Greetings, and welcome to the Edwards Life Sciences Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, David Erickson, Vice President, Investor Relations.
You may begin.
Welcome and thank you for joining us today. Just after the close of regulatory trading, we released our Q3 2018 financial results. During today's call, we'll discuss the results included in the press release and the accompanying financial schedules and then use the remaining time for Q and A. The presenters on today's call are Mike Nusolem, Chairman and CEO and Scott Nusolem, CFO. Before we begin, I'd like to remind you that during today's call, we will 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, legal 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 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 ks and our other SEC filings, all of which are available on our website at edwards dotcom. 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. And now I'll turn the call over to Mike Mussallem. Mike? Thank you, David.
We're pleased to report strong third quarter adjusted sales of $921,000,000 or 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% to 11%. And even with the backdrop of a tough 4th 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 untruthful today. In transcatheter heart valve therapy, global third quarter sales were $558,000,000 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 royalty revenues. Globally, our average selling price remains stable.
In the U. S, total procedures for the Q3 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 will 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 Q3, we began enrolling our limited continued access protocol or CAP for our U. S. PARTNER III trial, which had a minimal impact on this quarter's results. And we continue to anticipate data from the PARTNER 3 trial to be presented at the ACC meeting in March of 2019, followed by a 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, and 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 provision 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 double 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 the 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. And we remain on track to receive a CE Mark of the SAPIEN 3 Ultra system in the Q4. We've decided to implement a controlled rollout strategy of Ultra, including training to ensure high procedural success of this advanced development delivery system and now expected to have a minimal impact on results this year.
In an unrelated development earlier today, we announced that Accord of 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-three 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 Dial Therapy, underlying sales for the Q3 was $199,000,000 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 INSTRIS RESILIA aortic valve in Japan last month.
We expect strong adoption of this new class of resilient tissue valves in this important region. This valve is designed to be an attractive option for active patients when we preserve the 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% to 4%. Even as TAVR adoption expands, we are excited about our ability to provide innovative surgical treatment options for more patients and to extend our global leadership in surgical heart valve technologies. In Critical Care, our sales for the quarter were $164,000,000 and grew 15% on an underlying basis.
This performance was strong all our product lines, led primarily by demand for HemoSphere. In the U. S, 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 system, 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 Predictive Index, or HTI to a limited number of hospitals utilizing our current platform until it becomes available on HemoSphere, which is expected in the Q4. 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 Sphere, 2018 is turning out to be a particularly strong year for Personal Care. We now expect 2018 underlying sales growth to exceed the top end of our full year guidance range of 6% to 8%.
Turning to our transcatheter micro and tritestin therapies or TMTP, we continue to invest aggressively in our portfolio of therapies. As you heard last month at TCP, the results of the COAPT trial clearly demonstrated the importance of reducing mitral regurgitation, reinforcing confidence in our strategy to address this large opportunity. So we're also up based on our TMTP 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 micro repair, patients continue to be treated commercially in Europe with Cardioband and we are encouraged by the high level of interest from clinicians and its potential.
3rd quarter sales were limited to $1,000,000 due to the ongoing supply constraint in both our mitral and tricuspid programs, and we expect that trend to continue in the 4th quarter. In order to fortify our near term supply and scale for longer term volume expectations, we 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 and still 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 patients 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 is built on the learnings and experiences of CardiAQ. We continue to make good clinical progress with Evoque and SAPIEN M3 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 granular reduction system, and 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 micro and tricuspid valve disease, and we continue to expect a large global opportunity. And 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 $921,000,000 up 11% over 2017. These results were in line with our expectations and our typical Q3 of 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 $14,000,000 this quarter. We still expect to complete the conversion by year end and now estimate the conversion will impact sales by approximately $80,000,000 to $90,000,000 this year.
Adjusted earnings per share was $1.07 and 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 and Puerto Rico. These benefits were partially offset 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. 3rd quarter expenses increased 10% over the prior year to $270,000,000 or 29.7 percent of sales.
This increase was driven by personnel related expenses. The ratio of SG and A as a percentage of sales would have been 40 basis points lower if you exclude the impact of the HTT consignment conversion. We continue to expect full year SG and A excluding special items to be between 28% and 29% of sales. Research and development investments in the quarter increased 13% over the prior year to $152,000,000 or 17.8 percent 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 and D, including 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 18.5%. We continue to expect our full year tax rate, excluding special items, to be at the low end of our previous range of 13% to 16%. Foreign exchange rates decreased 3rd quarter sales growth by $7,000,000 or 0.9% compared to the prior year. At current rates, we continue to expect an approximate $30,000,000 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 $257,000,000 We define this as cash flow from operating activities of $342,000,000 plus capital expenditures of $85,000,000 Our year to date adjusted free cash flow, which excludes last quarter's tax audit settlements and repatriation taxes, was $550,000,000 Turning to the balance sheet. Total debt at the end of the quarter was $1,200,000,000 and we had cash, cash equivalents and short term investments of $1,600,000,000 Just after the end of the quarter, we retired maturing bonds, which reduced both of these amounts by about $600,000,000 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 $2,100,000,000 to $2,400,000,000 for transcatheter heart valve therapy, dollars 810,000,000 to $850,000,000 for SunGard valve therapy and $610,000,000 to $650,000,000 for Critical Care and for total Edwards $3,500,000,000 to $3,900,000,000 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 $700,000,000 to $775,000,000 For the Q4 of 2018, at current foreign exchange rate, we project adjusted sales to be between $950,000,000 $1,000,000,000 and adjusted earnings per share to be between $1.05 $1.20 And with that, I'll hand it over 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 adjusting 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 multibillion dollar market opportunities.
And 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 4, and the morning of Wednesday, December 5, 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 conducting a question and answer session. Thank you. Our first question comes from the line of Larry Kiefelstin with Wells Fargo. Please proceed.
Good afternoon, guys. Thanks for taking the question. 1 on 2019 and one legal question.
So Mike, this is 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. The consensus is modeling the 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 'eighteen, which could help. And The Street's modeling about 12% EPS growth. So is there anything you would call out there?
Can I add one follow-up? Yes, 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. But I just want to make sure, our TAVR business is healthy.
We should be able to expect mid teens growth in that marketplace through 2021 and beyond for that matter. And we know AS is dramatically undertreated. 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. And we just have continued confidence in our innovation strategy.
So we'll get into the numbers later, Larry, but particularly we have nothing specific to share at this time. I understand. So 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 Valve, that I'd like to buy the stock, but frankly, I'm concerned Boston could potentially enjoin both KPN 3 and Ultra in Germany any day. And I know you're appealing those decisions, But in the meantime, Procter does have that option.
So Mike, you were speaking to that investor. How would you allay his or her concern?
Thanks for
taking the questions.
Well, I think, in particular, 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. I wanted to go back to Larry's question about patient care. What we've seen thus far in 2018 and particularly for the last patient, are trials that would suggest that the low risk opportunity for you and TAVR is meaningful and could be material to growth rates for the marketplace. The ORT trials in Washington Hospital Center comes to mind recently.
And there are other puts and takes, obviously, with some of your product launches and seemingly perhaps having more impact on 2019 than 2018. So I guess if we just stick with the market growth rates and sort of your share trends both in the United States and Europe, Would you anticipate that the goings on with respect to trials and low risk over the next 6 to 12 months as well as new market entrants in the United States sort of offset by your product launches. We've created 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? Yes. Thanks, Jason.
It's a good question. As I said, we continue to be confident about our long term growth prospects for Jabber. But as you correctly surmise, I think this data that's going to come out relative to a 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 through a market that's already growing quite nicely. As we've talked before, our pricing has been quite stable.
And so the question comes back to share, but it's share of a rapidly growing market. And we're pretty confident in our position. I mean, it's absolutely true that we're going to have these competition. But at the same time, 2019 is going to be the 1st year that we have real impact from our Ultra Valve and CENTERA. Okay.
That's helpful. And then on the Mitchel side, Mike, you were asked several questions at the TCC meeting about the last. And I'm wondering with the benefit of an extra month or so since that trial was presented, you have any different or augmented perspective on how CorAps may or may not change the landscape in mitral and maybe more specifically how fast these trials enroll, whether it be your PASCAL study, uptake in Europe of Cardioband and PASCAL? And then also on the replacement side, what Corrupt may or may not do with respect to excitement around the trial enrollment in those studies? Do you have a couple going on right now?
Yes. Thanks, Jason. As you correctly point out, we've got quite a bit going on in the mitral space and we're excited about the new development. The results of COAP 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.
So we feel good about it. It can hurt enrollment, that's for sure. It should facilitate that both on the PASCAL side and our other clinical trials that we have ahead.
Our next question comes from the line of David Lewis of Morgan Stanley.
Good afternoon. Mike, just two questions for you. First one is on TORTIAGEN. In my sense, as you reiterated sort of the $15,000,000 contribution at CCP. So can you just talk about when the decision on manufacturing was reached?
Should we assume there'd be 0 revenue for Cardioband in the 4th quarter?
And as you think about next year,
you talked about scaling up manufacturing. Is $15,000,000 a better way of thinking about 'nineteen? Or is that sort of conservative relative to how you see the manufacturing scale up next year? And then a quick follow-up. Yes.
Well, thanks, David. You're right. We're more and more optimistic about being able to scale up CardiSpan. 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 done this process to begin the transition to other facilities. As I mentioned in the 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. So it's premature for us to be able to actually estimate numbers, 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 0, but it's probably going to look something more like what we did in Q3 $1,000,000 maybe $1,000,000 or somewhere in that range. Okay, that's helpful. And then Mike, obviously the biggest update on this call was the decision to move forward with the U. S. Pivotal for PASCAL.
So can you just talk about the decision of the COVID and move forward on primary MR and what the structure of that trial is going to look like? Thanks so much. Yes. So the this trial, what we call the trial class, is one where we're going to be studying primary micro regurgitation. It's going to be a 2 to 1 randomization versus MitraClip.
And it's going to be by for patients that are deemed inoperable by the local heart team. So the same way that MitraClip is labeled today. That will be a non inferiority study around 300 patients at 50 centers, primary endpoint MR grade reduction and then secondary endpoint of major adverse events. Okay. Thanks so much.
Sure.
Our next question comes from the line of Isaac Fitzgerald with Goldman Sachs.
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 cutting from market share in various ways.
So interested in if you could take some color on what's going on in assumed in the rest of the year for your guidance on that topic? Thank you.
Yes. Thanks. You're right. We have 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. We probably although there continues to be a significant difference between average pricing and our competitors, that has probably settled down a little bit. And we look from a share perspective to believe that it's probably stabilized versus the quarter before. So I don't know if that helps to get at your question.
Sure. That's helpful. And then just a follow-up on your comments for the med cat panel outcome. Obviously, there's been obviously a lot of debate about how the NPD 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 will have a meaningful impact initially and how you think that will play out over time?
Thank you.
Yes, it's a good question. I think big picture CMS has taken a look at our what's going on in TAVR from a reimbursement perspective and consider that a success. So 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. 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 J. J. Kumar with Evercore ISI. Please proceed.
Hey, guys. Thanks for taking my question. So maybe I wanted to start one with 2018 drivers. Obviously, given where we are in the year, I think all eyes are turned to 2019. When I think about the negatives, right, Mike, you obviously have pricing pressure ongoing in Europe.
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, party event ramping up, and pastel launching. I don't think you commented on the timing of pastel launch, and we're just assuming mid of 'nineteen.
And and the base case seems to be, you know, one off versus the other. Is there any reason why, TAVR growth in 'nineteen could be below 2018 levels that you could think of?
Yes. So I appreciate the fact that you're looking to negative. So we look at the future and we're pretty positive about it. The pricing pressure in Europe is something that we dealt with for a long time. That's been there and we're excited about having new products in the future.
And although it won't have a big impact on Q4, it will have impact going forward. The U. S. Approval has been somewhat inevitable, but there would continue that competition that we kind of fully accounted for that. 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 THB, the aortic business is a much larger business that has more influence on our near term of probably our 2019 sales.
That's helpful, Mike. And then maybe one if I could just on the Cardiobank, the ACTRA trial. So I think in some in a co op, whether it needs to be designed with some people. And so the feedback seems to be the Cardiobanca or the annual plastic patient population is very different from the sub patient population. If that piece or assumption is true, then you may not need to redesign the cardiobanca trial.
You could do a device versus a drug trial. I just want to know one, just speaking in annual class e coating brand as dead, how right or how wrong is the street on those assumptions and know, working to file, does that need to be changed? Any comments that would be helpful.
So, you know, we the big picture for us, we continue to get positive feedback. And our belief is that annual reduction provided by Cardioband could be a really important for 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 ACTRESS trial, post COAP, 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 Zai Senho 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. And so anything you can give us in terms of dynamics in Europe as we sit here today?
Yes. I think as we indicated last quarter, we feel like we experienced some share loss. And so we continue that share loss that happened. And so it continues to be reflected in our year over year growth rates. What we're saying is sequentially, shares seem to stabilize from our perspective.
So this is so we're saying we didn't see it as a continued trend that continued into the Q3. Does that get at your question, Raj? Yes, it does. And I'm curious if there's anything more you can offer in terms of where that was with specific accounts or why you did experience that share loss and why you don't expect these can't get any work for you in Europe? Yeah.
I don't know that I'm able to do that. I mean, this a pretty fast comment, a lot of countries, a lot of moving parts here. I think it's just generally true. Even 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 transcript or heart valves.
Okay. Fair. Maybe just for my follow-up. Just 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 value? Do you think you need
to go a bit slower now as you roll that out?
Well, it's a good question. So we learned with experience that the Ultra system is different from Sapient 3. And we wanted to ensure that we had 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 Accella sheet is an improvement, but it also benefits from additional training.
So we just wanted to make sure that we maintain this very high level of performance as we roll this out, knowing that it's a different valve. Valve. And that became apparent to us through our own experience.
Thank you. Our next question comes from the line of Bob Hopkins with Bank of America Merrill Lynch. Please proceed.
Thanks very much and good afternoon. Good afternoon.
I just
want to ask a couple of questions, Mike, on PASCAL. First of all, can you give us a sense as to the first time that we'll see data from any PASCAL trial? I assume the first data would be from the European study. So when will we see some of that data? Yes.
We would test that it would be mid next year when data will really be available on PASCAL. Okay. And then also, like 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.
So what's the strategy on secondary? Yes. I mean, 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.
But you're right, that's an important patient population as well. So we didn't want to hold up on getting moving forward with our existing trial. Got it. Thanks very much.
Thank you. Our next question comes from the line of Rick Wise with Stifel. Please proceed.
Good afternoon, Mike. Let me come back to your comments on the now the controlled launch for both for both the new tauro devices CENTERA and ULTRA. Is this the new norm you think going forward, we should generally assume and it makes sense, I get it, to move on more fully and maybe you could help us understand what control means? Does it mean for 3 centers? Does it mean that it'll take you 6 months to sort of get your C legs as it were?
Or no, this is a process that it could take a couple of years. Can you help us better frame the thinking behind all that? Yes. I don't know if it's the new norm. We certainly feel responsible.
We are talking 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 Cision 3 has performed in big data sets. And so 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. And so 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 reproctoring patients again. But 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.
And maybe a question
is for Scott. Scott, you highlighted the capacity investments and strategic growth in new products. Maybe talk about what that how long that spending is going to go on? When you think that's completed? And how that affects it at all, any of the ramp for these new products?
We've been investing in increasing our capacity now for a couple of years. And remember, we were supply constrained and so we had some catching up to do just to support TAC. Now we're ramping up to also support expansion and TMTT. And so we've been making investments in our existing facilities in the U. S.
And outside of the U. S. And as you know, we're working on building a new facility in Costa Rica and just announced a plan earlier this year to put a facility in Ireland. So I think that spending and investment is going to continue for a number of years down the road and you've seen it reflected in our higher capital expenditure investments, probably over $200,000,000 this year. And the result is going to be that we'll be able to satisfy the needs for really addressing these large untapped markets and years ahead.
Our next question comes from the line of Glenn Novo with RBC Capital Markets.
Hey, Mike, I know you don't want to give guidance for 2019, but as I think about what I'm hearing on this call, a slower rollout of safety and ultra in 2019 and hopefully some positive benefits later in the year from PARTNER 3. So should one assume as we build our models for 2019 kind of a slower first half and a stronger second half? And I know the comps are going to be a little bit easier as well. So maybe some color on kind of how we should think about 2019 and U. S.
TAVR ramp? Thanks. Yes. Thanks. But I think you've got the right idea.
I do think you should more think of ramp rather than kind of function in 2019. And you're right, whether it's the way we roll out new products or the way the product or the way that physicians and the rest of the marketplace absorb the low risk data. We think this is going to happen in a gradual fashion rather than sort of a jump. So yes, I think it's reasonable to think about that. Remember the low risk approval itself doesn't come until late in 'nineteen.
Okay. And then just as my follow-up, just to clarify, PASCAL in Europe, can you just remind us where you are in enrolling that trial? And can you give us some specifics as to when in 2019 you think you'll be launching in Europe? Thanks. Yes.
We've resisted giving specifics on 2019. We're right on track on that trial. So we're continuing to enroll patients. And so that it's right where we want it to be. And so we expect to be launching in 2019.
But in 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 with tax rate is? We're modeling an uptick, but is it 200 to 300 puts?
Anything in the ballpark for the tax rate next year would
be helpful. We're reluctant to do that
at this point. And I can say that it's a lot lower than we would have expected at the beginning of this year. As you know, we're looking at the lower end of a 13% to 16% rate for the full year 2018, but I'm reluctant to get into any more of that. Keep in mind, one of the big influences on our tax rate is this excess tax benefit that we've received from the premium on employee stock based, performance based options. And so that's a variable that we'll be able to estimate a little bit
question Our next question comes from the line of Bruce Bidell with SunTrust. Please proceed.
Good afternoon. Thanks for taking my Mike, you've had some commercial experience with Centerra in Europe. And just given all the discussions about pricing, are you seeing that the customer appeal of CENTERA is up to your expectations?
Yes. I mean our experience has been that the customers that have tried Centerra really like it. It's feature rich, and we've frankly sent a lot of excitement. And 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.
And my follow-up is on COAP. I mean, I listened to your comments today from last quarter. And you explicitly said you don't expect people can't hope for mortality benefit, but you got both mortality and a rehospitalization benefit in a very convincing way. And and before you had said,
you know, this mark would
be $3,000,000,000 in 2025. But how could we be thinking about it now that we actually have that very important clinical proof of concept?
Yes. No, you're right about that. We have shown confidence in this team, as we said, our $1,000,000,000 or $2,000,000,000 projections in the past, and we haven't backed off on that. And here is the COAPT trial that is very impressive and I think even surprised us. So we're thinking about that deeply, Bruce.
We don't have anything to share at this point. I mean, we'll be able to get deeper with you in terms of actual 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 spreading that now. Thanks so much. Sure.
Thank you. Our next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.
Hi, good evening and 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 SDS as not necessarily a metric for defining low versus intermediate risk. This sort of segues into the OG shocks and low risk really help them next year. How would you respond to that? John,
we don't think there's been any significant penetration of this low risk group. We believe that our customers largely stay on label and it's because it's backed up by the NCD. And again, as the NCD is very clear about what will be paid for and 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 it's 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 studying. And it's going to be more about anatomy than it is about risk. So we think the conversation is going to change. I think it's just 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.
And my second question has to do with timelines. I'm sure we'll get a full update in December. But can you give us an update on where you are with form a? Memory serves, do you pause for that clinical trial or product development? Thank you.
Yes. Thanks. So we had some procedural learnings as we rolled out pharma, and that led to system enhancements. And we resumed treating patients on a compassionate basis with the new pharma system, and we're pleased with that. But it's still early experience with the revised system.
Thank you. Sure.
Thank you. Our next question comes from the line of Chris Hassell with Guggenheim. 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 out the product design itself to make it more manufacturable? Yes. No, we're really talking about fixing supply constraints, Chris. If your question is, is there an issue with performance or with demand? I mean, we believe that the demand has been there.
We're 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. But recall, we're always innovating where we're going to improve the system over time. But 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. Yes.
And just to clarify, not talking about clinical performance, but just the manufacturability of the product. Is it too hard to make? Or is it just a problem with where it's being made? Yeah. So when you get into these kind of things, where we have many, many suppliers in that system, they wouldn't be typical Edwards supplier.
And they're also in a very small facility in Israel. It's not very typical to what Edwards would employ. And we just feel like we need to get some hydration 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 us for our long term expectations. That's helpful. And then
just a question on clinical care. Can you talk a little bit about how you
frame the opportunity for HemoSphere? Business grew 15% this quarter. That's something that 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?
Yes. We're really pleased with what's going on in critical care. And 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 help this year for some group purchase organization contracts, but Hemisphere has been the one that's really driven this.
It's 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. And so 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 Q2.
Our next question comes from the line of Robbie Marcus with JP Morgan. 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 FX both for balances here on the top to bottom line and what your latest account is in 2018? 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 percent in the Q3 of 2017. And it reflected benefit from improved mix, which we've been seeing consistently in the growth of GDC. And it also reflects the 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.
And where FX stands for top and bottom line during next year's current rate? So for FX, we continue to expect that for the full year, we'll see about a 1% benefit to sales or $2,000,000 At the gross profit line, we're largely insulated. By the time you get to EPS, it's about a penny benefit in the Q3. But the growth bottom line is still to predict what the impact is going to be on these hedge outcomes that we realized during the course of the year. Okay.
And 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 soon as we have that completed. We're hopeful that that's not going to go on too much longer.
Our next question comes from the line of Danielle Antony with Leerink
Mike, I just have two questions for you, one on U. S. And one on ex U. S. And litigation.
So first on U. S, this is a market that presumably or potentially could be going from 2 players to 4 sometime over the next, call it, 18 to 24 months. And 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 happened in Europe? And then
I just have the one follow-up on indication.
Sure. We have a lot of experience selling hard sellouts in the U. S. And we wonder whether the THC is going to be a lot different than 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, our disciplined pricers, especially with all the work that's necessary and clinical investment necessary to come to the U. S. Market.
So 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 discounting based on volume.
Okay. Okay. Got it. And then just last question here for me. Appreciating that you're not going to necessarily comment on the ongoing litigation.
But what's I understand that Ultra
is certainly in advance. But I'm curious about how you feel about your competitive positioning for season 3 with or without the advances of Ultra, I guess 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 Safety and Free 3 from here. But tell me if you think I'm thinking about that wrong.
Yes. I mean, we're really pleased. I think Safety3 has clearly demonstrated that it is best in class performance. And there's an awful lot of data that supports that. Our efforts in 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.
So we're very proud of the SAPIEN 3 platform and feel good about where it can.
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 questions. Sorry for my voice. I just wanted to circle back just in terms of thinking about kind of the P and L and just kind of generally your philosophy on how you think about I know
you're not giving guidance, I
assume you have specific evidence of the analysis. How do you feel about at this stage in ramping up to support things like Vantor and Tri Cusp Ed. Orange has been in a bit heavier in this quarter. It's kind of a new sort of run rate and we should think about 16% to 17% or maybe closer to 17% on run rate? And then are there enough of those vertical investments that need to be ready made from a sales and marketing perspective that's not really being reflected this year?
Yes. Thanks, Chris. And I'll maybe I'll make a few comments and let Scott jump in and kind of add additional color. So big picture, we're aggressive investors in R and 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 and D as a percent of sales always looks seasonably high in the Q3. Remember, this is our for at least our company, this is our lowest seasonal quarter. So ratios tend to be exceeding. But nonetheless, we're going to stay aggressive investors in this space. Yes.
I'd just add, we had the benefit of this tax reform in 2018. And so we ended up being able to invest even more aggressively and advance some of the programs that we've had on deck to really accelerate to ultimately commercialization. And so it's been fortunate to be able to fund these programs and to continue to invest for long term top line organic growth.
Okay. And then just to follow-up on the kind of topic of tax changes kind of came up before. If I look at kind of the year to date rate for the adjusted tax line, how much of that is associated to employee stock compensation? I guess this quarter it was 490. Is that consistent with fiscal year to date and kind of looking forward to next year?
And you didn't make comments, but is that something that you're assuming will benefit?
Yes. This is 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. So you get this double benefit. The reverse also happens. And so 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 of the tax rate.
So this year, this quarter, we realized an effective adjusted tax rate of about 13.5%. You mentioned before, 4.90 basis points of that was from the excess tax benefit. But we'll think more about it and try to give you our call when we get to the investor conference for 2019. But 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. Well, thanks all for your continued interest in Edwards. Scott, David and I welcome any additional questions by telephone. And with that, I'll turn it back over to 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 at edwards.com. If you missed any portion of today's call, telephonic inquiry will be available for 72 hours, and you can access this by dialing 877-660 6853 or 201-612-7415 and use the conference number 136 83434. Additionally, an audio replay will be available on the Investor Relations section of our website. Thank you very much.
Thank you.