Greetings, and welcome to the Edwards Life Sciences 4th Quarter 2018 Results Conference Call. At this time, all participants are in a listen only mode. It is now my pleasure to introduce your host, David Erickson, Vice President, Investor Relations. Thank you, sir. You may begin.
Welcome and thank you for joining us today. Just after the close of regular trading, we released our Q4 2018 financial results. In today's call, we'll discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q and A. Our presenters on today's call are Mike Mussallem, Chairman and CEO and Scott Ullam, CFO. Before we begin, I'd like to remind you that during today's call, we'll be making forward looking statements that are based on estimates, assumptions and projections.
These statements include, but aren't limited to, financial guidance, expectations for product opportunities, commercial trends, clinical trials, litigation, new product approvals, reimbursement, competitive matters and foreign currency fluctuations. These statements speak only as of the date on which they are made, and we do not undertake any obligation to update them as of 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 product mix information can be found in our press release, our 2017 Annual Report on Form 10 ks and our other SEC filings, all of which are available on our website at edwards.com. Also a quick reminder that when we use the terms underlying and adjusted, we are referring to non GAAP financial measures.
Otherwise, we are referring to our GAAP results. Additional information about our use of non GAAP measures is included in today's press release and on our website. Finally, please note that because the SYDICUNE III low risk data will be presented just 6 weeks from now, we will not be making any further statements or answering questions about expected results of the trial. Accordingly, we are not updating, withdrawing or supplementing any of our prior statements related to this topic. Would appreciate you restricting our request given the timing.
And now I'll turn the call over to Mike Mussallem. Mike?
Thank you, David. We're pleased to report strong 4th quarter total adjusted sales of $983,000,000 or 10% sales growth on an underlying basis, consistent with our expectations, driven by our portfolio of innovative technologies. For the full year 20 18, we also reported 10% growth on an underlying basis and over $3,800,000,000 in sales, also in line with our guidance. Profitability was strong in 2018 with adjusted EPS growing over 20% even as we continue to invest aggressively in our innovation initiatives and infrastructure. As you heard at our Investor Conference last month, we are as convinced as ever in the tremendous opportunity to improve patients' lives by addressing deadly conditions and bringing significant value to the healthcare system.
In transcatheter heart valve therapies, global sales for the Q4 were $592,000,000 up 11% on an underlying basis and over 12% for the full year. We estimate global TAVR procedures this quarter continue to grow in the mid teens. Our worldwide sales grew at a lower rate due to a modest year over year share decline as we continue to exercise price discipline and hold global average selling prices stable. We estimate our global competitive position remains stable in the second half of the year. Also, late in the quarter, we were pleased to receive approvals for our Safety3 Ultra system in Europe and the U.
S. We believe this therapy will bring significant value to patients and providers. As highlighted at our conference, we believe there are a large number of patients suffering from aortic stenosis who are either undiagnosed or untreated. We are investing in programs to increase awareness, increase diagnosis, improve referral patterns and help patients receive the care they need based on medical guidelines. In the U.
S, total TAVR procedures for the Q4 grew in the mid teens versus the prior year and our growth was comparable. Growth was highest in newer and smaller centers, which are providing access to a broader population of aortic stenosis patients. We continue to enroll the U. S. Pivotal trial to study our self expanding CENTERA VAL in intermediate risk patients.
We estimate enrollment of this trial will be completed next year. In the Q4, we continue to enroll our continued access protocol for our U. S. PARTNER 3 trial. The late breaker presentation of the PARTNER 3 trial results is scheduled for the ACC scientific session in March and our guidance continues to assume receipt of the low risk indications late this year.
CMS is currently in the process of formulating a draft revision to the National Coverage Determination or NCD, which we expect to be released at the end of March for public comment. We assume any changes to the current NCD are unlikely to significantly affect the global TAVR opportunity. We expect the new NCC to be finalized by the end of June 2019. Outside the U. S, in the Q4, we estimate TAVR procedures continue to grow in the mid teens, while Edwards procedures grew in the low double digits year over year.
We continue to see excellent long term opportunities for growth as we believe international adoption of TAVR therapy is still quite low. In Europe, we estimate the TAVR procedures grew at an impressive mid teens rate. Growth in countries with lower TAVR adoption rates continued to outpace countries where the therapy is more established. On a year over year basis, we experienced some expected share loss. However, our share continues to be stable on a sequential basis.
We are continuing to control commercial introduction of our SAPIEN 3 Ultra and CENTERA systems in Europe as we focus on achieving high procedural success rates. While early, we're receiving positive feedback from clinicians on the unique features offered by both products and the potential to streamline the procedure and have meaningful impact on patient outcomes. Our plans are to replace SafeN3 with SafeN3 Ultra as the market leading therapy in Europe. In Japan, we continue to see strong TAVR adoption driven by SAPIEN 3 and new centers are being qualified. This is our fastest growing region in the Q4 where we believe aortic stenosis remains an immensely undertreated disease among the large elderly population.
Earlier this month, we reached an agreement with Boston Scientific to settle all outstanding patent litigation. We are pleased with this conclusion that allows us to move forward dedicating our time and resources to advancing our innovations in helping patients. In summary, we're encouraged by the continuing strength of our TAVR adoption globally and continue to expect our underlying sales growth for 2019 to be 11% to 15%. We expect our sales growth rate to ramp up following Q1 as we introduce new products and continue to develop strong clinical evidence supporting this therapy. We're committed to maintaining our leadership in TAVR, which remains a large global opportunity that we estimate will double in size double in size and reach approximately $7,000,000,000 by 2024.
Turning to our transcatheter mitral and tricuspid therapies or TMTT, we remain enthusiastic about the opportunities to treat the many patients suffering from these deadly heart valve diseases. As we previously outlined, we continue to invest aggressively in our portfolio and plan to achieve significant milestones in 2019. You can expect to hear incremental updates at medical meetings this year, and today I will provide some select updates. Beginning with transcatheter mitral repair, we've made some progress toward obtaining a CE mark for the PASCAL transcatheter valve repair system. In the U.
S, clinicians are treating patients in the Class IIb pivotal trial to study PASCAL in degenerative mitral disease, and we are activating new sites. We continue to expect the initiation of our CLASP IIF pivotal trial for patients with functional mitral disease in late 2019. We were disappointed to learn earlier this week that Abbott is pursuing cat litigation regarding our PASCAL system in the U. S, UK and Germany. PASCAL represents the culmination of 20 years of innovation by Edwards to develop a novel, differentiated and more advanced platform for patients in need.
The IT landscape for transcatheter microtherapies is complex and crowded. In fact, Edwards owns an impressive portfolio of intellectual property in this space. We plan to vigorously defend ourselves and are currently evaluating a range of responses. Patients continue to be treated commercially in Europe with TARGETASAN. As expected, 4th quarter sales were limited to $1,000,000 due to the ongoing supply constraints.
We're continuing to transfer production of this platform to other Edwards manufacturing facilities in order to fortify our near term supply and scale for long term volume expectations. This process remains on track and we continue to expect supply to progressively improve throughout 2019. As this therapy advances, we believe that the annular reduction for rivacardiaband can be an important first line treatment for many mitral patients. In micro replacement, we continue to see significant progress in both of our novel platforms and remain strong believers in our transseptal strategy. We have initiated our U.
S. Early feasibility study for Evoque and are encouraged by the early clinical results. We're also continuing to enroll patients in a U. S. Early feasibility study for SAGEEN M3 and plan to initiate a U.
S. Pivotal trial in late 2019. In transcatheter tricuspid repair, again constrained by supply, clinicians continue to treat a limited number of patients in Europe with our Cardioband tricuspid system and we've received positive feedback on this therapy. In the U. S, clinicians are treating patients in our early feasibility study.
In summary, our guidance for total TMTT revenue assumes approximately $40,000,000 for 2019. We continue to estimate the global TMCG opportunity to reach approximately $3,000,000,000 by 2024 and are passionate about bringing these solutions to these deadly diseases and improving patients' lives around the world. In Surgical Structural Heart, adjusted sales for the Q4 of $212,000,000 were up approximately 5.5% on an underlying basis, excluding the impact of the consignment inventory conversion, which is now complete. For the full year, underlying growth in this product line was 3%. 4th quarter growth was driven by solid aortic unit volume and continued adoption of our newer premium aortic valve.
We're continuing to launch our Inspira Resilia aortic valve at all major regions and are encouraged by the strong adoption of this new class of resilient tissue valve. This valve is designed to be an attractive option for active patients and we've observed the trend of physicians treating younger patients with INSPIRIS versus traditional heart valves. We have begun enrolling our RESILIENCE trial, a prospective study to evaluate durability of RESILIA surgical tissue valves in patients under 65. And we remain on track to begin treating patients with our Harpoon system in Europe by mid year 2019. In summary, in surgical structural heart, we continue to expect full year 2019 underlying sales growth to be 1% to 3%.
And even as TAVR adoption expands, we are excited about our ability to provide innovative surgical treatment options for more patients and extend our global leadership in surgical structural heart technologies. In Critical Care, sales for the quarter were $178,000,000 and grew 10% on an underlying basis. For the full year, underlying sales grew 11%. This quarter's performance was strong across all of our critical care product categories, led by the healthy demand for HemoSphere and the continued growth of enhanced recovery. Sales in the U.
S. Continued to be robust this quarter. HemoSphere, our next generation all in one monitoring platform that is replacing our existing monitoring system, continues to receive excellent feedback from clinicians. This platform is designed to provide greater clarity on a patient's hemodynamic status and enables our artificial intelligence capabilities. These new monitors just continue to be an important growth driver for our critical care product line, although year over year comparisons will become more difficult in 2019.
In the Q4, we are pleased to announce FDA clearance of our Acumen Hypotension Prediction Index Software or HPI for use on HemoSphere. This platform is expected to be an important growth driver for 2019 and the commercial launch is underway. We continue to collect clinical evidence on this technology, which introduces artificial intelligence to hemodynamic monitoring through a machine learning data driven algorithm that indicates the likelihood of a hypotensive or low blood pressure event before it occurs. Additionally, we are on track with our assisted fluid management clinical trial in the U. S, which we have also described in our investor conference.
In summary, we continue to expect 2019 underlying sales growth of 5% to 7% as comparisons become more difficult throughout the year. We remain excited about our pipeline to innovate critical care products and look forward to continuing our global rollout of HemoSphere. And now I'll turn the call over to Scott.
Thank you, Mike. I'm pleased to report that our strong finish to the year enabled us to broadly meet or exceed our guidance for 2018. Today, I'll provide a wrap up of 2018, including detailed results from the Q4 as well as provide guidance for the full year and Q1 of 2019. For the full year 2018, adjusted sales increased 10% on an underlying basis to $3,800,000,000 Adjusted earnings per share grew 24 percent to $4.70 and we generated $786,000,000 of adjusted free cash flow. We are also pleased to invest in growth initiatives even more than originally planned in 2018 due to the benefit of U.
S. Tax reform that reduced our effective tax rate by approximately 400 basis points. We utilized the savings of over $40,000,000 to hire new employees, accelerate research and development initiatives, and contribute more to employee retirement accounts, while also growing earnings. And after recognizing the impact on unrepatriated earnings, we were able to utilize cash formerly trapped outside the U. S.
To fund growth investments, expansion of our facilities and share repurchases to offset dilution from stock option exercises. Unfortunately, the suspension of the medical device excise tax is scheduled to expire at the end of 2019. And if it is not repealed, it will largely consume the savings from tax reform. Consistent with prior quarters this year, adjusted sales exclude a sales return reserve related to our conversion to a consignment inventory model for surgical valves in the U. S, which was $5,000,000 in the 4th quarter.
As planned, we completed the conversion process in 2018 with a full year negative impact to reported sales of $83,000,000 Adjusted sales in the 4th quarter grew 10% on an underlying basis, and adjusted earnings per share grew 24% to $1.17 versus the prior year. GAAP earnings per share was $0.03 which included several one time adjustments, primarily a non cash charge of $116,000,000 or $0.52 per share related to the impairment of CardiGen intangible assets that I discussed at last month's investor conference and a $180,000,000 charge or $0.65 per share related to the previously announced settlement of patent disputes. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. I'll now cover the details of our results and then discuss guidance for 2019. In the 4th quarter, our adjusted gross profit margin was 76.1 percent compared to 73.8 percent in the same period last year.
This improvement was driven by favorable foreign exchange, the benefit of a more profitable product mix and the absence of last year's expenses associated with the closure of our manufacturing plant in Switzerland. These benefits were partially offset by continued investments in manufacturing capacity. We continue to gross profit margin to be between 7.6% and 78%. Our rate should be lifted primarily by foreign exchange along with an improved product mix tempered by capacity investments. Selling, general and administrative expenses in the 4th quarter were $288,000,000 or 29 percent of sales compared to $273,000,000 in the prior year.
This increase was driven primarily by TAVR therapy adoption initiatives, partially offset by lower reported expenses outside the United States due to the stronger U. S. Dollar. We continue to expect SG and A excluding special items to be between 28% and 29% of sales for full year 2019, which includes the continued suspension of the medical device excise tax until the end of this year. Research and development expenses in the quarter grew 11% to $163,000,000 or 16.7 percent of sales.
This increase was primarily the result of continued investments in our transcatheter surgical heart programs, including spending on clinical trials. For the full year 2019, we continue to expect R and D as a percentage of sales to be between 17% 18% as we invest in clinical trials to expand indications and develop new technologies. Regarding taxes, we recorded a direct benefit to earnings this quarter due to deductions resulting from our litigation settlement and intangible asset impairment. Excluding the impact of these and other special items, our tax rate this quarter would have been 17.2%. This rate includes an approximate 200 basis point benefit from the accounting for employee stock based compensation consistent with our guidance.
Our full year tax rate in 2018, excluding special items, was 13.4%, and we continue to expect our full year rate in 2019 to be between 12% 14%. Foreign exchange rates decreased 4th quarter sales growth by 1.6 percent or $14,000,000 compared to the prior year. At current rates, we now expect an approximate $60,000,000 negative impact or about 1.5 percent to full year 2019 sales compared to 2018. FX rates positively impacted our 4th quarter gross profit margin by 110 basis points compared to the prior year. Relative to our October guidance, OpEx rates positively impacted earnings per share by about $0.01 reflecting our effective currency hedging program.
Free cash flow for the Q4 was $235,000,000 We define this as cash flow from operating activities of $293,000,000 plus capital spending of $58,000,000 For the full year 2018, adjusted free cash flow was $786,000,000 Turning to our balance sheet. At the end of the quarter, we had cash, cash equivalents and short term investments of $956,000,000 Total debt was $594,000,000 We repurchased 1,800,000 shares during the quarter for $272,000,000 including the $250,000,000 accelerated share repurchase we announced at the December Investor Conference as well as additional shares repurchased through a 10b5 program. As a result of these repurchases, average shares outstanding during the quarter declined to 212,000,000 It is notable that in the past 2 years, we have reduced fully diluted shares outstanding by approximately 2.6% or 6,000,000 shares. We continue to expect average diluted shares outstanding for 2019 to be between $211,000,000 $213,000,000 Before turning the call back over to Mike, I'll finish with guidance for 2019. Our full year sales guidance ranges communicated at the Investor Conference last month remain unchanged.
For transcapitator aortic valve replacement, we continue to expect a range of $2,400,000,000 to $2,700,000,000 for surgical structural heart $810,000,000 to $850,000,000 for critical care $670,000,000 to $710,000,000 and for TMTT sales of approximately $40,000,000 For total Edwards, we expect sales in 2019 of $3,900,000,000 $4,300,000,000 For the full year 2019, we continue to expect adjusted earnings per share of $5.05 to $5.30 and free cash flow excluding special items of $800,000,000 to $900,000,000 For the Q1 of 2019, we project total sales to be between $950,000,000 $1,010,000,000 and adjusted earnings per share of $1.15 to $1.25 And with that, I'll pass it over
to Mike. Thanks, Scott. Our strong 2018 performance reinforces our confidence in our focused innovation strategy and our longer term outlook, and we anticipate an exciting 2019 as we pursue important therapies that will benefit many more patients. We look forward to launching a number of new technologies as well as achieving meaningful milestones across our product lines. And we're confident that our differentiated strategy and focus on leadership will continue to create value and benefit to patients we serve.
With that, I'll turn it back over to David.
Thank you, Mike. Before we open up for questions, please note that Edwards is planning to host an analyst meeting at ACC on Sunday, March 17th. This meeting will be webcast for those who cannot attend in person. More information will be available in the coming weeks. We're ready to take questions now.
Our first question is from the line of Bob Hopkins with Bank of America. Please proceed with your question.
Thank you and good afternoon. Just wanted to start out with a pipeline question related to mitral and then I had a follow-up on the Q1 guidance that you're providing. Start with the pipeline question on mitral valve repair. I'm just curious on PASCAL. Will we see some European PASCAL data at ACC or PCR?
Just give us a sense of when we'll see some PASCAL data and what exactly we'll see? Thank you.
Yes. Thanks, Bob. No, we're not expecting any data from PASCAL at ACC. We would expect to see PASCAL later in the year at PCR. There's a German meeting called BGK, which it might also share some PASCAL data.
So that might be the first time that you see some of that CE Mark data.
Okay. Still expecting midyear approval? Correct. Okay. And then on the Q1, either for Mike or for Scott, I'm sure there will be some questions on the earnings side given it's below kind of where the consensus is.
But I wanted to kind of ask about on the top line. The numbers you gave us, can you give us a sense of what growth rates that assumes? And I know at the Analyst Day, you said growth would be lower in the Q1. So maybe you could just kind of walk us through the revenue guidance to start, especially in light of the fact that you're launching the new TAVR launches. I would expect those you could start to see some perhaps some acceleration in TAVR growth in the Q1 because of those launches.
So just wanted to kind of ask a little bit about the Q1 revenue growth guide. Sure. So let me just take the full year underlying growth rate guidance, which for total Edwards is 9% to 12%, TAVR 11% to 15%. For TMTP, we're starting from a really small base, call it several $1,000,000 in 2018. Because the growth rate is not meaningful, but we're targeting around $40,000,000 in revenues for 2019.
Surgical structural heart, 1% to 3% under line growth and critical care 5% to 7%. So to your question about TAVR in the Q1, we're going to continue to grow, but a lot of the growth drivers in TAVR hit after the Q1, such as the new products that Mike talked about and clinical evidence that we're going to be continuing to develop during 2019. For TMTT, similarly, we'll start to see new products being recorded at the sales line as we get later into 2019 and as we start seeing some of the supply constraints continue to alleviate that have been affecting cardiac demand. In critical care, we probably came out of the 4th quarter stronger than we expected, and that may accrue to our benefit in the Q1. But overall, you should expect that Q1 sales and underlying growth year over year for Edwards to be lower than the rest of the year.
In fact, it might even be lower than the bottom end of that 9% to 12% range. This is something that we highlighted at the investor conference last month. We mentioned it again at the JPMorgan conference earlier this month. But overall, we're really positive on a very successful growth year in 2019. Yes.
And I'll just add, Bob, particularly on the TAVR numbers. Rather than us trying to score a touchdown in the Q1, we're executing a playbook where we very carefully try and roll out these technologies because the Phase 2 and 3 has such a strong track record clinically that we really feel like we want to have an outstanding launch of the Ultra Valve and CENTERA. They really are cheaper. They're different. They behave different in the hands of clinicians, and we're being very thoughtful about that.
But no changes since the Analyst Day, really. There's nothing changing in the guidance as it relates to Q1 or how the year is developing? No changes in the guidance for the year since the Analyst Day last month, Okay. Thank you very much.
Thank you. The next question is from the line of Isaac Brown with Goldman Sachs. Please proceed with your question.
Good afternoon, guys. Thank you. First question is on commercial org. Just hoping, Saad, if you could maybe help quantify the investments that you're making in the commercial organization ahead of the low risk indication that you guys expect later this year. And the reason I ask is I'm just thinking about how any incremental spending will ramp over the course of the year assuming the data is good at ACC.
Yes. So we've been investing in the commercial organization both in Europe and in the U. S. To support growth in TMTT and TAVR in particular. And we're going to continue to do that.
But you shouldn't expect that it's going to be a big stair step just because we've been doing this on an orderly fashion over time. In the Q4, SG and A as a percentage of sales was 29.3%, I we're going to be continuing to grow at that rate that we talked about at the Investor Conference, 28% to 29%. The other thing that we're doing on the FDA line is continuing to invest in therapy development initiatives and making sure that we are making patients and physicians and clinicians aware of therapeutic alternatives. And so we're investing even more aggressively going forward than we have in the past. Got it.
And then just
a follow-up on Europe. Appreciated your comments regarding the handouts that you expect from S3 over to Ultra and CENTERA. I'm kind of curious how quickly you expect that to play out this year and what that means for ASCs in TAVR in the region or globally? Thank you. Yes.
I mean, ultimately, we expect the Ultraval to replace Season 3. We haven't put ourselves on a strict timetable. What we're putting a premium on is to have outstanding results. But we'd like to move that right along. I expect both of the volumes to certainly move in Europe by the end of the year, but we don't have a firm number there, Isaac.
This is really more or less driven by our ability to execute at an extremely high level. In terms of ASP, we would expect, if you go really big picture, that you would see some modest ASP declines that's associated with volume discounts. But other than that, we're very disciplined strikers, so we don't expect this to be much different.
Thanks, guys.
Thank you. The next question is from the line of David Lewis with Morgan Stanley. Please proceed with your question.
Good afternoon. I'll start with Scott and maybe
a follow-up after that.
Scott, at Analyst Day, you suggested there were some allotments that were made for the Boston Legal Dynamics, and now I'm sort of thinking about 'nineteen. Ultra could come to Germany. There's no UK injunction coming up in May. So what impact now does that have on guidance?
Yes, I think it probably doesn't change our guidance specifically. It might derisk some of the guidance in sales that we provided for TAVR, but it doesn't fundamentally change our guidance at all, David. Okay. And just, Mike, just two questions for you. The first is you talked about, I would say, modest share loss in the U.
S. And stability ex U. S. And given the learnings that you have from Symtera and Ultra in the Q4, I wonder if you could just comment on how you're feeling about those expectations here and January based on the Q4 knowledge? And then
just a follow-up on Bob's question, do
you still intend to launch PASCAL mid-nineteen if you
don't have an injunction? Thanks so much.
Yes. Thanks, David. Yes, first of all, on your first question, no, our assumptions really have not changed since our investor conference. We continue to get positive reinforcement from our clinicians on what they've seen of culture and CENTERA, although we would admit that this is still early feedback. And so we're proceeding there.
So nothing that's really changed that. And then your second question was about what we expect for launch. Yes, we expect the European launch by mid-twenty 19, really haven't changed anything in that regard.
Thank you. Our next question is from the line of Larry Biegelsen from Wells Fargo. Please proceed with your question.
Good afternoon. Thanks for taking the questions. One strategic question to you, Mike, one guidance question for you, Scott. So Mike, you recently hired a new Chief Scientific Officer who is very well regarded in the cardiovascular state, but I believe is focused on the side of structural heart disease. So what's his mandate to be at Edwards?
And should we see any change in the company's focus or will your main types of focused in structural art? And I'll just throw in the second question for Scott. The follow-up on the earlier question on Q1 EPS, I think you've seen your points down year over year. So can you help us understand why that might be? Thanks for taking the questions.
Yes. Thanks, Larry. Yes. So we're very pleased that Doctor. Todd Britton is joining our organization as the Chief Scientific Officer.
He's got a tremendous background as both an engineer and a physician and which he's going to bring a lot to our company. The short answer is no, absolutely nothing is changing in terms of our hyper focus of our strategy. We're going to remain totally focused on structural heart disease and critical care technologies. Todd brings with him a lot of expertise, and we expect him to just help us even be more successful in the future than we have been in the past. And Larry,
on the ETF for 2019, if I were to look down at my risk band playbook, I'd say we're going to continue to invest aggressively in some of our growth initiatives that hit the R and D line and SG and A line. And sales growth, as I mentioned before, doesn't kick in in earnest until post the Q1. So you're right, Q1 EPS estimates at the midpoint would lag Q1 of 2018, and that's the reason.
Thank you. Thank
you. The next question is from the line of Vijay Kumar with Evercore ISI. Please proceed with your question.
Hey, guys. Thanks for taking my question. Maybe one on TAVR, just focusing on 1Q. Mike, it looks like yours was stable Q on Q, maybe international is a little bit softer. How much of this is just maybe the market softening a little bit?
I think Medtronic is commenting what maybe is overall market softening a little bit. And I think I saw something about share being stable. So maybe can you talk about share Q on Q and what happened to market growth?
Yes, sure. I can give you an estimate of what's going on. So we still think that the overall global market is growing in the mid teens and we think the U. S. And OUS actually are at very similar levels of growth there.
Is it possible that the market grew a little bit less in the Q4? It could have. It gets very difficult, especially the last 2 weeks of December to be very accurate in terms of estimating this. Just one implant per account could have dramatic impact on results. And so very difficult.
I wouldn't see that as a big signal. In terms of the competitive positioning, we think that's been quite stable overall on a sequential basis, both inside and outside the U. S.
That's helpful, Mike. And then maybe one for Scott. Scott, it looks like FX benefit gross margins in the queue. It looks like the benefit for Q1 should be higher if you don't have the hedges impact the gross margin line. I'm having a hard time to on on the EPS one.
Is there anything on the r and d line, which is, you know, you have a big up in Q1. So maybe just help us understand the Q1 dynamics.
Yes. Well, let me start with the first question on the Q4 and just take you through the impact of FX if you look down the P and L. Sales, we mentioned before, about 1.6% lighter due to a strengthening dollar. Gross profit margin benefited by over 100 basis points in Q4. R and D came down a little bit and SG and A was a little bit lower, again, as a result of a strong U.
S. Dollar. And earnings in Q4 benefited to the tune of about 0 point $3 If you roll forward to fiscal 2019, we were expecting a $90,000,000 headwind in sales last month at the Investor Conference. At current rates, that looks more like $60,000,000 of a headwind. And you're right, in terms of gross profit benefits and FX, it's probably closer to a couple of 100 basis points in the full year 2019.
And that should help our EPS a little bit as well when you go down to the bottom line. Although, again, if the current rates and those move around, it will impact our EPS forecast as we get into the year.
And just anything on the R and D line, gross margins potentially a rough one, I mean, the hard coming into the EPS Q1?
Yes. So R and D will come down a little bit and SG and A will come down a little bit, again, as a result of FX. Most of those expenses in R and D hit us in the U. S. There's relatively little in R and D that we realized from outside of the United States.
Our next question is from the line of Jason Mills with Penn Credit Union. Please proceed with your question.
Hi, guys. Thank you for taking the question. Scott, I'd like to start with you and I'll apologize in advance for the week for the question, but I wanted to kind of set it up.
As you look at your P
and L over the last 3 years, including the guidance for 2019, you've spent about the same percentage on SG and A in the last 2 years and you plan to spend similarly this year. You're growing your R and D and you're also growing your top line and your gross margin line. And so that's been the primary contributor along with tax rate improvements and share buybacks to drive a faster earnings decline. I'd just like you to maybe get a peek under the covers with respect to how conceptually you're thinking about your P and L as a company and specifically the middle of the P and L leverage that you might or might not still have as you look forward, understanding you've only given us 1 year forward guidance. Just conceptually, whether or not we, as outsiders, should expect or model as we model longer term to see leverage in the middle of the P and L?
Yes.
So Scott, why don't I answer the first part of this and then talk to the football. First of all, our focus is on top line growth. And given the value of the innovations from Edwards, we really feel like that the investments that we make to drive that top line, we get a very good return on. And Scott, why don't you comment on how you feel the rest of the P and L should be viewed? Yes.
I mean, we've been as you mentioned, Jason, we've been investing aggressively in R and D and SG and A to help support organic top line growth, which is our number one financial priority. We've still been able to drive bottom line growth. And in 2018, most of that bottom line growth was supported from this legislation because our expenses have been growing even higher than the top end, than the top line for a while. Over time though, longer term, we're expecting that R and D as a percentage of sales should come down. We're expecting the top line to grow faster than Now this isn't it's not a direct line down because the clinical trial expenses are lumpy.
And as the trial is ripping up, we get more R and D that hits the income statement. As it rolls off, then we get a lower percentage of the income statement. But over time, you should see R and D as a percentage of sales to come down from that 17% to 18% level that we're expecting this year. SG and A as a percentage of sales, you know, at 28% to 29%. We're running at a level that we think is sustainable.
And while we'd like to get some better utilization and efficiencies on our back end and administrative expenses, we think we're invested at the right level in the field and we're going to continue to invest with physician facing resources as business continues to grow. Net all of that out, we're expecting that we should get some lift in operating margin and some lift in EPS that will grow faster than top line. In 2018, rather, we got a little bit of dip in operating margin. We finished 2017 at about 30% operating margin as a percentage of sales. We did about 30.3% in 2018.
So a little bit of lift as we exited and our desire is to continue to do that. If we wanted to really turbocharge earnings, we could do it easily if we cut into R and D and SG and A. Our plan again and our priority is to continue to invest to grow top line over the long term. That's helpful. Thank you so much for all that detail.
And then, Mike, a much more brief question for you. I know you've been asked this several times, I'm sure, since TCP, but COAPT, Have you seen any demonstrable changes in the case of screening or the level of interest in any form that you might be willing to talk about as it relates to the repair or replacement trials that either you are conducting and you're conducting
the most that I know
of or any of the other trials other companies have done, just generally speaking, pace of the screening enrollment and interest level?
Yeah. It's something there that's I'll just take it. It does not change our strategy. It just reinforces our confidence As we have before, we're very committed to developing this portfolio of these innovative therapies for people that need mitral and probably help some treatment. We were big believers before that happened and we'll continue to be believers now.
I think it's been helpful that more patients will be treated as we have really safe and effective therapies.
Thank you. Our next question is from the line of Joanne Wuensch with BMO Capital Markets. Please proceed with your question. Good evening and thank you for taking the question. Most of our focus just remains on the U.
S, Europe and Japan, but there's a big world out there. Could you give us an update on plans to enter other geographies?
Yeah. Thanks, Joanne. I mean, in particular, I assume you're talking about TAVR.
Yes, please.
Yes. So TAVR is dramatically undertreated in so many places around the world and we're continuing to have a lot of impact in places that go beyond Europe, the U. S. And Japan. I mean, obviously, a clear and important target would be China.
And although we're not near the end zone on that one, that is one that we are actively pursuing. It's a pretty complex process there, and we don't expect to have anything really accomplished of substance in 2019, but it's a priority for us and we think another potential growth engine in the future.
Thank you. My second question has to back to mitral data. It sounds like there will be some PASCAL data at PCR, but what other data coming that you're looking for this year, whether it's ACC, PCR or some other venue?
Well, that's a difficult one for me. Of course, we expect there to be pass trial data, particularly the CE Mark data that will become available later on this year. But I would expect that medical meetings, you know the clinicians that are engaged in this, they're they're very anxious to be able to share what they have. And so, they're going to be sharing, even EFS data when they get a chance and that's collected. Maybe the most meaningful data that will be available later this year will be some of the pivotal data from Class IID.
These are the degenerative patients There would be study with PASCAL. So that was one that you might look for later in the year that would have some substance.
Thank you. Have a good year.
Thank you.
Thank you. Our next question is from the line of Matt Schneckford of Credit Suisse. Please proceed with your question.
Hi. Thanks for taking the question. So maybe I appreciate the color, Mike, on the U. S, OUS trends. And I think that's something that had some difficulty with parsing given the worldwide TAVR numbers that you folks are reporting now.
And I guess if you could provide any color as to what are some of the pandemic affecting Europe and in something a bit more detail maybe or regionally? And then what are some of the things that are enabling you to kind of stay with the market, hold share, defend share, if you will, in the U. S? I have one follow-up.
Thanks. A little different in Europe than it is in some other markets. Rather than the regulatory process being the important catalyst, the reimbursement process is quite important. And as I tried to indicate in our prepared remarks, what we are seeing are those countries that have been slower adopters traditionally and have a lower penetration rate in terms of cappers per million population, for example, are growing faster. We're watching that happen across the board, whereas those that were early adopters aren't growing quite as fast.
So maybe that helps give you a sense for some of the color that's going on. The thing that we feel really good about is, overall, here's a market that's still growing in the mid teens for all these years. I mean, TAVR was introduced in 2007. Not many technologies are still growing at that kind of rate and tells you about how much the therapy has continued to improve and how much opportunity there is for continued adoption. Many of these countries are just playing low in terms of their adoption rates today.
And so although it's painful to watch a flow, medicine changes sometime. I guess the upside of that is there's still a lot of opportunity ahead.
Okay. And just if I could clarify something. When you talk about faster growing later adopters, I mean, we talked to doctors and centers in some of these countries, and there is a budgetary consideration when considering which one of the platforms they're going to use or use more or use less. And is that, I guess, in those geographies, present a bit more of a challenge in terms of capturing the same kind of share that you might have in your earlier document kind of like Central European countries. And then I just have just one follow-up on foreign bonds, if I could.
No, Matt, you're right on. That's very much the case. There are people that just have such economic constraints that they feel like it has to drive their clinical conditions. We strive very much to make sure that we try and maintain price discipline so that our good customers aren't disadvantaged versus those that just don't have the ability to pay. And it's a consequence of where we are.
But overall, I'm very pleased with our leadership position in this therapy. And we're hopeful that as things improve in these countries economically and as the cost of TAVR continues to come down, that it's more and more accessible. Okay.
And then on the product launch, just Ultra in particular, I guess, so there's been a couple of periods over the past couple of years where your commentary heading into the year would include something like we expect to potentially lose some share to a Medtronic product launch that you might be facing in the U. S. And this is maybe the first time in a couple of years that you've really got a significant upgrade to the safety and platform. Not to push you too far out over your skis, but is there some potential here that this is something that gives you a little bit of a tailwind for you as to where you might have been sort of blankies on 2, 3 years ago?
Matt, are you talking about local U. S. Or OUS? In the U.
S, in the U. S. In particular.
Yeah. Well, in the U. S, we've tried to be clear here, nothing has really changed in terms of our assumptions. There's only some 2 competitors and we expect to have a third midyear and we expect that to have a modest impact on our share. And even though we're very excited about rolling out Ultra, we think that's inevitable.
At the same time, there's more and more evidence that's going to be presented. So we think that the TAVR market is going to continue to grow. So there's every opportunity for us to grow nicely as well.
Fair enough. Thanks.
Thank you. Our next question is from the line of Rick Wise with Stifel. Please proceed with your question.
Good afternoon, Mike. I'd like to go back to the cardioband. It sounds like much as you said at Analyst Day and recently the gradual process of improving supply, transferring it to the other Edwards facilities on track. Maybe just if you could just drill down into that a little more. Is this going to be sort of rapidly resolved as you unfold or no, it's really going to take to the second half?
Maybe just help us understand where you are in the process. And maybe just as part of that for Scott, can we talk about the $40,000,000 Scott, is this sort of half part of the event half pastel with the launch in Europe and the trial getting underway? How do we think about that breakdown?
Okay. Well, thanks. Yes, no, it's a priority for us to improve Cardiacom. But no, our plans are really unchanged. Our expectations are unchanged.
It's just going to be a gradual improvement in the supply situation during the course of the year. We have some pretty good confidence by the end of the year that we're going to have this transferred and have this in pretty good shape.
That's going
to take us some time, so I think we should anticipate a ramp.
And I'd just add to that. Our plan is our expectation is that PASCAL will probably be a larger contributor to that $40,000,000 in Fortioband in 2019. Also, Nitin, since you raised it, we're spending a lot of money in facilities and in our operations and getting our global supply chain positioned to support growth from all of our business units. So our guidance for 2018 was that we'd have CapEx to over $250,000,000 We'll probably come in a little bit less than that. That's grown in 2019 to about $350,000,000 So you've seen our announcements about continuing to build out our facility in Costa Rica, our new brownfield facility in Ireland.
We're planning to break down our greenfield facility in Ireland as well as we continue to add capacity in the U. S. And other locations around the world. And so these are all investments that support not just the transfer of Cardioband supply chain capacity, but other products that we're bringing to market as well. Thanks.
So just as a follow-up, maybe turning back to the IT discussion. I mean, clearly, as this has a huge portfolio of IT, And I feel like the back and forth of litigation is very similar to other periods of med device innovation I've seen over the years. And Mike, this might be really a dumb question, but it's curious to hear your thinking. Is there any silver lining here as these get worked through and resolve the previous place that the Boston settlement behind you. But does this sort of increase the moat around the major players who are really committed like you are to R and D and innovation and IP?
Or I mean, I don't know. I'm just maybe you have a better way to answer it.
Thanks a lot. Yeah. I'm not positive exactly where you're going with that question, Rick. Bigger picture, for sure, these patients need innovation. They have some pretty terrible outcomes right now, and they really don't have great solutions with a catheter based approach.
If we could deliver things to them that are really safe and effective, that's great. And actually a competitive environment with not a number of options, probably not a bad thing from a patient perspective. Yes, we're disappointed that Abbott chose to initiate patent litigation and we're obviously thinking deeply about that, but we think the best solution is not really to keep the fight. Even though we're going to aggressively defend ourselves, we much we think a competitive environment is the best situation for everybody.
Thank you. Our next question is from the line of Raj Denhoy with Jefferies. Please proceed with your question.
Hi, good afternoon. Maybe I
could follow a bit on
the commentary around Europe and the pricing pressure you might be seeing there. And I know it's relatively constrained as it's been for several quarters now. Is there anything more you can offer in terms of where that is and what's driving it? Is it still just a few very isolated centers? Or are you seeing it more broadly?
Just feel anything
would be helpful. Yes. I don't know that I have great details to add to that, Raj. I'd say in general, we see it broadly rather than in a focused way. We see a pretty consistent premium price.
We feel like we pretty consistently have substantial premium versus our competitors. Of course, people go to the large volume centers and would do some of the most aggressive bidding. But generally, I'd say it's broad. And we just have chosen with CPN free not to go down that road. We have a lot of confidence in our product.
We think highly differentiated in terms of its performance and we've been disciplined in our pricing.
Well, it's a little difficult to parse out from the results you're getting us now. But in terms of the share loss, I mean, how much share do
you think you may have lost in Europe at this point? Well, again, what we try to indicate here is sequentially, probably the second half of the year has been at least by our estimates, it's been pretty flat. If you go from a full year perspective, it's probably 1 to 2 points, something in that kind of range.
Okay. So it doesn't seem like it's getting worse relatively. No. I'm a matter
of fact, the opposite is that we think it's been pretty stable here for the last couple of quarters.
That's great. That's helpful. Thank you.
Our next question is from the line of Robbie Marcus with JPMorgan. Please proceed with your question.
Thanks for squeezing me in here. Appreciate it.
Just wanted to ask this
a couple different ways. Maybe I'll try a different one. If I think back to the conversion, it's XT and then it's 2nd and 3, it went very rapidly. Maybe you could just help us understand a little bit better why the hesitation to roll out new products in Europe on a more aggressive basis?
Sure, Robbie. It's actually not as complicated as you might think. You know, safety in was a great product. When safety in XT came along, it was significantly better. It was a giant step.
We went fast. When safety in 3 came along, it was a giant improvement. It went very quickly. Sation 3 has such stellar performance. And the Sation Ultra valve, for example, is just different.
It's got a different sheet. It's got different ways that the valve is delivered. And we just want to be very careful with that. When the performance is good as safety 3 is, we can't tolerate one mistake out of a 100 cases, right? We really need this to be virtually flawless.
And that's what's driving our caution and our care to make sure that we get this just right.
Okay. Helpful.
And just last year on surgical structural heart, as we're looking at a big ramp
in center growth over the course of 2019,
how should we think about the cadence here? And maybe if you could help us understand what percentage of that business is exposed to aortic surgical valves?
Thanks. At this point, the bulk of our business is aortic still in the surgical hair towel business. And so there's more than half of it that's exposed, if you will. Now as we've been introducing our new premium products, those are probably consuming maybe not quite a quarter, but a significant portion of the volume as well. And so we expect the growth of those, particularly in Scarif, which is enjoying a lot of success to be able to offset some of what we think is going to be natural cannibalization that comes from TAVR.
Okay. Any way to help us understand maybe on the volume basis that the more you move into low risk, what the assumptions are around cannibalization and how we think about that through the balance of the year?
Well, I mean, we think about that when we provide our guidance. And so we thought about that in advance. So when we give the guidance of 1% to 3%, you notice it's lower than the growth rate this year. Part of that is anticipating continued progress and particular progress on the low risk patients that's going to begin probably during 2019. So no, it's really it's anticipated in our guidance and we really haven't seen anything that changes our view at this early date.
Our final Just
wanted to start with, Mike, you and your team talked a bit about asymptomatic patient population, the opportunity there. I was just wondering how you see it playing out post low risk data. Do you feel like physicians will be more aggressive in terms of kind of eliciting symptoms or even stress some of these patients or think we're going to need to wait for early TAVR data for that asymptomatic patient population beginning to penetrate it?
And I just have one follow-up. Well, thanks. As you know, we're very excited about early TAVR, but it's going to take us a while till we see that. It's continuing to enroll nicely. I'd like to think that TAVR continues to stay popular with the spotlights provided by additional evidence.
We'll maybe stimulate that enrollment some, but it's early to tell. But we're making steady progress and we're really looking forward to getting results with that trial because we believe that's an underserved population.
Within the just a thought from that I understand you're just within the recent patients, Investor Day, I missed your outlook on the asymptomatic patient population. Do you think there is a segment of asymptomatic patients that just need to have their symptoms listed and how big could that be?
Yeah. We think it's a significant issue. We just think it's complicated for the health care system to both diagnose the aortic stenosis itself and symptoms and to attribute the symptoms to aortic stenosis rather than attributing it to someone else. And that complexity leads to confusion and ultimately leads to patients not being treated. And we think it is a real problem.
And we're spending a lot of time thinking about what we can do to improve it. One of the single most important thing we can do is to demonstrate it through the early TAVR trial that there's a big issue. But this is not uncommon. And we find in a lot of our own personal experiences to find these situations where people with symptoms just the symptoms are not recognized.
Great. And then just
my follow-up was just on manufacturing plant build out in Costa Rica and Ireland. Are there plans to transfer the Pascale manufacturing into one of those facilities? Thanks a lot.
Yes, thanks. Those build outs are going really well. We just don't comment on where we manufacture products. But thanks for that question. And so with that, thanks for all the continued interest in Edwards.
And Scott, David and I welcome any additional questions by telephone. And with that, back to you, David.
Thank you for joining us on today's call. Reconciliations between GAAP and non GAAP numbers mentioned during this call, which include underlying sales and growth rates and amounts adjusted for special items are included in today's press release and can also be found in the Investor Relations section of our website, edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877 660-6853 or 201-612-7415 and use conference number 136 86,196. Additionally, an audio replay will be available on the Investor Relations section of our website.
Thank you very much.