Greetings. Welcome to the Edwards Lifesciences fourth quarter 2019 results conference call. At this time, all participants are in a 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 Wilterding, Vice President, 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 Mussallem, Chairman and Chief Executive Officer, and Scott Ullem, Chief Financial Officer. Just after the close of regular trading, Edwards Lifesciences 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; 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 10-K, and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. A quick reminder that when using the terms "underlying" and "adjusted," management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP measures. Reconciliations between GAAP and non-GAAP measures mentioned during the call are included in today's press release. I'd like to turn the call over to Mike Mussallem for his comments. Mike?
Thank you, Mark. 2019 was a year of major milestones and significant investments for Edwards. Groundbreaking PARTNER 3 clinical trial results demonstrated the 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 HemoSphere and the addition of CASMed. Most importantly, in 2019, even more patients benefited from Edwards' life-saving 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 healthcare system. 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. 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%-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 disciplined 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 fourth quarter, we estimate total TAVR procedures grew in the high teens on a year-over-year basis. 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. 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 a 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 paravalvular 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%-15% 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're pleased to announce that the EVOQUE tricuspid 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 continued 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 were 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 IID pivotal trial study of mitral valve repair with PASCAL in degenerative mitral regurgitation and are on track to complete enrollment by the end of the year.
We're also enrolling our CLASP IIF pivotal trial for patients with functional mitral disease. In mitral replacement, we continue to gain experience with SAPIEN M3 and EVOQUE and anticipate enrollment in our M3 pivotal trial to begin in the second quarter. Early clinical evidence with both these low-profile, transfemorally delivered technologies has been encouraging. Turning to transcatheter tricuspid therapies. We're committed to providing solutions for patients with poor prognosis and very few treatment options. We've initiated enrollment in our CLASP II TR pivotal trial to study PASCAL in patients with symptomatic severe tricuspid regurgitation. As mentioned, we've made meaningful progress on our EVOQUE tricuspid replacement program. In addition, we're 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 at 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 1.5% 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 INSPIRIS valve continued to be a growth driver in the quarter as it has been throughout the year. We remain encouraged by the actions our focused team has 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're 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 structural 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're 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 5%-7% growth. HemoSphere, our all-in-one monitoring platform, grew faster than expected in 2019 following the global launch of that platform with our FloTrac 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 HemoSphere and continued growth in SMART Recovery. Growth in the quarter was led by sales in the U.S. In line with our commitment to enhance our broad portfolio of sensors, we initiated the commercial launch of ForeSight, our cerebral oximetry technology, on HemoSphere in the fourth quarter. As discussed at our recent investor conference, the integration of a full range of technologies on HemoSphere 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 6%-9%, and we remain excited about our pipeline of innovative critical care products. Now I'll turn the call over to 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. 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 of 2019, sales increased 15% on an underlying basis to $4.3 billion. Adjusted earnings per 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 clinical field 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 per 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 Cardioband production from Israel to Ireland. GAAP earnings per share was $1.32, which included a $41 million, or $0.19 per share, non-cash impairment of Cardioband intangible assets that we referenced at last month's investor conference.
A full reconciliation between our GAAP and adjusted earnings per share for these and other items is included with today's release. I'll now cover the details of our results and then discuss guidance for 2020. For the fourth quarter, our adjusted gross profit margin was 75.8%, compared to 76.1% 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 Cardioband 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 29.6% 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 16.5% 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 11.2%, or 12.3%, 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 five 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 $0.01, 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 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%-15% range. For the total company, full-year underlying sales growth rate around the top of our 10%-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 billion-$3.2 billion versus our previous range of $2.9 billion-$3.2 billion.
We continue to expect surgical structural heart sales of $820 million-$860 million, critical care sales of $780 million-$820 million, and TMTT sales of $50 million-$70 million. We are raising the bottom end of our guidance range and now expect sales for Edwards in total of $4.6 billion-$5.0 billion versus our previous range of $4.5 billion-$5.0 billion. For the full year 2020, we now expect adjusted earnings per share of $6.15-$6.40 versus our previous guidance of $6.05-$6.30. For the first quarter of 2020, we project total sales to be between $1.15 billion and $1.2 billion and adjusted earnings per share of $1.49-$1.59. With that, I'll pass it back to Mike.
Thanks, Scott. In conclusion, we're 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're 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, healthcare systems, and shareholders. This year will mark the 20th anniversary of Edwards Lifesciences as a public company. In acknowledgment of this milestone, we will host our annual investor conference at the New York Stock Exchange on December 10th. We'll share more details on that event as we get closer.
With that, let me turn it back over to Mark.
Thank you, 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 reenter the queue, and management will answer as many participants as possible during the remainder of the call. Diego?
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. Good afternoon. 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 that you can provide on the U.S. TAVR upside that you experienced in Q4, kind of where did it come 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 U.S. upside in TAVR 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; indeed, it was patients of all risk profiles. Even though there was clearly a switch from surgery to TAVR in a number of cases, we think the predominant effect was new patients coming off the sideline for treatment.
Okay. Interesting. I also want to ask one quick one about TMTT. Just wonder if you could give us an update on the litigation on PASCAL; just specifically, Abbott has said that there could be a ruling on an 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 for 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 U.K., and there's a decision that's pending on that, probably sometime in Q1. In Germany, there are going to be a couple of hearings. I think the first one will start in March with results to follow. And I think there's a possibility for a U.S. hearing beyond that.
Thank you.
Our next question comes from David Lewis with Morgan Stanley. Please state your question.
Good afternoon. Just two for me. First, Mike, just thinking about the ex-U.S. growth rate, there was a difference between procedure growth and constant currency 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? 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 were pretty comparable. I mean, 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. 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 your SAVR guidance is unchanged. Can you just share with us how you think we're seeing this very significant acceleration of momentum in the U.S. TAVR business, but yet, we're not seeing the degradation in the SAVR business I think many people would have expected. Thanks so much.
Thanks, David. If you were to ask the folks in the surgical business, they would say they're feeling what's going on right now. Again, we think that there's 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. Is it two-thirds, one-third? I don't know. It's something that probably feels closer to that from our perspective. Although we're going to feel it, or we're feeling it today in surgery, we feel like we rebound from that as we kind of anniversary this surge in growth.
Thank you. Our next question comes from Raj Denhoy with Jefferies. Please state your question.
Hi, good evening. I wonder if I can maybe just dig in 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? Such a strong quarter, there's got to be some more detail you can provide for us.
Thanks, Raj. 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 TAVR all the way through every person that has started more recently and in between.
Okay. Maybe I can just ask one on mitral then. I know this quarter obviously was a little bit mixed up with the PASCAL issue you had in Europe. With this pricing discipline strategy you have in Europe, has there been 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 into 2020?
Yeah. 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 million-$70 million of TMTT sales in 2020. Hopefully, that's a reflection of how we feel.
Okay, good. Thank you.
Our next question comes from Larry Biegelsen 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. Big picture, Mike, you've delivered 10+ years of double-digit growth, and you're on track to do it again in 2020. I think investors want to understand the durability of your growth. My question is, how important is it to deliver 10% growth year to year? Just how are you feeling about the durability of growth right now at Edwards? I have one follow-up.
Well, thanks, Larry. 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 is just 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 themselves, 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. 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. When you think about us pursuing a $10 billion opportunity out there in 2024, it makes me feel pretty good about our prospects ahead.
Thanks, Mike. How much did the ship hold impact TMTT sales in Q4? Is the transcatheter mitral market in general developing as you expected or a little bit slower because of the MITRA-FR results? Thanks for taking the questions.
Yeah. 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 hadn't have had that, we certainly would have had higher sales growth and maybe grown modestly off of Q3. 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. 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. Again, when we look forward 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 just 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 two-year data on low risk, any PASCAL data that could be coming up here over the coming months. Then I have a follow-up.
Yeah. You know what? I can't tell you for certain a number. We expect there to be some data. For example, in TMTT, we expect there to be an update on some of the early class studies. Both longer-term data and more patients added. Maybe some data on PASCAL tricuspid and Cardioband tricuspid. There could be those. In terms of whether we'll see two-year data on PARTNER 3, 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. Just with respect to the SAPIEN M3 study, I know that you had commented at the Analyst Day that you did 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.
Thanks, Kristen. You know what? There may be some confusion there. I don't believe we ever indicated a breakthrough pathway for SAPIEN 3. What we said is that we expect to be going to clinical trial. What I just updated is that indeed is proceeding, and we expect to have our first patients in Q2. Bigger picture here, we're very excited about having two pretty impressive transseptal replacement programs, both that are transfemoral and small -profile. Ultimately, that third trial will go up on clinicaltrials.gov, but there are still some details being ironed out.
Okay. Thank you very much.
Sure.
Congratulations on a good quarter.
Thank you.
Thank you. Our next question comes from Jason Mills with Canaccord Genuity. Please state your question.
Great. Thank you, Mike, for taking the question. First big -picture question, TAVR. Years ago, when we were talking about developing the market model, I don't think we ever discussed 700 plus centers. I think it was something less than that. Could you talk about how we've gotten from there to here? What's transpired in the market to promulgate 700 plus centers, and where do you think that could go now with the benefit of hindsight? Also maybe within that, discuss whether or not 700 - 750 centers are enough to generate the type of 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, clearly, we wouldn't be where we are today if it weren'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. With that acknowledgement, we've had some favorable rulings in terms of the interpretation by CMS. 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.
Bigger picture, you asked the question, 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 also the behavior of patients and physicians in the system and patients actually with severe aortic stenosis getting treated. 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. 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. One thing that you called out in the press release was the one-time spending associated with moving the Cardioband. Perhaps there are other more one-time things in nature, would you care to help us understand maybe how those things impacted earnings quantitatively in the quarter? Congrats on a great quarter.
Sure. Thanks, Jason. I guess you had two questions. One was leverage on increased sales. The second was the impact of moving the Cardioband. On the first one, we've increased the midpoint of our sales guidance range by $50 million, and we increased the earnings per share midpoint of the range by $0.10. 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 2nd question about gross profit, yeah, we've taken some decisions in the 4th quarter involving our production operations, including migrating production from Israel of our Cardioband product to other Edwards facilities, including our new facility in Ireland. You saw that show up in the fourth quarter results, which were a little bit lower than we expected. It's reflected in 2020.
Our guidance for 2020 for gross profit is unchanged at 76%-77%.
Thank you.
Okay, your next question, please.
Our next question comes from Robbie Marcus with JP Morgan. Please state your question.
Thanks, 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. 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 the fourth quarter and how we should think about any potential benefit flowing through in 2020. Second, you ended the year with about a billion and a half of cash on the balance sheet. You're generating north of $1 billion in free cash flow. What's the updated plan for utilization of cash here? Thanks.
Sure. Thanks. 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. We've also been adding field resources to support significant growth. You don't grow 40% 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. That was probably two-thirds.
The other third probably showed up in cost of sales, and I mentioned those earlier: the European Medical Device Regulations and the migration of Cardioband production. Regarding our cash balance, our philosophy and our strategy for deploying capital have 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, and purchasing options to buy other companies. Third, managing the balance sheet. We're going to continue to be a buyer of Edwards' stock over time, and opportunistically, we'll be executing share repurchases 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. 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. 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?
Well, thanks, Matt. It's a little tough for us to tell how fast the centers are going to join. We saw pretty good growth in the center. I think the last time we had reported on it, we said more than 650. You can see where we are now. 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 of those actually go for it and how fast do 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. That gives you some insight, but we can't be certain.
I was hoping you could give us some more insight, or inside baseball, on 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. 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. We'll just say this. You can see what our revenue assumption is for TAVR for the full year 2020, and we think 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 - Q1 2019. It's hard to know for certain, but maybe that's helpful.
Great. Thanks. Congrats.
Thank you. Our next question comes from Vijay Kumar with Evercore ISI. Please state your question.
Hey, guys. Congrats on a really solid print here. Mike, maybe on that last comment on the back half revenue growth in TAVR, the underlying , I guess, high end of 15% is the implication that we sustain and 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. It's difficult for us to know. Do we stay at double digits? Do we dip below it? Either of those are certainly possibilities. The growth is so strong. The good news is there are going to be more TAVRs done in the second half of 2020 than ever done in history. 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 probably the best guidance we can in terms of annual growth rates.
Gotcha. Focus on the gross margins here. Scott, did the recall impact you guys on the gross margins for Q4? How should we think about gross margin progression throughout the year? Thank you.
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. Maybe I can help at least with the baseline in Q4 and explain what happened in Q4 2019 versus Q4 2018, where we had about 30 basis points of higher FX on hedge gains in the fourth quarter of 2019 than we did in 2018. We had about 40 basis points of mix benefit that showed up in the fourth quarter, offset by those higher operating costs that we mentioned earlier in Israel and with European MDR. If you look out to 2020, we're expecting to continue to get a mix benefit that shows up on our gross margin. It can be 50 - 100 basis points or even more.
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 Kalia with Oppenheimer & Company. Please state your question.
Good afternoon, everyone. Mike, congrats on an excellent quarter. Mike, the question about capacity and your growth assumptions in TAVR has been asked. Let me see if I can come at it from a different angle. Our math is suggesting roughly 140-150 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? How do you look upon capacity utilization within these centers?
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 number of procedures done in a very large center and one that's small. 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, which has found the ability. We have a high-touch service model, so we're in every one of these cases. As they grow, for us to have the ability, for example, to flex in the U.S. and cover 40% growth versus the prior year was a heavy lift for us.
What happens is more patients show up. The line, the list, gets to be pretty long, and hospitals react to that by adding capacity. So far, we've been impressed by their ability to do that.
Got it. Finally, Mike, forgive me; I'm drawing a blank here. Did you all mention the M3 comparator arm? Thank you for taking my question, and congrats on a great quarter.
Thanks. No, we didn't mention the M3 comparator arm. 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. At some point, that will be published on clinicaltrials.gov, and you'll see it then. We'll let you know.
Thank you. Our next question comes from Rick Wise with Stifel. 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 SAVR and Critical Care. Can you remind us of the impact and what you're assuming or how you're thinking about the situation and what's reflected in guidance?
Yeah. Thanks, Rick. First of all, obviously, our key concern is always for our employees and patients. We feel we've been fortunate so far. We haven't had any impact on employees inside Edwards that we're aware of, and we've been able to maintain our supply line. 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 gone on with the coronavirus. We stay watchful.
Okay. Just as a follow-up, sort of a strange question maybe, but you probably saw that Abbott's Tendyne mitral device got approved for replacement in Europe today. My question is not about that as much as, is this an important moment for the field? 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, or the same? Thank you so much.
Thanks, Rick. Well, you know we are big believers in the opportunity for transcatheter mitral therapies. Whenever there's movement and a new regulatory approval for the whole field, that's a positive. We're glad to see that. You know about our portfolio. We're very focused on it. 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. We keep our eye on that. Any kind of favorable movement is good. I think there is a general openness to innovations within mitral disease.
Thank you. Our next question comes from Danielle Antalffy with SVB Leerink. Please state your question.
Good afternoon, everyone. Thanks so much for taking a question. Congrats on a really strong year and a 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 onto share, not losing share. What are you seeing? Specifically, I'd be curious about what you're seeing as the new centers open up and how they're adopting valves. Are they just going with one player, and so are they a little bit more protected from share loss? Curious about how that's playing out. Thanks so much.
Thanks. Danielle, as we indicated, we believe that our growth was comparable to the growth that was going on in overall procedures, whether that was in the U.S. or OUS. From our point of view, no real change of significance in our share position in the last quarter. There may have been changes in share position between our competitors; we really don't have clear visibility to it. When we gave our guidance in December, we indicated there would probably be some modest share loss in 2020. That's yet to play out. We also expected that to happen in 2019. It didn't really. It may have been just delays on the part of our competitors; we know they're still early in their launch process.
Just a quick follow-up: safe to say in Europe, it feels like things have stabilized there? It sounds like that's what you're seeing, too, from a shared perspective.
Seeing big share shifts. We obviously watch that very carefully. That's not such a fast-moving market that we don't feel like we have a reasonable handle on it. 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. First question is just to dig a 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 U.S., the 40%, there was a nice addition from those new centers, but again, we saw it kind of across the board.
Great. On the SG&A side, I understand that hiring field personnel in the U.S. for TAVR and TMTT in Europe makes sense relative to the growth there. Can you help us break out the marketing costs you incurred in the fourth quarter? Are those costs recurring at similar levels in 2020, or should they decrease? Thanks so much.
Yeah, thanks. I can begin here, and then Scott can add on what our 2020 guidance looks like in SG&A. We try to stay one step ahead of what we see as procedure growth, and we add resources that we think are 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. Having said that, maybe Scott, you're best to comment on what our guidance is for SG&A for 2020.
Sure. I guess I'd say 28%-29% for 2020. In addition to the clinical support and selling resources that are out in the field, we're also doing work around patient education regarding the severity of aortic stenosis and treatment options, the benefits of TAVR. We're doing outreach to referring physicians on therapy options available today. 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 Miksic 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 to follow up on something you talked a little bit about on your Analyst Day meeting and your Investor Day, and you've touched on here, I think, in terms of investments to kind of support identifying patients and so on. Mike, you talked a while back about tracking patients through the system. It sounds like maybe part of the investments you've made around CardioCare are helping to do that, I think, if I understand them correctly. Maybe if you could 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. You know what? Scott started going down this path. There are a few broad categories here. One is educating patients themselves; others are 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 have better echo findings and make sure that their referral pathways actually work. We have a benchmark program that allows centers to operate at maximum efficiency. It's pretty broad-based. As Scott mentioned, we've got a new initiative with the American Heart Association. It's broad-based; rather than me trying to detail it here, you should know that that is an area of new investment.
That's great. Just one follow-up, if I could, on the moving into early feasibility study for EVOQUE. If you could maybe just give us a sense of what we should expect in terms of the enrollment at some of these M.I.T. programs. 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. 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 stage, early feasibility studies and ultimately pivotal trials are going to enroll.
Fair enough. Thanks.
Thank you. Ladies and gentlemen, we have exhausted our allotted time for questions. I'll now turn the call back to management for closing remarks. Thank you.
Thanks for your continued interest in Edwards, and Scott, Mark, and I welcome any additional questions.
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