Greetings, and welcome to the Edwards Lifesciences Second Quarter 2018 Results 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, President, Investor Relations.
Thank you. Thank you, Dan.
Welcome and thank you for joining us today. Just after the close of regulatory trading, we released our Q2 2018 financial results. During today's call, we'll be discussing these results that are included in the press release and accompanying financial schedules, and then we'll use the remaining time for Q and A. Our presenters on today's call are Mike Massalam, Chairman and CEO and Scott Ullam, 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, clinical trials, new product approvals, reimbursement and 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.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. And now, I'll turn the call over to Mike Massalla. Mike?
Thank you, David. We're pleased to report strong second quarter performance that delivered double digit organic sales growth driven by robust sales of our innovative therapies. Total adjusted sales of $972,000,000 grew 10% on an underlying basis, consistent with our expectations and in line with our 10% to 11% underlying full year growth forecast. We experienced broad based growth across the Edwards portfolio. Bigger picture, structural heart disease is largely undertreated and underdiagnosed, and we remain committed to increasing awareness and providing innovative life saving therapies so even more patients can benefit.
In Transcatheter Heart Valve Therapy, 2nd quarter global sales were $585,000,000 Underlying sales were up over 12% compared to the prior year, which reflects strong organic growth, partially offset by lower royalty revenues. Our global average selling price increased slightly as a result of favorable country mix. We estimate global TAVR procedures continue to grow in the mid teens, while our growth globally was a bit lower due to share decline outside the U. S. In the U.
S, total procedures for the Q2 grew in the mid teens versus the prior year and our growth was comparable. Strong therapy adoption continued to fuel procedure growth across the broad spectrum of TAVR centers in the network of approximately 600 hospitals. As physicians presented at PPT last month, evidence continues to show a large number of diagnosed patients who are not being treated for aortic stenosis. We are introducing new capabilities to help U. S.
Hospitals properly identify patients and streamline the care pathway to enable an efficient patient management process. We still expect the limited continued access protocol or CAP for our U. S. PARTNER III trials to begin in the Q3 and we continue to anticipate data from the PARTNER III trial to be presented at the ACC meeting in March of 2019 followed by the receipt of a low risk indication late that year. Yesterday, the Centers for Medicare and Medicaid Services convened a panel to consider procedural volume requirements for TAVR programs.
This panel listens to presentations from a wide range of stakeholders, including Edwards. CMS will take the panel's comments along with other inputs into consideration as it shapes the updated National Debtors Determination or NCD. We expect this to be finalized sometime over the next year. We have confidence in the thoughtful process and our positive outlook on long term TAVR opportunity is unchanged. Outside the U.
S, procedure shows continued impressive growth estimated to be in the mid teens. We continue to see excellent long term opportunities for growth as we believe international adoption of TAVR therapy is still relatively low. Our underlying sales growth this quarter was around 10%. In Europe, we are impressed that TAVR procedures continue to grow in double digits across nearly every country even after more than 10 years since the therapy introduction. With the advances of low profile systems, we've seen the expected decline in our TA platform, which was significant this quarter.
We have maintained price discipline and ceded share to competitors who have chosen to price aggressively in this region. While our SYKPM3 valve continues to demonstrate best in class clinical performance, we look forward to reinforcing our leadership position with the introduction of our SAPIEN 3 Ultra and CENTERA valves later this year. In Japan, our highest growth region, we continue to see strong TAVR therapy adoption with several new centers being added. We continue to enroll patients in the small clinical trial of our SACON3 Ultra system to supplement our European regulatory submission and remain on track to receive a CE mark later this year. The same valve system is also on track to gain U.
S. Regulatory approval in late 2018. We have completed a minor modification to the delivery system of our self expanding CENTERA valve. We plan to continue the commercial introduction and commence our U. S.
Pivotal trial late in Q3. In summary, we continue to expect our 2018 THVT underlying sales growth rate to be at the higher end of 11% to 15% aided by new TAVR and TMTT platform in the 4th quarter. There are many patients who would benefit from TAVR who are not diagnosed or treated today and we're encouraged that the TAVR opportunity remains robust, and we're confident in our ability to maintain a strong leadership position as this opportunity grows to over $5,000,000,000 by 2021. Physical Heart Valve Therapy, adjusted sales for the Q2 of $219,000,000 were up 3% on an underlying basis, including the impact of the consignment conversion. Once again, our new premium aortic valve products drove underlying sales growth faster than the total procedure growth.
We are pleased to see adoption of our INSPIRIS RESILIA aortic valve accelerate during the Q2. This valve is designed to be an attractive option for active patients, and we've observed the size of physicians treating younger patients in our early experience. We continue to expect to introduce the 2 class of resilient tissue tissue valves in Japan this year, pending reimbursement approval. And adoption of our ENTUNITY ELITE valve system in the U. S.
Contributed to our growth again in the Q2. We are examining the root cause of the complications in specific harpoon patients that covered last quarter and will update our introduction plans once completed. We do not expect that this will have a material impact on our 2018 surgical heart valve sales and remain optimistic about this novel therapy to treat degenerative micro valve regurgitation. 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 leadership in surgical heart valve technologies.
Through critical care, sales for the quarter were $169,000,000 and grew 12% on an underlying basis. This performance was driven by strong growth across our product lines, led primarily by HemoSphere. Additionally, sales in the U. S. Were uniquely strong this quarter aided by new GPO contracts.
HemoSphere, our next generation all in one monitoring platform, continues to receive excellent feedback from clinicians and is expected to be an important growth driver in 2018 and beyond. As a reminder, HemoSphere offers clinicians an intuitive, simple to use touchscreen platform that provides the patient's hemodynamic status. We continue to plan 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 later this year. Our HBI algorithm was recently acknowledged in the peer reviewed journal Anesthesiology. It concluded that in 84% of surgical cases, HPI predicted potential dangerously low blood pressure 15 minutes before it occurred.
In summary, we continue to expect full year 2018 underlying sales growth in Critical Care to be at the higher end of 6% to 8%, and we remain confident in our innovation strategy in this market leading product line. Turning to our transcatheter mitral and tricuspid therapies or TMTT, we continue to invest aggressively in this portfolio and believe we are well positioned to address this opportunity as there are millions of patients without effective treatment options. We're encouraged by the progress on each of our programs, and today, I will cover some select updates. Beginning with the transcatheter mitral repair, patients have been treated commercially with Cardioband and we're encouraged by the high level of interest from clinicians in its potential. We believe that this platform advances and believe that as this platform advances, the annular reduction provided by Cardioband can be an important first line therapy for many mitral patients.
The ongoing integration into Edwards supply chain is making good progress and continues to constrain supply in both the mitral and tritustic programs, which limited second quarter sales to approximately $1,000,000 We continue to target a ramp in TMTG sales in the second half to reach approximately $15,000,000 for the full year 2018. Enrollment in the CLASP CE Mark trial for our PASCAL mitral repair therapy remains on track and we still expect to launch this platform in 2019. And we continue to treat patients in our U. S. Early feasibility study.
In micro valve replacement, we're continuing to see good clinical progress with both of our transeptal programs, Edwards Cartier II and SAPIEN M3, and we're encouraged by the positive scientific presentation at TGP last month. In transcatheter tricuspid repair, we're pleased to announce the receipt of a CE mark for our Cardioband tricuspid valve reconstruction system, and clinicians have begun treating patients. In the U. S, we're on track to begin the early feasibility study but may be limited by supply. Overall, we remain enthusiastic about the opportunities to treat patients suffering from micro and tricuspid valve disease with our transcatheter therapies, and we continue to expect the global opportunity to be more than $3,000,000,000 by 2025.
We are optimistic in achieving significant clinical milestones in 2018 and realizing our goal of launching at least one new therapy a year in each of the next several years. You can expect to hear incremental clinical updates at the upcoming TCR Lung and TAL and PCT medical meetings. And now I'll turn the call over
to Scott. Thank you, Mike. We continued this year's strong performance with adjusted sales in the Q2 of $972,000,000 If the foreign exchange rates were used to provide guidance back in April, adjusted sales would have been approximately $10,000,000 higher. Adjusted sales grew 10% on an underlying basis. Adjusted sales exclude a $28,000,000 sales return reserve related to our conversion to consignment inventory model for surgical valves in the U.
S. As a reminder, we initiated the consignment model in the Q1 to complement the introduction of our new premium products and streamline inventory management at hospitals. I expect to complete the conversion by the end of 2018 and estimate the conversion will impact sales by $60,000,000 to $75,000,000 this year. We are excluding these conversions in our non GAAP sales results and underlying growth rates. In addition to our strong sales performance, adjusted earnings per share grew 14.8 percent to 1 $0.24 GAAP earnings per share was $1.32 which includes several tax benefits and the surgical valve consignment conversion I just mentioned.
A full reconciliation between our GAAP and adjusted earnings per share is included with today's release, and I will provide further details on the tax benefits and the billing. I'll now cover the details of our 2nd quarter results and close with an update on guidance for 2018. For the quarter, our adjusted gross profit margin was 74.4% compared to 75.3% in the same period last year. This reduction was driven by a 120 basis point impact from foreign exchange and continued investments in our operations, partially offset by a more profitable product mix. We continue to expect our 2018 adjusted gross profit margin, excluding special items, to be between 74% and 76%.
Selling, general and administrative expenses in the quarter were $275,000,000 or 29.1 percent of sales compared to $244,000,000 in the prior year. This increase was driven by personnel related expenses and the strengthening of the euro against the dollar. The ratio of SG and A as a percentage of sales would have been 80 basis points lower if you exclude the impact of the consignment conversion. We continue to expect SG and A, excluding special items, to be between 28% 29% of sales for the full 2018 year. Research and development expenses in the quarter grew 15% over the prior year to $154,000,000 This increase was primarily the result of continued investments in our transcatheter heart valve therapy programs, including spending on clinical trials.
For the full year 2018, second half spending is expected to be higher than the first half, and we continue to expect R and D, excluding special items, to be between 16% 17% of sales. Turning to taxes. We now expect our 2018 full year tax rate, excluding special items, to be at the low end of our previous guidance range of 13% to 16%. This quarter's rate benefited from several items. Accounting for employee stock based compensation benefited our tax rate nearly 7 percentage points and earnings per share by $0.08 which was in line with our guidance.
Additionally, our reported tax rate benefited from special items this quarter that we excluded from adjusted earnings per share. Most significantly, during the quarter, we settled tax audits that resulted in a $36,000,000 benefit to our tax provision. Additionally, we realized a year to date $9,000,000 non recurring benefit stemming from updated U. S. Tax reform planning.
This quarter, total special tax items combined to benefit GAAP earnings per share by $0.24 Foreign exchange rates increased 2nd quarter sales by $19,000,000 compared to the prior year. At current rates, we now estimate a $30,000,000 lift or about 1% to full year 2018 sales compared to the prior year. This current estimate is about $50,000,000 lower than our estimate last year. Compared to our April guidance, foreign exchange rates impacted earnings per share by less than $0.01 this quarter, reflecting the effective currency hedging program we have in place. Free cash flow generated during the Q2 was $87,000,000 We define this as cash flow from operating activities of $140,000,000 less capital spending of $53,000,000 Turning to our balance sheet.
At the end of the quarter, we had cash, cash equivalents and short term investments of $1,400,000,000 Total debt was $1,200,000,000 During the quarter, we extended our credit facility and refinanced bonds to strengthen our capital structure. In June, we issued $600,000,000 of 10 year bonds in advance of the maturity of our outstanding bonds this October and entered into a related swap agreement. As a result of our revised debt position and forecasted higher interest income for the year, we now expect our net interest expense for 2018 to be approximately $5,000,000 In April, we entered into an accelerated share repurchase agreement for $400,000,000 Average diluted shares outstanding during the quarter declined 214,000,000. We continue to expect average diluted shares outstanding for 2018 to be between 213,000,000 215,000,000. Dollars As of the end of the quarter, we had approximately $850,000,000 remaining of our share repurchase authorization.
Turning to our 2018 guidance. Given our strong performance during the first half of the year, at current exchange rates, we remain confident in achieving the higher end of each of the sales guidance ranges shared at our investor conference in December. Those ranges are $2,100,000,000 to $2,400,000,000 for transcatheter heart valve therapy, dollars 8.10 to $850,000,000 for surgical heart 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 For full year 2018 adjusted earnings per share, we are raising our guidance range to $4.60 $4.75 up from our previous guidance of $4.50 to $4.70 This improvement is driven by our strong first half performance and a lower projected tax rate. Lastly, we will continue to expect full year 2018 free cash flow to be
at the higher end of our
original guidance range of $700,000,000 to $775,000,000 For the Q3 of 2018, at current foreign exchange rates, we project total sales to be between $900,000,000 $950,000,000 and adjusted earnings per share of $0.93 to $1.03 And with that, I'll hand it back to Mike.
Thanks, Scott. We remain confident in our outlook for continued strong sales growth, and we remain 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 a 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 David.
Thank you, Mike. Before we open up
for questions, I'd encourage you to mark your calendars for Tuesday Wednesday, December 4th 5th, and we will host our 2018 Investor Conference here
at our corporate headquarters in Irvine. This event will include updates on
our latest technologies as well as our outlook for 2019. Look for more information in the next few months. 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 reenter 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. Our first question comes from the line of Bob Hopkins with Bank of America. Please proceed.
Okay. Thank you very much and thanks for taking the questions. I just want to ask 2 TAVR related questions, if I may. First is a question on travel pipeline and the second is a question on travel numbers in Europe this quarter. So I'll start with the pipeline and I apologize if I missed it, but can you just update us on when will FINCHERATE be back and full launch outside the United States?
And also please update us on what's your latest expectations for ahead for the United States and in
the United States? Thank you. So what we indicated, Bob, was that we had completed the minor modifications to the delivery system on CENTERA and that we planned a commercial introduction and our U. S. Pivotal trial late in Q3.
So we're going to start pivotal in the U. S. And have a commercial introduction ready to go by the end of Q3. As it relates to ULTRA, we're continuing to enroll patients in the small clinical trial, and we are using that to supplement our European regulatory submission. So we're on track to receive the CE mark later this year.
And in the U. S, we expect to gain U. S. Regulatory approval late in 2018.
No real change at that, how much you are experiencing previously? Exactly right.
And then one other question
I want to ask you
is on the European cattle. So last quarter you said you talked about 3 double digits and it is a slower due to competition. It sounds maybe from your comments here today that competitive pressures in Europe kind of really waste in the second quarter. Was that the right read? Was that all pricing?
Was that volume? Just maybe a little more color on what's going on inside the United States in the quarter.
Yes. We felt like we saw some change in behavior from our competitors on pricing. We made a strategic decision, and we've been operating this way for quite a while to maintain our pricing. And we're willing to cede share over the short term with the competitors who have chose to price aggressively. We've observed some recent behavior.
It appears to be kind of a more aggressive regional pricing, and they don't they're not we kind of maintain careful control on a global basis. So we don't see that same behavior all the time from our competitors.
Thank you. Our next question comes from the line of Isaac Ro with Goldman Sachs. Please proceed.
Good afternoon. Thank you. Just a follow-up on the same topic with regards to European share trend and pricing. Could you just talk a little bit about what you're assuming for the rest of this year to the extent that the change in competitor behavior was perhaps a bit of a surprise here. Why are you confident that this dynamic doesn't get worse throughout the course of year since you're able to still hit the higher end of your range?
And as part of that, talk a little bit about the importance of having CENTERA and Ultra available. Is that a big part of why you're confident? Thanks, Isaac. Can you put your finger on it? Yes.
One of the things that gives us comfort is the fact that we have the Safe injury Ultra and Sentara, 2 terrific valve systems coming. We really believe that it's going to reinforce our leadership position. Those we're quite prepared for that Ultra launch in Europe, and we expect that to be a strong win and then CENTERA is coming along as well. And so this is going to be a chance for us to touch many of our customers across Europe, and we think change is dynamic in a time when even though Safety3 is a best in cloud, platform, it's been in place for a couple of years now. Thanks.
And Saad, just a question on the EPS cadence for the rest of this year. Your updated guidance does seem to call for a pretty big sequential pickup from 3Q into 4Q. Can you maybe give us a little more detail as to key assumptions that underpin that? And to the extent that the new product launches required that that would
be a helpful addition? Thank you. Sure. The EPS guidance increase midpoint is $0.07 or $0.08 and it reflects the beat in the second quarter, which resulted from a couple of things. One was really the delay in recording some expenses that we expect to record now in the second half of the year.
And so part of that beat in the second half is going to be contributing to EPS or beat in the first half is going to be contributing to higher EPS in the second half, and part of it is going to go to more investments in R and D and catching up on some spending.
Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.
Good afternoon. Thanks for taking the question.
Mike, let me ask you to keep your questions. So the MedCAC and the NCD, just give us your thoughts on the MedCAC yesterday and if you think the reopening of the NCD will be a net positive for TAVR? And if so, why? And I had a follow-up question.
Yes. Yes. Thanks a lot, Larry. We saw, obviously, those mixed reactions that came out of the Big Tex channel yesterday. There was, we feel, a lack of consensus.
That was not surprising to us. We believe that CMS understands deeply about access and how that relates to the underserved. So ultimately, we believe that this is really not a change to our long term thinking. We expect the adoption of TAVR therapy to continue to grow, and we're confident in the $5,000,000,000 opportunity by 2021.
Thanks. And then there's several joint milestones studies, Mike, as you know, that we've been reading out in 2018, most notably MITREFR at ESC and COAPT, which is expected to be in the PCT in September. Can you talk about the potential impact in the field and your expectations? There's been obviously a lot of nervousness among clinicians, a lot of this reported in the medical press. These studies only show quality of life benefits, but no benefit to mortality and hospitalizations, for example.
How would that impact you? Thank you for taking the questions.
Sure. We continue to believe that a successful COAP will be very beneficial. But aside from that, we believe the TMTP opportunity is likely to reach more than $1,000,000,000 by 2021 regardless of the result. Negative collapse could perhaps be an issue, but more likely, people are going to point to the trial endpoint design. So it's something that we think deeply.
We work very closely with FDA where we design our own endpoint. But it's pretty rare when you have a technology that's going to impact mortality. I think you're going to have some very successful products that have an impact on quality of life. If you're going to actually get a mortality impact, I think that is probably above and beyond what people are anticipating today.
Our next question comes from the line of David Lewis, Morgan Stanley.
Scott, just a financial question for you and then maybe a strategic one for Mike. Just on the 3Q earnings guide, Scott, I took your historical cycling at the midpoint of
your range. It kind of implies you
do the upper end around $103,000,000 in the Q3. So I'm just sort of curious, what gets you to the bottom end of the earnings range the Q3? Because that would put you to the outside of your kind of historical cycling. That's probably, David, really tied to sequencing and phasing of when we report expenses during the Q3. That's probably what's going to influence most our earnings per share.
We will get some contributions to EGS from the Centerra from Centerra introduction and from the CAP in the U. S. Those are really Q4 events, not Q3 events to your question.
Okay. And then Mike, just 2
kind of strategic soft clinical questions. The first would be in product protection. Obviously, one of your competitors has sort of made a move to perhaps build that market. Have your views around the law protection changed at all? And I appreciate your comments on PASCAL.
It sounds like you're on track. We've heard some things about some catching issues ex U. S. I just want to sort of ask you about those issues and why you still remain very confident in the outlook for Comcast accounts. Thanks so much.
Sure. Yes, on
the acquisition, you know that the system that was studied when it was used with Edwards Valves, it didn't show any benefit. And so recall with the SAPIEN 3 data that you've seen in the past, there's very low slow pace at 1% at 3 days. So our belief is that adding another delivery system, another catheter potentially adds as much risk as it erases. So for the additional cost, it's not worth it. So we don't think it's going to be an important part of the therapy.
As it relates to PASCAL, did that answer that question, David? Yes, sir. Okay. So as it relates to PASCAL, we're pleased with the way that's going. Enrollment is on track.
And we look forward to having the results presented at future medical meetings. We plan to complete the LCE Mark trial in 2018 and expect to launch the product in 2019.
Our next question comes from the line of Raj Denhoy with Jefferies.
This is Anthony for Raj. Maybe just to go back to NTP MedCAC. If you compare sort of the public comments, they seem to be more notably positive than sort of comments out of MedCAC. And I'm just wondering how do you weight those 2 as you go into the final position? And should we get a situation where the volume requirements are actually eased?
Do you see a situation for where perhaps that possibly could bend the growth curve upward? And then a quick follow-up could just be on cardio band into the second half. I think you've guided still for $15,000,000 full year. Just how should we think about ramping to Q3, Q4? Thanks.
Yes. So yeah, I mean, if you watch that MedTech panel, there were a lot of different voices that came through. Our belief is that CMS understands those key issues pretty well and are going to take them into consideration the full range. And it's not the big tech panel that ultimately matters. It's how that new NCD gets written.
And that's probably going to happen sometime over the next year. We believe that the qualification shouldn't be based solely on volume requirements, and our priority is to ensure equitable access. It's probably too early for us to comment on how it's going to go. The I think all of the comments in total, whether it's the panel themselves or the public comments that have been coming in and continue to come in, are all going to be considered by CMS.
And on the Cardioband second half impact, I think you just expect that we're going to be ramping between now and year end. And so you should get more sales in Q4 than in Q3. That's helpful. Thanks.
So as we've previously indicated, we're in the process of integrating the Cardioband supply chain into the Edwards quality system, and the inventory might be constrained throughout 2019 as we continue that process. So we're still in a position where we expect to ramp TMTG sales in the second half to reach approximately $15,000,000 for the full year.
Thanks. Thank
you. Our next question comes from the line of Jason Mills with Canaccord Genuity. Please proceed.
Hi, Mike. Thanks for taking my question. 2 TAVR related questions for you, more sort of 20,000 foot view, one of them and then one just for the pure business. So you asked for the first half, I believe, somewhere around 11% underlying growth in that business and reiterated the execution will be at the top end. So you obviously we're looking to accelerate that in the second half.
And then I know you're not ready to go to 2019 guidance, but certainly we'll see the setup base with Globus, and Dua coming in the first half of the year, SIMPAR and ultra launches as you've mentioned, and then the approval for Globus in the second half of the next year. Are we possibly about to embark on a calendarized next 4 or 5 quarters where the risk profile for your type of business, perhaps, however, for everyone in the market, it's far a little bit.
Let me see if I can answer. First, I believe that the first half sales was more in the 12%, 12.5 percent range and not 11%. So it's not maybe quite as big a leap. But we do continue to expect to be at the higher end of 11% to 15%. And what we've got going for us is the fact that we've got Ultra and Centerra coming later in the year, the TMTP, the cardiochem gets reported in that category.
And we also have CAP, which will be a contributor. Remember that's a non randomized trial. So all those help contribute to the growth rate in the Q4, if you will. Looking forward, we're not ready to share the growth rates for next year. As you know, we feel like the CAGR is going to average in the mid teens to reach the $5 plus 1,000,000,000 opportunity by 2021 for the broad market.
And we expect and we're confident that we're going to prove non inferiority with the positive clinical trial output. We're not really expecting superiority, Jason, if that's a bit of where you're going. So at this point, I think you have to wait for the investor conference to get a projection for 2019. But we continue to feel that strategically we're very well positioned. We have a rich pipeline, and we're a guest of investors in the space.
And we continue to know that there's a large untreated patients that we can reach in the future.
Okay. That's helpful, Mike. And just following up
on that, you're talking about the
kind of
priority versus superiority. Do you
think that there is a different market reaction if you do indeed get a share buy that's either superior or trending towards that And if you don't realize you'd expect, do you still expect that the low risk data will have a positive impact on the market? And then lastly on that front, similarly, with respect to your market estimates, at even 10% growth, the market over the next few years, you're going to get to that $5,000,000,000 mark probably a year earlier than 2021.
I just wanted to make
sure that I heard you right that we said by 2021 that you're not expecting slowing growth. Thanks. Yeah. So I mean, on your first point, Jason,
we think the market is pretty smart. They know that this trial is powered for non inferiority, that it would take a much much larger trial to drive superiority. So I don't think anybody is really seriously expecting superiority. But when we prove non inferiority, I think that's a it's a net positive because it's going to impact the FDA approval, which will be supported then by reimbursement, and it will give clinicians the opportunity to expand their treatment. Separate from that, I think you were talking about how we think that we're we continue to see that this technology has a lot of legs.
Length of stay is improving quality of life. It's preferred procedure by patients. And so when we said plus 5,000,000,000 by 2021, we realized that there's upside. So of course, there's an upside in that number, but Mark's out there. Whenever I think when we made that prediction, it was out there 4 or 5 years, which always is a little bit dangerous.
But we continue to feel confident in what we said. Thanks, Mike. Sure.
Thank you. Our next question comes from the line of Vijay Kumar with Evercore. Thanks for
Hey, guys. Thanks for taking my question. Maybe Mike, now I want to start off on the last question on the back half guidance, right, the
acceleration
growth in the back half, right? So Tower, which is done about $12,500,000 in the first half, that's going to actually risk north of us, 13.5% in the back half, which still implies Tower is going to improve by about another 100 deaths, right, to get us close to
that 15% in the back half or north of 'fifteen.
I'm just curious because it seems like a lot of this optimism is being based around Ultra and Factorra launch in Europe. And given that these are premium priced products and the commentary we've heard on competition being pricing aggressively in select regions. But I'm just trying to match like why Tencentra and Ultra, if they're going to be premium price, why are they going to accelerate growth in the back half?
Yes. So a couple
of things, Joe. One is, we're not shaken by what happens in any given quarter on market share that it's some kind of fundamental change to the heart valve market. These are heart valves. People buy heart valves based on quality, based on proven outcomes with scientific studies, and we think that's that they'll continue to do that. When we have products like CENTERA and Ultra that are going to be introduced, those are some pretty terrific products when we think they're really going to get people's attention, and they're going to be interested in those.
And those are going to give us some lift. But as you properly note out note, TNTP, what happens in target then is also going to give us a lift. And that test study that comes shortly will also give us a lift. So that combination gives us a lot of confidence. So we're going to be at the high end of 11 to 15% range.
That's helpful, Mike. I forgot about the CapEx. But maybe on the last comment on QMTT, that implied Q4 CAUTI band number, right? Is that a normalized run rate number, Mike? Is there some catch up of the demand, right?
Because right now we're supply constrained. Does that 4Q is that a if that's north of a
$12,000,000 let's call it high single so $10,000,000 number, should we annualize that for next year? Or is there
what's the normalized quarter run rate for
the Cardio brand number? Yeah. Vijay, in the field system, I think it's a little early for us to be just projecting how we end the year and how to plan 2019 beyond. We think there's a lot of demand there and that we'll be able to see the numbers that we protected during the Q4. But I'll ask that you have some patience to wait for the investor conference, and we'll try and lay out what our longer term plans are at that time.
Thank you, guys. Sure.
Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Please proceed.
Thanks. Mike, Abbott announced the start
of their TENDYNS U. S. Trial earlier today. You mentioned you're making some progress with your own mitral placement program.
Can you
give us any more color on when you
think you can be positioned to ramp up clinical activity there with 1 or both of those products? And is it still your plan to wait until you have a transeptal system fully ready to go before you start your own U. S. Trial?
Yes. Yes. I think we reported on the call here that we continue to see good clinical progress with both of those platforms, and our strategy is unchanged. We're very focused on transeptal. We think the transeptal solution is going to be necessary to drive the safety and the efficacy and the chance to really drive that opportunity.
And so we're not deterred by the fact that there might be a transapical system that comes sooner. We don't think that that's going to be really meaningful in the long term.
Okay. And then I wanted to ask a rare critical care question. So that business has been a real standout performer in the first half of the year. And at this point, you're running at about 10% underlying growth. You guided to 8%.
Can you talk about the drivers there? And is there any reason we should necessarily expect that momentum to fall off and come down to that lower level?
Yes. Our critical care team is not used to having the spotlight here, but I'm sure they welcome it. We did see really strong growth, and one of the things that underpins it is the hemisphere. But the other thing that I'll note is that we have some help in the U. S.
By new contracts. So we're not ready to say that you should count on sustained growth rate throughout the year. But nonetheless, we're expecting this to be a strong year for critical care and to be at the high end of the 6% to 8 percent year
over year. Our next
question comes from the line of Joanne Wuensch with GLO Capital Markets. Please proceed. Good afternoon and thanks for taking my question. Can we revert back for a moment into Europe? Trying to better understand the dynamics there, how much of it is companies who have had products in the market for a long time, disrupting their pricing?
And how much of it may be some newer products or companies just coming out in now with lower prices?
Yes. It's actually a little too close. So we still have the longer term competitor that does some aggressive pricing. But we also see, Brett, the Sometis product is now in the hands of a larger company, even going to places that they haven't been before and also sort of continuing some of the aggressive pricing in the past.
And as a follow-up, just to sort of set the stage for next year, I think most investors assume to get low risk approval in 2019. What kind of ramp do you think we should expect? And similar to the intermediate risk level approval, do you think that you'll start to see some flow through after the data presentation before approval by the FDA?
Yeah. It's a good question, Joanne. We're going to spend some time really trying to lay that out in detail. Our history is that, yeah, the data itself does drive some level of performance, but the actual approval Our FDA does also some reimbursement along with it. So those both are factors.
It's in our experience, it kind of smooths over time. It's not a step function, and we would expect that to be the case in 2019, but probably not prepared at this point to be able to get much cheaper than that.
Thank you. Our next question comes from the line of Glenn DeBoer with RBC Capital Markets. Please proceed.
Hi, good afternoon. Mike, two questions on the U. S. Market. So it sounds like the U.
S. Market was in line with your marketing and your sales were in line with your expectations. But in past quarters when the U. S. Would come in better, Mike, you always called out new centers and you always called out volumes coming in stronger at the new centers.
So I'm wondering, can you give us some color as to how many centers you started up in the Q2? And are you still getting the strong demand from these new centers? And then I had a follow-up.
Yes. Thanks, Glenn. Yes, we did get new centers. I don't know the number, but I think we're closing into around 600 centers at this time in the US. And what my commentary was intended to do is not to say that we didn't get a lift from new centers because we did, but we saw a third broad base.
We also saw a lift in the centers that have been around very large centers that have been around for a while. So it was particularly broad based this quarter.
And then just as a follow-up, the NCV that's going to be considered over the next 12 months, does that do you think that has any impact near term on more centers opening up? Thanks.
I mean, I don't think in the near term there's going to be any change. When we actually see what's written in the NCD, it could have some impact. Now what do we think is going to happen? It's a little difficult for us to predict in the future. But if you were to ask us strategically if we changed our outlook, no, we haven't changed our outlook.
The NCC is going to provide a favorable climate and so that TAVR technology will continue to expand.
Okay, great. Thanks, Mike. Sure.
Thank you. Our next question comes from the line of Rick Wise with Stifel. Please proceed.
Good afternoon, Mike. How are you doing? I know, turning to Michael, you talked about in very quick, it's hard to predict and you're not yet to connect with N3 or cardiac too. But just as I reflect on the next couple of years, it would seem like there's going to be a couple of micro replacement devices taking into the clinic with very large trials. Do you worry at all, should we be concerned at all that it's going to be difficult to enroll or something more challenging than usual?
How are you thinking about that? Well,
this is one of the reasons why we're frankly attracted to TF as an option. We would imagine it might be difficult to enroll a TA trial. You know, we we know what the rate of surgery is today for, for mitral patients, and it's not attractive. And although TA might be incrementally better than open chest surgery, we don't think it's a big enough lead to really change treatment patterns. And that's why we're convinced the transeptal offering is the right approach to take on a longer term basis.
Okay. And just to follow-up on Ulta, I just wanted to make sure I understand your viewpoint. Is Ultra market share driving, pricing,
is it producers planning?
Just help me understand how it might offset the U. S. Tariffs that we've seen there, if at all, is that the right way to think about it or
maybe reframe what I'm saying is? Yeah. We haven't initially pegged it as a share gainer. We look at it as one that has greatly enhanced teachers and help us maintain our leadership. But having said that, it's an opportunity for us to go out there and spend time with each center, just to transfer us to go through the training process, and we think they're going to like what they see.
Just a last question on Japan. You said it was strong. Is it running as it captured? Are you now that you every quarter that passes, give a data sense of that market that there might be some upside there? Again, any color would be welcome.
Thanks so much.
Yes. We've always found Japan to be an incredible opportunity. We think the opportunity is still very significant. It's tracking just how would we expect it. But it's a lot to say.
As fast as TAVR is growing, it is our fastest growing region again this quarter with continued to see strong TAVR adoption and several new centers were being added there. So that's an encouraging sign. Thank you.
Thank you. Our next question comes from the line of Chris Nizau with SunTrust. Please proceed.
Good afternoon. Thanks for taking the question. Mike, I unfortunately watched that
you know, I was struck by the almost total lack of interest in the data that both you and Medtronic put forward regarding center variability and the fact that even if there's a little bit, it it pales in comparison to non treatment, which is your point. But my question is, you
know, you guys have a
lot of experience with SAVR and, there was no real discussion about what the volume to outcome relationship is for SAVR, which is a much more invasive procedure with probably greater chance for poor outcomes if things aren't
done exactly properly. Could you comment on that and how that might fit into the ultimate decision CMS makes? Yeah. Yeah, I wish you were on the panel yesterday because your observation is a good one. I think there are going to be a number of considerations that go into reconsidering the NCD.
The panel was asked to focus on 9 specific questions, and that wasn't one of the questions that they were really asked to delve into. It's a I think we think it's a fascinating one, and it's a really important one. We continue to believe that both TAVR and surgical valve replacement procedures could be expanded, but they should be restricted to programs that deliver high quality outcomes. So, we're we are of that mind, and we think that CMS is going to take a broad perspective on the reconsider the NCB. And then a very quick follow-up.
Just on the
when you mentioned 10% ex U. S. Underlying growth in TAVR, Was that not counting the slight ASP uplift you're referring to procedures? I just want to
be very clear about that. So
the slight uplift in ASP what we were talking about was on a global basis. And so on the global basis, you saw regions like Japan and U. S, which have stronger ASPs grow faster. And so that's what I was trying to indicate by the ASPs, right? Okay.
So your
TAVR revenue growth ex U. S. Was around 10%?
Correct. Yes. Thank you so much.
Thank you. Our next question comes from the line of Josh Jennings with Cowen and Company.
Please proceed.
Hi, good evening. Thanks for taking the question. I was hoping to make just your view or just experience here over
the last half of the
year on search engine behavior, particularly whether or not they're defending their territory, last gas buffers in front
of low risk in the next year.
I mean, the MedCAC meeting occurred. You had the consensus expert document that was run by my surgical society primarily. I just wanted to kind of hear what you're experiencing out there on the surgeon side in terms of whether they're setting their turf more aggressively at some of these centers. Yeah. I think we have a lot of common views with those that were involved with the consensus documents, but there's other places where we depart.
And, you know, we can choose the other side just so they accuse us of being self interested. So I set that aside. I like to think that the evidence has been or prevailed and that there's going to be good sense. You have this remarkable procedure in TAVR that really addresses a very serious and debilitating disease with a procedure that's safe and very effective and can be performed around the world actually at a high level of proficiency. We don't think that's going to be lost.
So ultimately, it's going to come through. The practice of medicine always changes frustratingly slow, and so we're not totally surprised by that. But ultimately, we think the technology will stand on its own merits. Thanks for that. And I just wanted to follow-up just when you're calling out the CAP program as a modest tailwind in the second half year.
Can we just help us think through the clinical revenue headwinds that you guys were facing in the first half? The Novus trial was enrolling at full pace, as my understanding, in the first half of last year. And the early TAVR and TAVR unload, I believe, are kind of slower enrolling trials. But any type of color in terms of clinical revenue headwinds you face in the first half, if that's going to be resolved by the CAT program coming on would be great. Thanks again.
Yes. I don't know. It's possibly helpful to think about it this way. Our low risk finished up at the end of last year. But remember, the low risk trial was a randomized trial.
So half of the patients would have gotten Phase 3, half of them no therapy. When we get on a CAP program, it's not a randomized trial. So you can almost think of it as, you know, at twice the pace as you would have had in terms of clinical because you don't have the half that would have gotten surgery.
Our next question will come from the line of Danielle Antalffy with J. Hainan Partners.
I just wanted to follow-up and I'm sorry, I keep coming up on the call. But just as we look at the back half and the market share loss that you guys talked about in Europe, and I appreciate that, that there is definitely an improvement, CENTERA, as far as you'll be relaunching or restarting the launch of CENTERA. But how do you think about the receptivity of some of the European accounts to price uplift? I am hearing that Medtronic is getting a premium relative to their Revolut Pro, but I'm also hearing Puerto Rico pricing at that 50 percent discount. So I'm just trying to get a sense of how aggressive some of these other players are and what that's doing to the mindset of some of these centers as it relates to powering even more relative to the PN3?
Yes. We think that heart valves are very important. We have a very long term history with surgical heart valves, and we choose not to really approach that as a market that should be buying on price. I mean, this is something that's expected to keep you alive for years. And we think that we try and offer a lot of value.
We back up our technology and continue to try and push it and back it up with a lot of evidence. And so we just we don't compromise on pricing. It's not surprising to have competitors at a lower price. And so this is not unexpected. And it's always going to be a little bit lumpy.
But on a long term basis, we expect that the best technology is going to prevail and maintain a strong leadership position.
And so I guess are you in essence sort of saying you highlighted some share loss the last two quarters ex U. S. These new products, even though you are expecting to price them at a premium, you think they help you retain share? Or do you think it just improves the mix
for EDGAR? Yes. I think we're very proud to be the leader, and we expect to be able to maintain that leadership. It probably does help from a share perspective, Danielle.
Okay. Thank you so much. Sure.
Our next question will come from the line of Matthew Marcus with JPMorgan.
Scott, I wanted to ask you a financial question here. With the tax guidance, the low end of 13% to 16 percent now versus 19% to 21% at the Analyst Day before tax reform. Can you help us understand how much of the EPS provision this year has come from financial leverage like tax debt pay down share buyback and how much they've been from operational gains?
Sure. So tax legislation probably contributed about 5 percentage points to reduction in our effective tax rate. Before, we got some benefit from some refined interpretation about the tax legislation. So it's probably a bit more than 5 percentage points. And then we got some benefit as well.
It was an excess of what we expected for the excess tax benefit from stock based compensation. So those 2 together reduce the rate pretty significantly from the original guidance at the investor conference.
Okay. And how much of this tax rate is sustainable? How do we think about what it should be on an ongoing basis in 'nineteen and beyond?
Sure. So this year, I
think low end of that 13% to 15% range. Longer term, we're still processing how we're going to true up and realize the benefits of the tax legislation.
And so we'll give you more guidance at
the Investor Conference. I think directionally, the guidance we would provide would probably be mid teens at this point, and we'll give you some more definition around that as we get to the Investor conference.
Great. And maybe just one quick follow-up. Capital allocation, you did the ASR earlier this year, but cash continues to build. How should we think about future uses of that cash? Do you look to build out or supplement the mitral transeptide and mitral pipeline?
Or is share repurchase focused? Thanks.
Sure. So our capital allocation priorities haven't really changed. The first call on cash is continuing to invest in our internal growth programs and programs especially that will generate high returns over the long term. 2nd is supplementing those internal programs with external investments, whether it's minority investments or acquisitions of companies on the smaller size. And then we get to financial engineering and using our balance sheet like share repurchase, which we'll continue to do over time.
As a reminder, we've got about $850,000,000 of share repurchase authorization left.
Okay. Well, thanks all. We appreciate your continued interest in Edwards. And Scott and David and I welcome any additional questions by telephone. Back to you, David.
Thank you for joining us on today's call. Reconciliations between GAAP and non GAAP numbers mentioned during the
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