Greetings, and welcome to the Edwards Lifesciences third quarter 2018 earnings conference call. At this time, I will put the participants line in listen-only mode. A brief question and- answer session will follow the formal presentation. Anyone who requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I will now turn the conference over to your host, Dave Erickson, President, Investor Relations. Thank you. You may begin.
Welcome, and thank you for joining us today. Just after the close of regular trading, we released our third quarter 2018 financial results. During today's call, we will discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A. The presenters on today's call are Mike Mussallem, Chairman and CEO, and Scott Ullem, CFO. Before we begin, I would like to remind you during today's call we will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include but are not limited to financial guidance, expectations for product opportunities, clinical trials, litigation, 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 after today.
Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in our press release, our 2017 annual report on Form 10-K, and our other SEC filings, all of which are available on our website at edwards.com. Also, a quick reminder that when we use the terms underlying, organic, 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 our website. Now I will turn the call over to Mike Mussallem. Mike?
Thank you, David. We are pleased to report strong third quarter adjusted sales of $921 million for 11% growth on an underlying basis, consistent with our expectations, driven by our remarkable portfolio of innovative technologies. Year to date, underlying sales growth was 10% and was consistent with our full year guidance of 10%-11%. Even with the backdrop of a tough fourth quarter comparison, we expect 2018 to be a year of strong financial performance while also aggressively investing in our future. Looking forward, based on recent learnings, we have increased confidence that our innovative life-saving therapies can benefit many more patients whose structural heart disease is deadly and untreated today. In transcatheter heart valve therapy, global third quarter sales were $558 million. Underlying sales were up 12.7% compared to the prior year, which reflects continued impressive organic growth.
We estimate global TAVR procedures continued to grow robustly in the mid-teens. Our worldwide sales grew at a lower rate due to a modest year-over-year share decline outside the U.S. and lower loyalty revenues. Globally, our average selling price remained stable. In the U.S., total procedures for the third quarter grew in the mid-teens versus the prior year, and our growth was comparable. Growth was highest in newer and smaller centers where this therapy is increasingly accessible to a broader population of aortic stenosis patients. Based on our continued research, we are increasingly confident that there are many patients who would benefit from TAVR who are not diagnosed or treated today. We are continuing our efforts to increase awareness, improve diagnosis, and help patients receive the care specified in medical guidelines.
Late in the third quarter, we began enrolling our Limited Continued Access Protocol, or CAP, for our U.S. PARTNER 3 trial, which had a minimal impact on this quarter's results. We continue to anticipate data from the PARTNER 3 trial to be presented at the ACC meeting in March 2019, followed by receipt of a low-risk indication late that year. Earlier this month, we announced the commencement of the U.S. pivotal trial that will study our self-expanding Centera transcatheter valve for patients at intermediate risk of open heart surgery. We expect the SAPIEN 3 Ultra system to gain U.S. regulatory approval around the end of the year. Following a public comment period and a review of TAVR outcomes at the Medicare Advisory Committee meeting in July, CMS is currently in the process of formulating a draft revision of the National Coverage Determination, or NCD.
This reconsideration is critically important for U.S. patients seeking treatment for this deadly disease. We assume any changes to the current NCD are unlikely to significantly affect the global TAVR opportunity. We expect the new NCD to be finalized by June 2019. Outside the U.S., procedures showed significant continued growth estimated to be in the mid-teens. Our procedures grew in the low single digits. We continue to see excellent long-term opportunities for growth as we believe international adoption of TAVR therapy is still low. In Europe, we estimate that TAVR procedures grew at an impressive mid-teens rate spread broadly across most countries. On a year-over-year basis, we experienced some expected share loss. However, our shares stabilized this quarter compared to last quarter. This quarter, we are implementing a targeted commercial introduction in Europe of our feature-rich Centera platform, which demonstrated outstanding clinical outcomes in its early experience.
We remain on track to receive a CE mark of the SAPIEN 3 Ultra system in the fourth quarter. We've decided to implement a controlled rollout strategy of Ultra, including training, to ensure high procedural success of this advanced valve delivery system, and now expect it to have a minimal impact on results this year. In an unrelated development earlier today, we announced that a court in Germany granted a preliminary injunction on future commercial sales of our SAPIEN 3 Ultra valve in that country. This decision does not impact sales of our SAPIEN 3 or Centera valves or the clinical study for European approval of SAPIEN 3 Ultra. We will promptly appeal. In Japan, we continue to see strong TAVR therapy adoption driven by SAPIEN 3, and new centers continue to be qualified.
This is our fastest-growing region this quarter, where we believe aortic stenosis still remains a large untreated disease. In summary, year-to-date underlying sales growth for THVT is 12.5%, and we would expect full year 2018 to be in that area because of a limited contribution from Cardioband, which I'll discuss in a moment, and a revised rollout strategy for SAPIEN 3 Ultra. We are encouraged that the TAVR opportunity remains robust, and we're confident in our new product offerings to sustain our strong global leadership position. In surgical valve therapy, underlying sales for the third quarter was $199 million, up 3% on an underlying basis, consistent with our expectations. Growth was driven by solid aortic unit volume and continued adoption of our new premium aortic valve. With the approval of reimbursement, we're pleased to announce that we began launching our INSPIRIS RESILIA aortic valve to Japan last month.
We expect strong adoption of this new class of RESILIA tissue valves in this important region. This valve is designed to be an attractive option for active patients, and we've observed a trend of physicians treating younger patients in our early global experience. In summary, in surgical heart valve therapy, we continue to expect full year 2018 underlying sales growth of 2%-4%. Even as TAVR adoption expands, we're excited by our ability to provide innovative surgical treatment options for more patients and to extend our global leadership in surgical heart valve technologies. In critical care, our sales for the quarter were $164 million and grew 15% on an underlying basis. This performance was strong across all our product lines, led primarily by demand for HemoSphere. In the U.S., it was particularly robust this quarter, additionally aided by new group purchasing organization contracts.
HemoSphere, our next-generation all-in-one monitoring platform that is replacing our older monitoring systems, continues to receive excellent feedback from clinicians. HemoSphere is designed to provide greater clarity on a patient's hemodynamic status. This new monitor is expected to continue to be an important growth driver, although hospital capital replacement cycles can be somewhat unpredictable. We continue to introduce our Acumen Hypotension Prediction Index, or HPI, to a limited number of hospitals utilizing our current platform until it becomes available on HemoSphere, which is expected in the fourth quarter. This first-of-a-kind technology leverages predictive analytics to alert clinicians of dangerous hypotension or low blood pressure before it occurs in their surgical patients. In summary, due to excitement by early adopters of HemoSphere, 2018 is turning out to be a particularly strong year for critical care.
We now expect 2018 underlying sales growth to exceed the top end of our full year guidance range of 6%-8%. Turning to our transcatheter mitral and tricuspid therapies, or TMTT, we continue to invest aggressively in our portfolio of therapies. As you heard last month at TCT, the results of the COAPT trial clearly demonstrated the importance of reducing mitral regurgitation, reinforcing confidence in our strategy to address this large opportunity. We're also updates on our TMTT program, and you can expect a more complete overview of our portfolio at our investor conference in December. Today, I will cover some select updates. Beginning with transcatheter mitral repair, patients continue to be treated commercially in Europe with Cardioband, and we are encouraged by the high level of interest from clinicians in its potential.
Third quarter sales were limited to $1 million due to the ongoing supply constraints in both our micro and tricuspid programs. We expect that trend to continue in the fourth quarter. In order to fortify our near-term supply and scale for longer-term volume expectations, we've decided to transfer production of this platform from the facility that we acquired to other Edwards manufacturing locations. We expect Cardioband supply constraints to progressively improve throughout 2019. We believe as this therapy advances, the annular reduction provided by Cardioband can be an important first-line treatment for many mitral patients. We continue to receive very favorable clinician feedback on our PASCAL mitral repair therapy. We expect the European launch of this platform in 2019. In the U.S., we're pleased to announce the approval of our pivotal trial to study patients with primary mitral regurgitation and are in the process of securing hospital contracts.
In mitral valve replacement, we're encouraged by the positive scientific presentations at TCT last month on our new EVOQUE system, which was built on the learnings and experiences of CardiAQ. We continue to make good clinical progress with EVOQUE and SAPIEN 3 systems and remain confident in our transseptal mitral replacement strategy. In transcatheter tricuspid repair, again, constrained by supply, clinicians continue to treat a limited number of patients in Europe with our Cardioband tricuspid annular reduction system. We've received positive feedback on this therapy. In the U.S., we have initiated our early feasibility study. Overall, we remain enthusiastic about the opportunities for our transcatheter therapies to help patients who are suffering from mitral and tricuspid valve disease. We continue to expect a large global opportunity. Now I'll turn the call over to Scott.
Thanks, Mike. I'm pleased to report another quarter of double-digit underlying sales growth. Adjusted sales were $921 million, up 11% over 2017. These results were in line with our expectations and our typical third quarter seasonality. Consistent with our practice in the prior two quarters, adjusted sales exclude a sales return reserve related to our conversion to a consignment inventory model for surgical valves in the United States, which was $14 million this quarter. We still expect to complete the conversion by year-end and now estimate the conversion will impact sales by approximately $80 million-$90 million this year. Adjusted earnings per share was $1.07. GAAP earnings per share was $1.06. Adjusted EPS growth was 27%, which benefited from a lower tax rate driven by U.S. tax reform and solid growth in operating income.
Adjusted earnings per share was $0.02 higher this quarter than it would have been if the excess tax benefit was as we estimated in our guidance last quarter. For the quarter, our adjusted gross profit margin was 75.5% compared to 74.4% in the same period last year. This improvement primarily reflects the benefit of a more profitable product mix and the absence of last year's expenses associated with Hurricane Maria in Puerto Rico. These benefits were partially offset by continued investments in manufacturing capacity. We continue to expect our full year 2018 gross profit margin, excluding special items, to be between 74% and 76%. Turning to selling, general and administrative expenses. Third quarter expenses increased 10% over the prior year to $270 million or 29.7% of sales. This increase was driven by personnel-related expenses.
The ratio of SG&A as a percentage of sales would have been 40 basis points lower if you exclude the impact of the HVT consignment conversion. We continue to expect full year SG&A, excluding special items, to be between 28%-29% of sales. Research and development investments in the quarter increased 18% over the prior year to $162 million or 17.8% of sales. This increase was primarily as a result of continued investments in our transcatheter programs, including spending on clinical trials. We continue to expect R&D, excluding special items, to be between 16%-17% of sales for the full year. Our reported tax rate for the quarter was 9.2%, down from 19.7% in the prior year period. This reduction was driven primarily by U.S. tax reform.
This quarter's rate benefited 490 basis points from the accounting for employee stock-based compensation, which was 190 basis points higher than we estimated in our guidance last quarter. Excluding the impact from special items, our tax rate this quarter was 13.5%. We continue to expect our full year tax rate, excluding special items, to be at the low end of our previous range of 13%-16%. Foreign exchange rates decreased third quarter sales growth by $7 million or 0.9% compared to the prior year. At current rates, we continue to expect an approximate $30 million lift or about 1% to full year 2018 sales compared to the prior year. Compared to our July guidance, FX rates benefited earnings per share by about $0.01 this quarter, reflecting the effective currency hedging program we have in place. Free cash flow generated during the quarter was $257 million.
We define this as cash flow from operating activities of $342 million, less capital expenditures of $85 million. Our year-to-date adjusted free cash flow, which excludes last quarter's tax audit settlements and repatriation taxes, was $550 million. Turning to the balance sheet. Total debt at the end of the quarter was $1.2 billion, and we had cash equivalents, and short-term investments of $1.6 billion. Just after the end of the quarter, we retired maturing bonds, which reduced both of these amounts by about $600 million. Now turning to our 2018 guidance. For the full year, as we discussed earlier, we are now modeling slightly lower Transcatheter Heart Valve Therapy sales and higher Critical Care sales.
For the total company, our prior guidance ranges are unchanged, as we continue to expect to achieve the higher end of each of the current sales guidance ranges of $2.1 billion-$2.4 billion for Transcatheter Heart Valve Therapy, $810 million-$850 million for Surgical Heart Valve Therapy, and $610 million-$650 million for Critical Care. For total Edwards, $3.5 billion-$3.9 billion. Our prior guidance ranges for adjusted earnings per share and free cash flow are also unchanged. We continue to expect our full-year adjusted EPS to be between $4.60-$4.75. Lastly, we continue to expect adjusted free cash flow to be at the higher end of $700 million-$775 million. For the fourth quarter of 2018, at current foreign exchange rates, we project adjusted sales to be between $950 million-$1 billion, and adjusted earnings per share to be between $1.05-$1.20. With that, I'll hand it back to Mike.
Thanks, Scott. We remain confident in our outlook for continued strong sales growth and are passionate about helping more patients around the world. We continue to focus on driving organic growth with leading innovative technologies while aggressively investing in our future. Our foundation of leadership, coupled with our robust product pipeline, positions us well for continued longer-term success and greater shareholder value as we pursue multi-billion-dollar market opportunities. With that, I'll turn it back over to Dave.
Thank you, Mike. Before we open it up for questions, I would like to remind you to mark your calendars for the evening of Tuesday, December 4th, and the morning of Wednesday, December 5th, when we will be hosting our 2018 Investor Conference at our corporate headquarters here in Irvine, California. This event will include discussions with key opinion leaders, updates on our latest technologies, and views on longer-term market potential, as well as our outlook for 2019. More information will be available in the coming weeks. We're ready to take questions now. In order to allow broad participation, we ask that you please limit the number of questions. If you have additional questions, please re-enter the queue, and we'll answer as many as we can during the remainder of the call. Operator, please go ahead.
Thank you. We will now be commencing a question- and- answer session. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Thank you. Our first question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.
Good afternoon, guys. Thanks for taking the questions. One on 2019 and one legal question. Mike and Scott, I know you won't provide 2019 guidance until the investor conference in December, but you've always been helpful in providing some of the puts and takes looking at the following year. I think consensus is modeling about 10% revenue growth next year, which is similar to the underlying sales growth you're guiding to this year. It does seem like there's more tailwinds in 2019 than 2018, which could help. The Street's modeling about 12% EPS growth. Is there anything you would call out there? I have one follow-up.
Yeah, Larry, you kind of answered your own question. We're not in a position to provide 2019 guidance until we get to the investor conference. I just want to big picture. Our TAVR business is healthy, and we continue to expect mid-teens growth in that marketplace through 2021 and beyond, for that matter. We know AS is dramatically under-treated. When you couple that with this comprehensive TMTT portfolio with some very nice mid to longer term growth opportunities, we think it provides a very positive backdrop. We're committed to win in that space, and we've been aggressively invested. We just have continued confidence in our innovation strategy. We'll get into the numbers later, Larry, but I think we have nothing specific to share at this time.
I understand. Mike, let me push my luck a little bit and ask a legal question. I spoke with an investor today who said, "I love what Edwards is doing in transcatheter heart valves, and I'd like to buy this stock, but frankly, I'm concerned Boston could potentially enjoin both SAPIEN 3 and Ultra in Germany any day." I know you're appealing those decisions, but in the meantime, Boston does have that option. Mike, if you were speaking to that investor, how would you allay his or her concern? Thanks for taking the questions.
Well, I think big picture, you know that Boston Scientific has initiated litigation that involves a number of patents in multiple countries, and it's likely to yield a number of court actions over an extended period of time. The recent developments have not changed our view that Boston's patents are invalid, and we're confident in our leading intellectual property position.
Got it. Thank you for taking the questions.
Sure.
Thank you. Our next question comes from the line of Jason Mills from Canaccord Genuity. Please proceed.
Hi, Mike. Thanks for taking the question. I wanted to go back to Larry's question about puts and takes. What we've seen thus far in 2018, and frankly for the last 18 months, are trials that would suggest that the low-risk opportunity for you in TAVR is meaningful and could be material to growth rates in the marketplace. The LR2 trials in Austin Health comes to mind recently. There are other puts and takes, obviously, with some of your product launches and seemingly perhaps having more impact on 2019 than 2018.
If we just stick with the market growth rates and sort of your share trends, both in the U.S. and Europe, could you anticipate that the goings-on with respect to trials and low risk over the next 12 months as well as new market entrants, Boston Scientific in the U.S. sort of offset by your product launches, would you see an environment where market growth rates are still strong, maybe commensurate with what we've seen this year, and you can maintain share over that time?
Yeah. Thanks, Jason. It's a good question. As I said, we continue to be confident about our long-term growth prospects for TAVR. As you correctly surmise, I think the data that's going to come out related to low-risk indication has the potential to be some kind of a catalyst. As we've said before, probably not a step function, but a net positive to a market that's already growing quite nicely. As we've talked before, our pricing's been quite stable, the question comes back to share, but it's share of a rapidly growing market, and we're pretty confident in our position. It's absolutely true that we're going to have new competition, at the same time, 2019's going to be the first year that we have real impact from our Ultra valve and Centera.
Okay, that's helpful. On the mitral side, Mike, there were several questions at the TCT meeting about COAPT, and I'm wondering with the benefit of an extra month or so since that trial was presented, did you have any different or augmented perspective on how COAPT may or may not change the landscape in mitral? Maybe more specifically, how fast these trials enroll, whether your PASCAL study uptake in Europe of Cardioband and PASCAL. Also on the replacement side, what COAPT may or may not do with respect to excitement around future trial enrollment in those studies, because you have a couple going on right now.
Yeah. Thanks, Jason. As you correctly point out, we've got quite a bit going on in the mitral space, and we're excited about some new developments. The results of COAPT clearly demonstrated the importance of reducing mitral regurgitation, and it does reinforce our confidence in our strategy to try and address this opportunity that's very large. We're enthusiastic about the transcatheter therapies to help patients that are suffering in these areas. We feel good about it. It can't hurt enrollment, that's for sure. It should facilitate that both on the PASCAL side and our other clinical trials that we have ahead.
Thanks, Mike.
Thank you. Our next question comes from the line of David Lewis with Morgan Stanley. Please proceed.
Good afternoon. Mike, just two questions for you. First one on Cardioband. My sense is you reiterated sort of the $15 million contribution at TCT. Can you talk about when the decision on manufacturing was reached? Can we assume it's zero revenue for Cardioband in the fourth quarter? As we think about next year, you talk about scaling up manufacturing. Is $15 million a better way of thinking about 2019, or is that sort of conservative relative to how you see the manufacturing scale up next year? Then a sort of follow-up.
Yeah. Well, thanks, David. You're right. We were more and more optimistic about being able to scale up Cardioband, and now we expect that to change. We fell short of our goals of our current supply base and also the acquired facility, and so we've already begun this process to begin the transition to other facilities. As I mentioned in prepared remarks, we expect the supply constraints to progressively improve throughout 2019, and we'd expect the manufacturing transition probably to finish by the end of the year. It's premature for us to be able to actually estimate numbers, David, but hopefully that gives you a sense of the direction and the rationale why.
David, it's Scott. I'd just add in terms of contributions to Q4, it's not going to be zero, but it's probably going to look something more like what we did in Q3, maybe $1 million or somewhere in that range.
Okay. That's helpful. Mike, obviously the biggest update on this call was the decision to move forward with the U.S. pivotal for PASCAL. Can you just talk about the decision of the company to move forward on primary MR and what the structure of that trial is going to look like? Thanks so much.
Yeah. This trial, we call the trial CLASP, is one where we're going to be studying primary mitral regurgitation. It's going to be a two-to-one randomization versus MitraClip, and it's going to be for patients that are deemed inoperable by the local heart team. The same way that MitraClip is labeled today. It'll be a non-inferiority study, around 300 patients at 50 centers. Primary endpoint, MR grade reduction, and then secondary endpoint of major adverse events.
Thanks so much.
Sure.
Thank you. Our next question comes from the line of Isaac Ro, Goldman Sachs. Please proceed.
Good afternoon. Thank you, guys. I want to start with a question on pricing. I think you guys mentioned in your prepared comments that the global pricing dynamic for TAVR has been stable. I'm interested in sort of what went on in the quarter competitively. I think that's been a topic of interest all year long, and it seems like your competitors are still pretty active in fighting for market share in various ways. Interested in if you could put some color on what's going on in pricing, what to assume in the rest of the year for your guidance on that topic. Thank you.
Yes. Thanks. Yeah, you're right. We had mentioned in prepared remarks that global average selling price remains stable, and we would expect that condition to continue in 2018. That's been very steady for some time to come. I know that we had some conversations last quarter about some aggressive pricing that we saw in Europe. Although there continues to be a significant difference between average pricing and our competitors, it's probably settled down a little bit, and we look from a share perspective to believe that it's probably stabilized versus the quarter before. I don't know if that helps get at your question.
Yeah, sure. That's helpful. Just to follow up on your comments for the MedCAC panel outcome. I'm sure there's been obviously a lot of debate about how the NCD gets updated, what that means for the marketplace and TAVR overall. Just want to make sure I understand your reasoning as to why you don't think that'll have a meaningful impact, at least initially, and how you think that'll play out over time. Thank you.
Yeah. It's a good question. I think big picture, CMS is taking a look at what's going on in TAVR from a reimbursement perspective and consider that a success. Although the NCD needs updating and it will be updated, we don't expect right now for whatever happens to have a significant impact on the TAVR opportunity. Now, of course, depending on what they decide, it could have some influence up or down, but we're just trying to share with you that when we do our own modeling, we're kind of modeling no significant change.
Understood. Thank you.
Thank you. Our next question comes from the line of Vijay Kumar with Evercore ISI. Please proceed.
Hey, guys. Thanks for taking my questions. Maybe I want to start one with 2019 drivers. Obviously given where we are in the year as an old life return to 2019. When I think about the negatives, Mike, obviously you have pricing pressure ongoing in Europe. Then you have a new competitor coming into the U.S. at some point, possibly next year. But on the other side, you have low risk approval, Cardioband backing up and PASCAL launching. I don't think you commented on the timing of PASCAL launch, and we're just assuming mid-2019. This case seems to be one offset the other. Is there any reason why TAVR growth in 2019 could be below 2018 levels that you could think of?
I appreciate the fact that you're looking at the negatives. We look at the future, and we're pretty positive about it. The pricing pressure in Europe is just something that we've dealt with for a long time. That's in there, and we're excited about having new products in the future. Although it won't have a big impact on Q4, it will have impact going forward. The U.S. approval has been somewhat inevitable that there would be that competition, and we've kind of fully accounted for that, and we're going to be excited about bringing Centera and Ultra to the U.S. as well. In terms of the upside on TMTT and some of those, we're not prepared yet to talk about when we're going to launch PASCAL in terms of what time of the year, but it's going to be positive.
You also have to remember that THV, the aortic business, is a much larger business that has more influence on our near-term, probably our 2019 sales.
Yeah. That's helpful, Mike. Maybe one, if I can, on the Cardioband, the ACTIVE trial. I think some data post-CAP, in a COAPT, whether it needs redesign, I've heard some people and the feedback seems to be the Cardioband or the annular class, the patient population is very different from the clip patient population. If that thesis or assumption is true, you may not need to redesign the Cardioband trial. You could do a device versus a drug trial. I just wanted to, one, get your street of thinking in annular class, the Cardioband is dead. How right or how wrong is the street on those assumptions? Were the trial designs need to be changed? Comments at that would be helpful.
The big picture for us, we continue to get positive feedback, and our belief is that annular reduction provided by Cardioband could be a really important first-line therapy. Again, it's going to require some advancements on our part, but we continue to feel strongly about that. In terms of the future implications of the ACTIVE trial, post-COAPT, we are assessing the implications of clinical trial design based on what was learned in that, and we hope that we're going to have more to share with you about that when we get to our Investor Conference in December.
Thanks, Mike.
Sure.
Thank you. Our next question comes from the line of Raj Denhoy with Jefferies. Please proceed.
Hi, good afternoon. I wonder if I could maybe just dig a little bit on Europe. I think you mentioned that you did see some share loss early in the year, but it's stable at this point. I'm curious if you can confirm that. Anything you can give us just in terms of dynamics in Europe as we sit here today?
Yeah, I think when I indicated last quarter, we feel like we experienced some share loss. That share loss had happened, it continues to be reflected in our year-over-year growth rates. What we're saying is sequentially, shares seem to stabilize for our perspective. We're saying we didn't see it as a continued trend that continued into the third quarter. Does that get at your question, Raj?
It does. Yeah, it does. I'm curious if there's anything more you can offer in terms of where that was it specific accounts or why you did experience that share loss and why you don't expect it's going to get any worse for you in Europe?
Yeah. I don't know that I'm able to do that. This is pretty vast. I'm in a lot of countries, a lot of moving parts here. I think it's just generally true. When we think back to what happened in Q2, it's not like it's widespread. It doesn't take a lot of procedures to change the actual results in transcatheter heart valves.
Okay. Fair. Maybe for my follow-up, you mentioned that you're now going to look at more of a measured rollout for Ultra in Europe, and I'm curious why that is. Is there something about that valve you think you need to go a bit slower now as you roll that out?
Well, it's a good question. We learned with experience that the Ultra system is different from SAPIEN 3, and we wanted to ensure that we ensured our own high performance through training. Remember, we took steps out of the procedure with Ultra, mounting the valve on the balloon rather than alignment in the aorta. The Axela sheath is an improvement, but it also benefits from additional training. We just wanted to make sure we maintained this very high level of performance as we rolled this out, knowing that it's a different valve. That became apparent to us through our own experience.
Okay. Thank you.
Thank you. Our next question comes from the line of Rob Hopkins with Bank of America Merrill Lynch.
Oh, thanks very much. Good afternoon.
Good afternoon.
Just wanted to ask a couple questions, Mike, on PASCAL. First of all, can you just give us a sense as to the first time that we'll see data from any PASCAL trial? I assume the first data we see will be from the European study. When will we see some of that data?
Yeah. We would guess that it would be mid-next year when data will really be available on PASCAL.
Okay. Also, maybe this is just my misunderstanding, but I'm just curious about your U.S. PASCAL trial strategy, focusing on primary MR, the strategy for focusing on secondary MR, which is obviously the bigger market opportunity and the one that created all the attention at TCT. What's the strategy on secondary?
Yeah. Obviously it's on our radar screen. We don't have anything specific to report at this point. We'll probably have more to say about that when we get to the investor conference, Bob. You're right, that's an important patient population as well. We didn't want to hold up on moving forward with our existing trial.
Got it. Thanks very much.
Thank you. Our next question comes from the line of Rich Ascough.
Good afternoon, Mike. Let me come back to your comments on the now controlled launch for both the new TAVR devices, Centera and Ultra. Is this the new norm you think going forward we should all generally assume? It makes sense, I get it, to promote it now more fully. Maybe you could help us understand what controlled means. Does it mean two or three centers? Does it mean that it'll take you six months to sort of get your sea legs as it were? No, this is a process that it could take a couple of years. Can you help us better frame the thinking behind all that?
Yeah. I don't know if it's the new norm. We certainly feel responsible. We are going to customers and offering systems that we think are improvements over systems that already have some very high performance. So you know the way that SAPIEN 3 has performed in big data sets. We feel the obligation to make sure that the next generations of systems, whether it's Centera or Ultra, continue to perform at least at that level or better. We just want to make sure that we invest the time to do that. For the most part, I expect this training to be done by our clinical specialists. It's not like we're going to start re-proctoring patients again. We do feel like we want people to slow down and recognize, "Hey, there's a number of advancements in these systems.
Let's really focus on them, understand them well, so that you get great performance right from first patient.
All right. Maybe a question for Scott. You highlighted the capacity investments and significant growth in new products. Maybe talk about how long that spending is going to go on, when you think that's completed, and how that affects, if at all, any of the ramps for these new products.
Right. We've been investing in increasing our capacity now for a couple of years, and remember, we were supply constrained. We had some catching up to do just to support THV. Now we're ramping up to also support expansion in TMTT. We've been making investments in our existing facilities in the U.S. and outside of the U.S. As you know, we're working on building a new facility in Costa Rica and just announced a plan earlier this year to start a facility in Ireland. I think that spending and investment is going to continue for a number of years down the road. You've seen it reflected in our higher capital expenditure investments.
We'll probably be over $200 million this year. The result is going to be that we'll be able to satisfy the needs for really addressing these large, untapped markets in the years ahead.
Thanks, Scott. Thanks, Mike.
Thank you. Our next question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed.
Hi. Good afternoon. Hey, Mike, I know you don't want to give guidance for 2019, as I think about what I'm hearing on this call, a slower rollout of SAPIEN 3 Ultra in 2019 and hopefully some positive benefits later in the year from PARTNER 3. Should one assume as we build our models for 2019, kind of a slower first half and a stronger second half? I know the comps are going to be a little bit easier as well, maybe some color on how we should think about 2019 and U.S. ramp. Thanks.
Yeah. Thanks, Glenn. I think you've got the right idea. I do think you should more think of ramp rather than step function in 2019. You're right, whether it's the way we roll out new products or the way that physicians and the rest of the marketplace absorbs the low-risk data, we think this is going to happen in a gradual fashion rather than sort of a jump. Yeah, I think it's reasonable to think about that. Remember, the low-risk approval itself doesn't come until late in 2019.
Okay. Just as my follow-up, just to clarify, PASCAL in Europe, can you just remind us where you are in enrolling that trial? Can you give us some specifics as to when in 2019 you think you'll be launching in Europe? Thanks.
Yeah. We've resisted giving specifics on 2019. We're right on track on that trial, we're continuing to enroll patients, that is just right where we want it to be, we expect to be launching in 2019. At the investor conference, we may have more details for you, Glenn.
Okay. Can I just sneak in one more for Scott? Scott, can you give us just ballpark for next year of where the tax rate is? We're modeling an uptick, is it 200, 300 basis points? Anything in the ballpark for the tax rate next year would be helpful. Thanks.
We're reluctant to do that at this point. I can say that it's a lot lower than we would've expected at the beginning of this year. As you know, we're looking at the lower end of a 13%-16% rate for the full year 2018, I'm reluctant to get into it any more than that. Keep in mind, one of the big influences on our tax rate is this excess tax benefit that we receive from premium on employee stock-based, performance-based options. That's a variable that we'll be able to estimate a little bit better maybe when we get to the investor conference in December.
Okay, great. Thanks, Scott.
Thank you. Our next question comes from the line of Bruce Nudell with SunTrust. Please proceed.
Good afternoon. Thanks for taking my question. Mike, you've had some commercial experience with Centera in Europe, and just given all the discussions about pricing, are you seeing that the customer appeal of Centera is up to your expectations?
Yeah. Our experience has been that the customers who have tried Centera really like it. It's feature-rich, and we've frankly sensed a lot of excitement. So the early feedback has been pretty strong on that system, and even the early feedback in the U.S. is quite positive for those people that are in the trial.
My follow-up is on COAPT. I listened to your comments today from last quarter, and you explicitly said you don't expect people to dare hope for mortality benefits, but you got both mortality and a rehospitalization benefit and in a very convincing way. Before you had said this market could be $3 billion in 2025. How should we be thinking about it now that we actually have that very important clinical proof of concept?
Yeah, no, you're right about that. We have shown confidence and this came, as we said, our $1 billion or $3 billion projections in the past, and we haven't backed off on that. Here's the COAPT trial that is very impressive and I think even surprised us. We're thinking about that deeply, Bruce. We don't have anything to share at this point. We'll be able to get deeper with you in terms of the financial models when we get to the investor conference. I guess we're starting to sound a little bit like a broken record, but we're in the process of studying that now.
Thanks so much.
Sure.
Thank you. Our next question comes from the line of Joanne Wuensch with Janney Capital Markets. Please proceed.
Scott, good evening. Thank you for taking my question. One of the things that investors frequently ask us is how much or how many of the low-risk patient pool has been already penetrated with sort of the shifting labeling of SDF as not necessarily a metric for defining low versus intermediate risk. This sort of segues into the OD shocks, can low risk really help them next year? How would you respond to that?
We don't think there's been any significant penetration of this low-risk group. We believe that our customers largely stay on label, it's because it's backed up by the NCD. Again, the NCD is very clear about what will be paid for, the stakes are quite high to go off base from that perspective. Having said that, the whole designation of risk categorization by various patient groups, I think, is going to become an obsolete notion once PARTNER 3 is out there. There's not going to be this question of, "Gee, how risky is it for patients to go through surgery?" We believe that we're going to have a trial that demonstrates that TAVR is substantially equivalent to surgery for all patients at this point, or at least the groups that have been studied. It's going to be more about anatomy than it is about risk.
We think the conversation's going to change, we believe it's going to be helpful to have that PARTNER 3 data. Probably the last really big transcatheter aortic valve study done in patients with severe aortic stenosis and symptoms.
My second question has to do with product timelines. I'm sure we'll get a full update in December, but can you just give us an update on where you are with FORMA? If memory serves you paused that clinical trial or product development. Thank you.
Yeah, thanks. We had some procedural learnings as we rolled out FORMA, that led to system enhancements. We resumed treating patients on a compassionate basis with the new FORMA system, we're pleased with that. It's still early experience with the revised system.
Thank you.
Sure.
Thank you. Our next question comes from the line of Chris Pasco, Goldman Sachs. Please proceed.
Thanks. Mike, first on Cardioband. I just wanted to confirm that this is an issue with the facility and not with the product. Is the fix here really just a location change, or are there things you need to tweak about the Cardioband design itself to make it more manufacturable?
Yeah, no, we're really talking about fixing supply constraints, Chris. If your question is there an issue with performance or with the demand? We believe that the demand has been there. We've got a lot of suppliers on that system. There's been a lot of integration into the Edwards system, and this has been significant. Recall, we're always innovating, and we're going to improve the system over time. The supply constraints that I'm talking about are not related to some overall performance shortcoming, but just our ability to supply at the level that we'd like to at the quality level we want to.
Yeah. Just to clarify, I'm not talking about clinical performance, but just the manufacturability of the product itself. Is it too hard to make, or is it just a problem with where it was being made?
Yeah. When you get into these kind of things where we have many suppliers in that system, they wouldn't be typical Edwards suppliers, and they're also in a very small facility in Israel. It's not very typical to what Edwards would employ, we just feel like we need to make a migration of both some of the suppliers and the manufacturing facility itself so that we feel confident both in boosting the near term and fortifying the supply and also being able to scale this for our long-term expectations.
That's helpful. Just on critical care, can you talk a little bit about how you're framing the opportunity for HemoSphere? The business was 15% this quarter. Definitely should get noticed a little bit. Should we be thinking about that as a very short-term upgrade cycle you're going through right now, or could double-digit growth in that business actually be sustainable for a while?
Yeah. We're really pleased with what's going on in critical care. You're right, HemoSphere has been very popular with customers, and these early adopters have really boosted our sales growth rate. Now we did get a little bit of help this year for some group purchasing organization contracts, HemoSphere has been the one that's really driven this. Part of what we're benefiting from is a capital replacement cycle as it replaces our existing monitors. Although we're not deep into that replacement cycle at this point, it's hard for us to predict what this is going to look like. It's tough to say exactly what it's going to mean for the future growth rates. I wouldn't automatically anticipate that we're going to maintain a growth rate like we just enjoyed in the third quarter.
Thanks.
Thank you. Our next question comes from the line of Robbie Marcus with JP Morgan. Please proceed.
Thanks for taking the question. Scott, maybe some financial housekeeping questions here. Gross margin came in better than expected. Maybe you could help us with drivers there. Were hedges included in that, and how you think about effects both for balance this year on the top to bottom line and what your latest count is in 2015?
Sure. As it turns out, gross margin came in right about where we expected. I think that was a little bit above where some on the street were, but it was right where we thought it was going to be. It was up over 100 basis points versus the 74.4% in the third quarter of 2017. It reflected benefit from improved mix, which we've been seeing consistently with the growth of TAVR. It also reflected benefits of not having the recurring expenses that we experienced from Hurricane Maria last year.
That is offset a little bit by manufacturing capacity investments that we talked about earlier. Their effect then for top and bottom line compared next year, correct?
For FX, we continue to expect that for the full year, we'll see about a 1% benefit to sales or $3 million. At the gross profit line, we're largely insulated. By the time you get to EPS, it's about a penny benefit in the third quarter. For gross profit line, it's tough to predict what the impact is going to be from these hedge outcomes that we realize during the course of the year.
Okay, thanks. Maybe as a follow-up, I haven't heard any update on HARPOON lately. Can you just give us the latest data for that program?
Sure. Last time we talked about it, we said that we're examining the root cause of some of the complications we saw earlier. We haven't completed that analysis. We will report to you as soon as we have that completed. We're hopeful that that's not going to go on too much longer.
Thank you.
Sure.
Thank you. Our next question comes from the line of Danielle Antalffy with Raymond James. Please proceed.
Hey, good afternoon, guys. Thanks so much for taking the question. Mike, I just have two questions for you, one on U.S. and one on Ex-U.S. and litigation. First on U.S., this is a market that presumably or potentially could be going from two players to four sometime over the next, call it 18-24 months. I know I've asked this before, but just how are you feeling about the sustainability of the pricing environment, particularly in the context of what we're seeing happen in Europe? Then I just have the one follow-up on litigation.
Sure. We have a lot of experience selling heart valves in the U.S., and we wonder whether THV is going to be a lot different from that. It's a pretty heavy lift to be able to get a product approved in the U.S. market, and we think largely our competitors are disciplined pricers, especially with all the work that's necessary and clinical investment necessary to come to the U.S. market. We're not overly concerned. In our long-term models, we model a modest price decline, but we don't think there's going to be anything that's dramatic. For the most part, when we do our own pricing, we do some discounts, discounting based on volume. Right.
Okay. Got it. Then just a last question here from me. Appreciating that you're not going to necessarily comment on the ongoing litigation, but let's just assume, I understand that Ultra is certainly advanced. I'm curious about how you feel about your competitive positioning for SAPIEN 3 with or without the advance of Ultra. I guess what I'm trying to get at, assuming Ultra does get joined. It feels to me like there's no reason to think there should be any significant shift in market share for SAPIEN 3 from here, but tell me if you think I'm thinking about that wrong.
Yeah, we're really pleased. I think SAPIEN 3 has clearly demonstrated that it is best-in-class performance, there's an awful lot of data that supports that. Our efforts at Ultra was to be able to do that and do it even better and be able to have some advantages for physicians and patients to go along with that. We're very proud of the SAPIEN 3 platform and feel good about where it stands.
Thank you so much.
Thank you. Our final question today comes from the line of Kristen Stewart with Barclays. Please proceed.
Hey, guys, thanks for taking the question. Sorry for my voice. Little winded here. I just wanted to circle back just in terms of thinking about P&L and just generally your philosophy on how you think about, you're not keeping quiet, I've seen you give specific guidance with the analysts, but how do you feel about at this stage in ramping up to support things like Mitral and Tricuspid? Are you seeing in a bit heavier quarters this kind of a new sort of run rate where we should think about 16%-17% maybe closer to that P&L ongoing rate? Other helpful investments that need to already be made from a sales and marketing perspective that's not really being invested this year.
Thanks, Kristen. Maybe I'll make a few comments and let Scott jump in and add additional color. Big picture, you know we're aggressive investors in R&D, and we see rich opportunities. We've been aggressive not only in our current portfolio but also in the new portfolio associated with transcatheter mitral and tricuspid. I think our R&D as a percent of sales always looks seasonably high in the third quarter. Remember, for at least our company, this is our lowest seasonal quarter, so ratios tend to be deceiving. Nonetheless, we're going to stay aggressive investors in the space.
I'd just add, we had the benefit of this tax reform in 2018, we've been able to invest even more aggressively and advance some of these programs that we've had on deck to really accelerate to ultimately commercialization. It's been fortunate to be able to fund these programs and to continue to invest for long-term top-line organic growth.
Okay. Scott, just to follow up on the topic of tax changes, this kind of came up before, if I look at year-to-date run rate for the associated tax rate, how much of that is just related to employee stock compensation? I guess this quarter it was 490. Is that consistent with the full year to date? Looking forward to next year, I know you didn't make comments, is that something that, this quarter, this year, assuming no benefit?
It's really hard to estimate because as you know, exercises tend to go up when the stock price performs well, and then the tax benefit is even greater the higher the stock price is. You get this double benefit. The reverse also happens. If the stock is not as mobile on the upside, then there may not be as many exercises, and the value of those exercises does not flow through to the same degree as the tax rate. This quarter, we realized an effective adjusted tax rate of about 13.5%. You mentioned before, about 490 basis points of that was from the excess tax benefit. We'll think more about it and try to give you our call when we get to the investor conference for 2019. This is one that's tricky.
It's one of the reasons why we've also started talking about our operating profits and our operating margins, just because the bottom line is more volatile as a result of this new accounting practice.
Okay, that makes sense. Thanks very much, guys.
Okay, well, thanks all for your continued interest in Edwards. Scott, David, and I welcome any additional questions by telephone. With that, I'll turn it back over to David.
Thank you for joining us on today's call. The reconciliations between GAAP and non-GAAP numbers mentioned during this call, which include underlying sales and growth rates and amounts adjusted for special items, are included in today's press release and can also be found in the investor relations section of our website at edwards.com. If you missed any portion of today's call, a telephone replay will be available for 72 hours. You can access this by dialing 877-660-6853 or 201-612-7415, and use the conference number 13683434. Additionally, an audio replay will be available on the investor relations section of our website. Thank you very much.
Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.