please state your question.

Well, hi, good evening. I wonder if maybe just take it a little bit more to the new centers. Is there any way you can maybe parse out what percentage of growth they might have added in the quarter, you know, such a strong quarter, there's got to be some more detail you can provide for us.

Yeah, thanks, Raj. Yeah, I mean, the new centers added, but it really was broad-based. I couldn't say that they were a primary driver of growth. We saw it across the board. We saw it in our large centers that were some of the very first partner centers from the beginning of TABOR all the way through every people that have started more recently and in between.

Okay, maybe I can just ask one on Michael then. You know, I know this quarter obviously was a little bit mixed up with the Pascal issue you had in Europe. This pricing discipline strategy you have in Europe, is there been any, you know, anything more you can offer on that? Are you seeing more receptivity amongst your customers to the premium price strategy of Pascal as you're moving here to 2020?

Yeah, so, you know, we're very committed to this. We feel like we have differentiated technology. We have a high-touch model, and we're executing this price discipline, and we're going to continue to do that. We know that there's not a lot of data out there today, but we think ultimately that will prove to be the case. We obviously have confidence in this strategy. For us, it's more important to build toward long-term leadership. We're committed and feel confident in the estimate that we gave you that we'll have $50 to $70 million of TMTT sales in 2020. So, hopefully that's a reflection of how we feel.

Okay, good. Thank you.

Our next question comes from Larry Beegelson with Wells Fargo. Please state your question.

Good afternoon. Congrats on the quarter, and thanks for taking the question. Hey, Mike, one big picture question for you and one TMTT question. So, big picture, Mike. You've delivered 10-plus years of double-digit growth, and you're on track to do it again in 2020. But I think investors want to understand the durability of your growth. So, my question is how important is it to deliver 10% growth each year to you? And just how are you feeling about the durability of growth right now at Edwards? And I have one follow-up.

Well, thanks, Larry. So, two different things. One is do we think it's going to continue, and how important is it for Edwards? You know us pretty well by now. We are not a financially driven company that just is driven only to hit a number. We really feel like when we focus on great therapies for patients and we get that just right, the numbers end up taking care of itself. And it has played out on a long-term basis. Having said that, I have a lot of confidence in our future. When you start with our biggest product area of TAVR, that continues to be one that has a lot of growth associated with it. You remember that we said more than $7 billion by 2024, which infers a double-digit growth rate. We believe that TMTT, which is a brand new addition to our portfolio, has an opportunity for the overall market to be $3 billion by 2024. So, when you think about us pursuing a $10 billion opportunity out in 2024, it makes me feel pretty good about our prospects ahead.

Thanks, Mike. And how much did the general developing as you expected or a little bit slower because of the Mitra FR results? Thanks for taking the questions.

Yeah, you know, it's a good question. We started our sales in October. It was interrupted. We had basically stopped supply during November and we restored it in December. If we wouldn't have had that, we certainly would have had higher sales growth and maybe grown modestly off of Q3. You know, overall, we feel good about the market opportunity. As you probably note, there's been more growth in the U.S. than there has been outside the U.S. and so probably this Mitra FR is having some kind of impact in Europe, but we hope that we'll be able to influence that as they get to see results from the Pascal system. And again, when we look at our own results, we expect to regain momentum in Q1 and start focusing on new site activation again. Thanks for taking the questions.

Thank you. Our next question comes from Kristen Stewart with Barclays. Please state your question.

Hi, thanks so much for taking my question. I was just wondering if you could maybe explain a little bit just about whether or not we would expect any data that could be coming out at the ACC conference coming up here. We would expect to see to your data on low risk any Pascal data that could be coming up here over the coming months. And then I have a follow-up.

Yeah, you know what? I can't tell you for certain on a number of, we expect there to be some data. So for example, in TMTT, we expect there to be an update on some of the early class studies. So both longer-term data and more patients added, maybe some data on Pascal tricuspid and Cardioban tricuspid. So there could be those in terms of whether we'll see two-year data on partner three. It's too early to say. I don't know that there's anything official yet, so we really can't say anything until it's clear.

Okay. And then just with respect to the Sapien M3 study, I know that you had commented at the analyst's day that you could get FDA approval and breakthrough, I believe, designation for that. Do you have any clarity on the trial design of that yet and any timelines that we should expect for enrollment? I know that's pretty critical, it sounds like, towards you starting to achieve the timelines for getting to that $3 billion market opportunity along with Pascal as well.

Yeah. Thanks, Kristen. You know what, there may be some confusion there. I don't believe we ever indicated a breakthrough pathway for Sapien M3. What we said is that we expect to be going to clinical trial. What I just updated is that indeed is proceeding. We expect to have our first patients in Q2. But a bigger picture here, we're very excited about having two pretty impressive transeptal replacement programs, both that are transfemoral and small profiles. Ultimately, that M3 trial will go up on clintrials.gov, but there's still some details being ironed out.

Okay. Thank you very much. Congratulations on a good quarter.

Thank you. Thank you. Our next question comes from Jason Mills with Canaccord Genuity. Please, say your question.

Great. Thank you, Mike, for taking the question. First big picture question, Tavar. Years ago when we were talking about developing the market model, I don't think we ever discussed 700 plus centers. Maybe it was something less than that. Could you talk about how we've gotten, sort of got from there to here, what's transpired in market to promulgate 700 plus centers, and where you think that could go now with the benefit of hindsight? Also, maybe within that discuss, whether or not 700 to 750 centers is enough to generate the type of growth, compounded growth that you're projecting over the next couple of years, or if you think that there needs to continue to be additions to the number of centers?

Yeah, thanks, Jason. Well, I mean, clearly we wouldn't be where we are today if it wasn't for a greatly improved procedure. This procedure has really gotten to deliver incredible outcomes. And it's also demonstrated to be a teachable procedure so that people that are starting new are able to stand on the shoulders of those that went before them and deliver really good results right from the beginning. And with that acknowledgement, we've had some favorable rulings in terms of the interpretation by CMS. And with that came an updated NCD, which allows more centers to become qualified for it. If we were to look forward, we would say that maybe up to 850 have the ability to qualify as a TAVR center. Now, again, we're not sure that all those 850 are going to go for it, so it depends on their own sites. But bigger picture, you ask the question, you know, can we get the kind of growth necessary with, for example, 850 centers in the U.S.? We think absolutely yes. A lot of what has to change is not just center capacity, but the behavior of patients and physicians in the system and patients actually with severe aortic stenosis getting treated. And there are a number of places where the system is less than ideal. We're trying to be an assist to that, but we see it getting better on a regular basis. Thank you for that, Mike. It's

very helpful. And then more of a housekeeping item for Scott. Scott, when you come into a quarter and you see the press release and you see that kind of upside in TAVR relative to consensus, estimates, and guidance, you expect it to generate positive leverage. And one thing that you called in the press release was the one-time spending associated with moving, cardio-band, and perhaps there are other more one-time things in nature. But would you care to help us understand maybe what that and how that impacted, how those things impacted our needs quantitatively in the quarter? Congrats on a great quarter.

Sure. Thanks, Jason. So I guess you had two questions. One was leverage on increased sales. The second was the impact of moving cardio-band. On the first one, so we've increased the midpoint of our sales guidance range by $50 million, and we increased earnings per share midpoint of the range by 10 cents. So that gives you a sense of the leverage that we're putting through the P&L. We are planning to accelerate some investments with some of the expected incremental sales. Regarding your second question about gross profit, yeah, we've taken some decisions in the fourth quarter involving our production operations, including migrating production from Israel for a cardio-band product to other Edwards facilities, including our new facility in Ireland. And so you saw that show up in the fourth quarter results, which were a little bit lower than we expected. And it's reflected in 2020, but our guidance for 2020 for gross profit is unchanged at 76 to 77 percent.

Thank you.

Next question, please.

Our next question comes from Robbie Marcus with JP Morgan. Please, do your question.

Thanks. And I'll add my congratulations on the great quarter as well. Scott, two financial questions for you. Maybe I'll just give them both up front. You know, I totally get the reasoning for investing in the business here on such a great quarter, but maybe just help us understand exactly where the investments went in fourth quarter. And, you know, how should we think about any potential benefit flowing through in 2020? And then second, you ended the year with about a billion and a half of cash on the balance sheet. You're generating north of a billion in free cash flow. You know, what's the updated plan for utilization of cash here? Thanks.

Sure. Thanks. So first question regarding where we invested extra dollars. Relative to, I guess, our expectations at the beginning of the quarter, about two-thirds of the incremental investment were reflected in operating expenses. They included things like disease awareness and therapy adoption initiatives. Just to give you one example, there was an announcement by the American Heart Association in November regarding an initiative that they're undertaking that we're supporting. And then we've also been adding field resources to support significant growth. You know, you don't grow 40 percent in the U.S., for example, and see the growth that we are expecting in Europe without also putting in resources to help support the high touch model that we have in place. So those probably two-thirds. And then the other third probably showed up in cost of sales. And I mentioned those earlier, the European medical device regulations and the migration of cardio band production. Regarding our cash balance, you know, our philosophy and our strategy for deploying capital has not changed. We've got a number of priorities. The first one is investing in our global supply chain to support the growth of Edwards. Second, investing externally in things like acquisitions, strategic alliances, purchasing options to buy other companies. And then third, managing the balance sheet. So we're going to continue to be a buyer of Edwards stock over time and opportunistically we'll be executing share purchases to help offset dilution and over time as well manage the share count down. Thanks a lot.

Thanks. Our next question comes from Matt Taylor with UBS. Please state your question.

Hi. Thank you for taking the question. So I guess the first thing I wanted to ask about was the center growth and whether you have insight into how many centers could grow this year. And do you still think that we're going to get towards about a 50 or is it possible that there could be more given how quickly they seem to be growing here?

Yeah, well thanks Matt. You know it's a little tough for us to tell how fast the centers are going to join. We saw pretty good growth in center. I think the last time we had reported on it we said more than 650. So you can see where we are now. Yeah, when we look forward and try and interpret the NCD our estimate is that about 850 centers would be qualified to do it. How many do those actually go for it and how fast they act is hard for us to know. If we were guessing we'd say we get to that kind of 850-ish number maybe over the next year or two something like that. And so it gives us some insight but we can't be certain.

And then I was hoping you could give us some more insight or inside baseball and the trends in the U.S. The growth was so strong in Q4. It seems like you must be seeing the same kind of strong growth here in Q1. I think investors have some questions around how much of this is kind of a bolus versus sustained. And you seem to be suggesting with your comments that it's growing across the board that it's more sustainable. Can you talk a little bit about what you're seeing in Q1 and how it could be sustained?

Yeah, thanks Matt. Well you know how difficult it is for us to predict quarters and we always hate to take one month and to do anything important with it. But we'll just say this. You can see what our revenue assumption is for TAVR for full year 2020. And we think it is going to that the growth rate is likely to decrease during the course of the year as we anniversary the growth rates. In that assumption is that probably Q1 TAVR looks similar to Q4 in terms of revenue dollars. You'll have to remember there was a big step up in Q4 versus Q3. And we saw a similar trend last year going from Q4 2018 to Q1 2019. So you know it's hard to know for certain but maybe that's helpful.

Great,

thanks. Thank you.

Our next question comes from Vijay Kumar with Evercore ISI.

Please follow up. Mike, maybe on the last comment on the back half revenue growth in TAVR. The underlying of I guess the high end of 15% is the implication that we sustain hold the line on double digits in the back half or maybe how should we think about the back half? Yeah,

it's a good question Vijay. You know it's difficult for us to know. Do we stay at double digits? Do we dip below it? You know either of those are certainly possibilities. The growth is strong. I mean the good news is there are going to be more TAVRs done in the second half of 2020 than ever done in history. And so in terms of procedures per day those are going to be records. Now how much growth is there over this year? It's not clear. But we've given you the probably the best guidance we can in terms of annual growth rates.

Gotcha. And then one on the gross margins here Scott. Did the recall impact you guys gross margins for Q1? Just excuse me Q4. How should we think about gross margin progression throughout the year? Thank you.

So it's a little bit difficult to predict gross margin progression throughout the year because a lot of it ends up getting tied to our TAVR performance. But maybe I can help at least with the baseline on Q4 and explain what happened Q4-19 versus Q4-18 where we had about 30 basis points of higher FX and hedge gains in the fourth quarter of 2019 than we did in 2018. We had about 40 basis points of mixed benefit that showed up in the fourth quarter offset by those higher operating costs that we mentioned earlier in Israel and with European MDR. So if you look out to 2020 we're expecting to continue to get a mixed benefit shows up on our gross margin. It can be 50 to 100 basis points or even more. But generally I think it's probably relatively flat during the course of the year at least for modeling purposes. That's the right assumption at this point. Thank you Scott.

Thank you. Our next question comes from Suraj Kaya with Oppenheimer and Company. Please state your question.

Good afternoon everyone. Mike, congrats on an excellent quarter. So Mike, the question about capacity and your growth assumptions in TAVR have been asked. Let me see if I can comment it from a different way. Our math is suggesting roughly 140 to 150 cases per year per center in the U.S. Can you give us a perspective of what percent of the cases being done currently in these seven centers are independent in nature and how do you look upon capacity utilization within these centers?

Yeah, good question. We don't look at it that way in terms of average number for a center. As you might imagine there's a great difference, Suraj, between the amount of procedures done in a very large center and one that's small. So those are different. The thing that has been remarkable to us is the ability of centers to add capacity. They have found a way to manage they add more cases per day. Sometimes they add on a day. Actually it's been quite a test for our team and I'm so proud of our team has found the ability. You know we have a high touch service model so we're in every one of these cases. So as they grow for us to have the ability for example to flex in the U.S. and cover 40 percent growth versus the prior year was a heavy lift for us. But you know what happens is more patients show up. The list gets to be pretty long and hospitals react to that by adding capacity and so far we've been impressed about their ability to do that.

And finally Mike, forgive me I'm drawing a blank here. Did you mention the N3 comparator arm? Thank you for taking my question and congrats on a great quarter.

Thanks. No we didn't mention the M3 comparator arm. So that trial design is still one that has not been finalized and we just decided it's prudent for us not to communicate it till it's really final. So at some point that will be published on clinttrials.gov and you'll see it at the end. So we'll let you know.

Thank you. Our next question comes from Rick Wise with Stiefel. Please state your question.

Hi Mike, hi Scott. China hasn't come up. I think your exposure there is small and maybe if I recall correctly mostly sovereign critical care. But can you remind us the impact and what you're assuming or how you're thinking about the situation and what's reflected in guidance?

Yeah thanks Rick. Yeah you know first of all obviously our key concern is always for our employees and patients. We feel you know we've been fortunate so far. We haven't had any impact to employees inside Edwards that we're aware of and we've been able to maintain our supply line. So at this point you're right China's not really huge for us. It's still just a small percentage of Edwards sales. But we don't expect there to be a significant change at this point from what's going on with the coronavirus. But we stay watchful.

Okay and just as a follow-up, I mean it's sort of a strange question maybe but you probably saw that Abbott's 10-dime mitral device got approved for replacement in Europe today. And my question is not about that as much as is this an important moment for the field? Does this, how does this make you feel about the openness of European regulators to consider the mitral waves coming at them? Does it say anything that we can extrapolate that makes you feel better, worse, the same? Thank you so much.

Yeah thanks Rick. Well you know we are big believers in the opportunity for transcatheter mitral therapies. And so whenever there's movement and a new regulatory approval for the whole field that's a positive. So we're glad to see that. You know about our portfolio. We're very focused on it. You know we're just pleased. We think what's going to be most meaningful is when we have these smaller transfemoral type systems. We think those are the things that really cause a change in behavior of patients and physicians. And so we keep our eye on that. But you know any kind of favorable movement is good. And I think there is a general openness to innovations within mitral disease.

Thank you. Our next question comes from Danielle Antalfi with SVB Lyric. Please set your question.

Hey good afternoon everyone. Thanks so much for taking a question. Congrats on a really strong year, strong quarter. Mike I was hoping you could comment on the competitive landscape specifically in the U.S. What you're seeing out there. It sounds like your competitor had called out share loss. It seems like you guys are holding on to share not losing share. So what are you seeing? And specifically I'd be curious about what you're seeing as the new setters open up and how they're adopting valves. Are they just going with one player? And so they're a little bit you know more protected from share loss. Just curious about how that's playing out. Thanks so much.

Yeah thanks. Well so Danielle you know as we indicated we believed that our growth was comparable to the growth that was going on in overall procedures whether that was in the U.S. or OUS. So from our point of view no real change of significance in our share position in the last quarter. Now there may have been changes in share position with our between our competitors but we really don't have clear visibility to it. When we gave our guidance in December we indicated there was probably be some modest share loss in 2020. So that's yet to play out. We also expected that to happen in 2019. It didn't really and so it may have been just delays on the part of our competitors but we know they're still early in their launch process.

And just a quick follow-up. Safe to say in Europe it feels like things have stabilized there. Is that it sounds like that's what you're seeing too from a share perspective?

Seeing big share shifts. We obviously watch that very carefully and that's not such a fast moving market that we don't feel like we have a reasonable handle on it. So yeah it does feel reasonably stable at this point.

Thank you.

Our next question comes from Pito Chickering with Deutsche Bank. Please state your question.

Good afternoon guys. Thanks for taking my questions. The first question is just to little more into the new centers. Is your market share in those centers similar to your market share of the more established centers?

That's a good question. I'm not sure that I really have data at my fingertips on that one. My sense is that it varies significantly. There are some centers that probably start up that are primarily Edwards and there are others that may start up with others. We just say when we look at our overall growth in the US, the 40%, there was a nice addition from those new centers. But again, it was just we saw it kind of across the board.

Great. Then on the I guess you may side it. I understand that hiring field personnel in the US for TAVR and TMTT in Europe makes sense relative to the growth there. But can you help us out the marketing costs you incurred in the fourth quarter? And are those costs recurring at similar levels in 2020 or should they decrease? Thanks so much.

I can begin here and then Scott can add on what our 2020 guidance looks like in SG&A. We try and stay one step ahead of what we see as procedure growth. We add resources that we think commensurate. When we have fast growing businesses like TAVR and what we anticipate in TMTT, we try and stay a little bit ahead of that. Having said that, we still think that there's probably some leverage on the SG&A line. We maintain a high level as you properly noticed of case coverage and we're in every case. But having said that, maybe Scott, your best to 2020?

I guess I'd say 28 to 29 percent for 2020. But in addition to the field clinical support and selling resources throughout the field, we're also doing work around patient education regarding the severity of aortic stenosis and treatment options, the benefits of TAVR. And we're doing outreach to referring physicians on therapy options available today. And so there are other activities and expenses associated with those activities beyond just the field resources we talked about earlier.

Thank you. Our next question comes from Matt Mixitch with Credit Suisse. Please state your question.

Hey, thanks for taking a question here and congrats on a really outstanding quarter and year. The question I had was maybe just follow up on something you talked a little bit about on your analyst day meeting or investor day. And you've touched on here, I think in terms of investments to kind of support identifying patients and so on. And Mike, you talked a while back about tracking patients through the system. It sounds like maybe part of the investments you've made around cardio care are helping to do that. I think if I understand them correctly, maybe if you just talk about how that's going, how widely you've rolled that out and to what degree you're employing other types of technology to help you kind of support this growth and identify these patients.

Yeah, thanks, Matt. And you know what, Scott started going down this path. There's three broad categories here. One is educating patients themselves. Others trying to help the referral pathway be better educated. That continues to be a priority for us. We also have a team that helps systems and have better echo findings and make sure that the referral pathways actually work. We have a benchmark program that allows centers to operate at maximum efficiency. So it's pretty broad-based. As Scott mentioned, we've got a new initiative with the American Heart Association. It's broad-based. And rather than me trying to detail here, you should know that that is an area of new investment.

That's great. That's great. And then just one follow-up, if I could, on the moving into early feasibility study for Evoke. If you could maybe just give us a sense of what should we expect in terms of the enrollment at some of these mitral programs. You know, it takes a little while. And what should we think about in terms of maybe getting that enrolled and maybe getting to a point where we'd be seeing some data from that program?

Enrollment cadence looks like. You know, we're excited about the technology. But we're not in a position yet where we're going to disclose timelines or predict how these early feasibility studies and ultimately pivotal trials are going to enroll.

Fair enough.

Thanks. Thank you. Ladies and gentlemen, we have exhausted our lot of time for questions. I'll now turn the call back to management for closing remarks. Thank you.

Thanks for your continued interest in that words. And Scott, Mark, and I are welcome. Any additional questions?

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