Greetings, and welcome to the Edward Life Sciences First 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 David Erickson, Vice President, Investor Relations.
Thank you. Please begin.
Welcome and thank you for joining us today. Just after the close of regular trading, we released our Q1 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. 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 clinical trials and the timing and impact of new product approvals, competitive matters, litigation, therapy adoption 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 Web site at edwards.com. Also a quick reminder that when we use the terms underlying and adjusted, we are referring to non GAAP financial measures.
Otherwise, we are referring to our GAAP results. Additional information about our use of non GAAP measures is included in today's press release and on our website. And now I'll turn
the call over to Mike Massalla. Mike? Thank you, David. We're pleased with our start to 2018 with 1st quarter total adjusted sales of $938,000,000 consistent with our expectations. This represents 9% underlying growth and positions us for 10% to 11% underlying sales growth this year.
Therapy adoption of transcatheter heart valves once again drove the majority of growth aided by solid performance in our other product lines. Adjusted EPS grew 30% even while investing aggressively and making significant progress in our transcatheter mitral and tricuspid therapies and as we continue to build capabilities and advance clinical trials across our portfolio of replacement and repair technologies. Most importantly, even more patients are benefiting from our life saving technologies than ever before. Turning to transcatheter heart valve therapy, we are announcing 2 new developments in our TAVR U. S.
Clinical trials and we'll discuss those in a moment. In the quarter, consistent with our expectations, adjusted gross sales were $560,000,000 up 12% on an underlying basis over the prior year. This growth rate includes the final quarter of adjustments for stocking inventory in Germany, which began a year ago. Growth was driven by continued strong therapy adoption and our global average selling price remained stable. In the U.
S, transcatheter heart valve procedures for the Q1 grew in the mid teens versus prior year. We believe overall U. S. Procedure growth was roughly in line with our growth. Strong therapy adoption continued to fuel procedure growth broadly across our network of hospitals and our SAPIEN three valve has continued its best in class clinical performance.
Growth was particularly strong in lower volume centers where this therapy is increasingly accessible to a broader population of aortic stenosis patients. Based on our continued research, we are increasingly confident there are many patients who would benefit from TAVR and are not diagnosed or treated today. We are increasing our efforts to communicate with physicians to help them properly identify patients and assist them with navigating the care pathway. Outside the U. S, our procedure growth rate was in the low double digits.
We continue to see excellent long term potential for growth and we believe TAVR therapy penetration is still relatively low. Procedure growth in Europe was double digits this quarter, while our growth was lower due to a year over year shift in share to our largest competitor. We look forward to the introduction of SAPIEN 3 Ultra and CENTERA VALS to strengthen our leadership position. Growth in countries with lower TAVR adoption rates continued to outpace countries where the therapy is more established. In Japan, our highest growth region, we continue to see strong TAVR therapy adoption with a few new centers being added.
We believe Edwards procedure growth in the Q1 was in line with the overall procedure growth in that geography where aortic stenosis remains a large under treated disease. As previously reported, we are conducting a small clinical trial of our SAPIEN 3 Ultra system to supplement our European regulatory submission. This was unanticipated at the start of the process and is a reflection of the evolving European regulatory climate. We expect to complete enrollment of these patients this quarter and to receive CE Mark approval of the Ultra system in the second half of twenty eighteen. And following discussions with FDA, we continue to feel confident in the U.
S. Approval of this system in late 2018. In February, we were pleased to receive CE Mark for our premium price self expanding CENTERA valve, which contributed a minimal amount of sales this quarter. Clinician feedback has been very positive for this innovative valve system and we have begun a targeted introduction to strategically position this valve in specific European centers. Additionally, we're pleased to announce approval of a U.
S. Pivotal trial to study CENTERA for severe symptomatic aortic stenosis patients who are at intermediate risk for open heart surgery. We're enthused to launch this rigorous study, which we believe will build an extremely robust body of evidence to support the introduction and positioning of this feature rich self expanding valve system. We expect to begin enrollment in Q3 of this single arm trial, which will study nearly 1,000 patients with a 1 year endpoint, including roll in patients and a bicuspid substudy. Since it will be conducted in current Edwards Centers, it's not likely to result in incremental sales, but will increase R and D spending.
Separately, I'm pleased to announce the U. S. Approval of a limited continued access protocol or CAP of our PARTNER 3 trial for low risk patients with severe symptomatic aortic stenosis. Since the low risk trial has completed enrollment, the study will allow for the ongoing treatment at selected clinical sites of a limited number of low risk patients with the SAPIEN-three transcatheter heart valve. We expect the CAP program to commence in the Q3.
We continue to anticipate data from the PARTNER 3 trial to be presented at the ACC in March of 2019 and to receive FDA approval of a low risk indication late that year. In summary, we continue to expect our THVT full year 2018 underlying sales growth rate to be at the higher end of 11% to 15%. Turning to surgical heart valve therapy. Adjusted sales for the Q1 of $214,000,000 were up 2% on an underlying basis. These results exclude a sales return reserve related to a strategic change to convert to a consignment inventory model.
This will complement the introduction of our new premium products and streamline our inventory management. Scott's going to discuss this more in more detail in just a moment. Edwards' new products drove underlying sales growth at a rate higher than total procedure growth. Underlying heart valve sales grew in the mid single digits compared to a mid single digit decline from the smaller repair segment. Adoption of our Intuity Elite Valve System in the U.
S. Continued to be strong during the quarter and we've seen high demand for our recently launched INSPIRIS RESILIA Aortic Valve. This valve is designed to be an attractive option for active patients, which is reflected in the trend to younger patients in our early experience. We continue to expect to introduce this new class of resilient tissue valves in Japan this year, pending reimbursement approval. Since completing our acquisition of Harpoon Medical in December last year, our integration activities have been going very well with significant progress made to our mid year 2018 European launch.
However, we have recently learned of complications with 3 of the 65 treated in early clinical studies. While still early, we're looking into the root cause, which may influence the timing of our commercial launch. We do not expect this to have a material impact on the 2018 surgical heart valve sales and remain optimistic about this innovative therapy to treat degenerative mitral valve regurgitation. In summary, in surgical heart valve therapy, we continue to expect full year 2018 underlying sales growth of 2% to $64,000,000 and grew 8% on an underlying basis. This performance was driven by strong growth across the portfolio, led primarily by HemoSphere and strong regional performance in the U.
S. And Asia Pacific. 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. HemoSphere is designed to provide greater clarity on a patient's hemodynamic status to enable clinicians to make timely, potentially life saving decisions. During the Q1, we are pleased to announce the regulatory approval of our Acumen Hypotension Prediction Index or HPI in the U.
S. We plan to introduce this technology to a limited number of hospitals utilizing our current platform until it's available on HemoSphere later this year. This first of a kind technology leverages predictive analytics to alert clinicians to address potential hypotension or low blood pressure before it occurs in their surgical patients. In summary, based on our momentum, we now expect full year 2018 underlying sales growth in critical care at the higher end of 6% to 8%. Turning to our transcatheter mitral and tricuspid programs or TMTT.
We continue to invest aggressively in this portfolio of therapies 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 continued progress on each of our programs and in the quarter treated patients with all of our TMTT repair and replacement therapies. We continue to be optimistic about each of their potential to be a valuable treatment option. Today, I will cover some select updates. Beginning with transcatheter mitral repair, we recorded sales of less than $1,000,000 Patients are being treated with the CE Mark approved Cardioband and we're encouraged by the high procedural success rates.
As previously indicated, we're integrating the Cardioband supply chain into the Edwards quality system and inventory may be constrained throughout 2018 as we continue that process. We continue to expect TMTT sales to ramp throughout the year to approximately $15,000,000 for the full year 2018. We believe that the annular reduction provided by Cardioband can be an important first line therapy for many mitral patients. Enrollment in our CLASP CE Mark trial for our PASCAL transcatheter mitral repair program remains on track and we expect to launch this platform in 2019. We are also on track to initiate our U.
S. Trial later this year. In mitral valve replacement, we're continuing to see good clinical progress with both of our transseptal platforms, Edwards CardiAQ and SAPIUM M3. During the quarter at the CRT meeting in Washington, D. C, promising early clinical data for M3 were presented.
The earlier experience was encouraging and suggested the system is feasible for the treatment of patients with severe MR who are at high risk for mitral valve surgery. In our tricuspid repair therapies, we're pleased to announce we completed enrollment of our Cardioband tricuspid CE Mark trial and remain on track to begin introducing this platform in Europe later this year. In the U. S, we continue to activate sites for an early feasibility study. Overall, we remain enthusiastic about the opportunities to treat patients suffering from tricuspid and mitral valve disease with our transcatheter therapies.
We're optimistic in achieving our 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. And you can expect to hear more clinical updates at the upcoming uroPCR and TVT medical meetings. Before I turn it over to Scott, as we previously indicated, Boston Scientific initiated litigation that involves multiple patents in multiple countries that will likely yield numerous court actions over an extended period of time. The recent developments have not changed our view that Boston's patents are invalid and we are confident in our leading intellectual property position. And now I'll turn the call over to Scott.
Thank you, Mike. We continue to see robust demand for TAVR therapy, which generated total company underlying sales growth of 9.3%. In addition to our strong sales performance, we achieved significant leverage with adjusted operating income growing 14% and adjusted earnings per share growing 30% to $1.22 aided by a reduced tax rate. There were 2 adjustments to our reported sales in the Q1. First, this is the final quarter in which we recorded an adjustment for our German stocking sales.
And second, adjusted sales excludes a $35,000,000 sales return reserve related to our conversion to a consignment inventory model for surgical valves in the United States. We decided to implement this model to complement the introduction of our new premium products and to streamline inventory management at hospitals. We estimate this conversion will be completed by year end, which will result in an additional sales return reserves during the course of this year and will total an estimated $60,000,000 to $75,000,000 in 2018. We will exclude these reserves in our non GAAP sales results and underlying growth rates. As a reminder, the Medtronic royalty, which is included in our U.
S. Sales, was lower this quarter. The royalty rate reduced on January 1 per the terms of the agreement and we expect the full year 2018 royalty to be $15,000,000 to $20,000,000 less than it was in 2017. GAAP earnings per share was $0.96 which was impacted by 2 notable adjustments, a $24,000,000 tax reserve related to the new U. S.
Tax law and the surgical valve sales return reserve 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 reserve in a moment. I'll now cover the details of our Q1 results and then discuss guidance for 2018. For the quarter, our adjusted gross profit margin was 74.5% compared to 75.7% in the same period last year. This reduction was driven primarily by the impact from foreign exchange and some continued investments in our operations, partially offset by a more profitable product mix led by growing sales of TAVR.
We continue to expect our 2018 adjusted gross profit margin, excluding special items to be between 74% 76%. Selling, general and administrative expenses in the Q1 were $256,000,000 or 28.6 percent of sales compared to $230,000,000 in the prior year. This increase was driven by the strengthening of the euro against the dollar and personnel related expenses. The ratio of SG and A as a percentage of sales would have been 130 basis points lower if you exclude the impact of the special sales adjustments. We continue to expect SG and A excluding special items to be between 28% 29% of sales for the full year 2018.
Research and development expense in the quarter grew 11% over the prior year to $143,000,000 or 16% of sales. This increase was primarily the result of continued investments in our transcatheter heart valve programs, including spending on clinical trials. The ratio of research and development as a percentage of sales would have been 70 basis points lower if you exclude the impact of the special sales adjustments. For the full year 2018, we continue to expect research and development excluding special items to be between 16% 17% of sales. Turning to taxes, our reported tax rate of 21.6% for the quarter was driven by a $24,000,000 reserve against the tax benefit we recognized last quarter in connection with U.
S. Tax reform. The need for the reserve was triggered by new guidance issued by the Internal Revenue Service during February. Excluding the impact of this reserve and other special items, our tax rate would have been 13.2%. This was a lower rate and driven by more favorable benefit from U.
S. Tax reform and higher employee stock based compensation deductions. We now expect our 2018 tax rate excluding special items to be between 13% 16%. Foreign exchange rates increased 1st quarter sales by $36,000,000 compared to the prior year. At current rates, we now estimate an $80,000,000 lift or about 2% to full year 2018 sales compared to the prior year.
Compared to our February guidance, FX rates positively impacted earnings per share by $0.04 this quarter. Free cash flow generated during the Q1 was $108,000,000 We define this as cash flow from operating activities of $151,000,000 less capital spending of $43,000,000 Turning to our balance sheet. At the end of the quarter, we had cash, cash equivalents and short term investments of $1,500,000,000 the majority of which was held outside the U. S. Total debt was $1,100,000,000 Average shares outstanding during the Q1 remained level with the prior quarter at 215,000,000.
We continue to expect average diluted shares outstanding for 2018 to be between $213,000,000 $215,000,000 Turning to our 2018 guidance. Given our strong start to the year, combined with the strengthening of the euro, 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 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 now expect to be between $4.50 $4.70 up from our previous guidance of $4.43 to $4.63 This improvement is driven by a lower projected tax rate, partially offset by increased investments from our tax savings to accelerate growth initiatives consistent with our strategy. Lastly, we continue to expect full year 2018 free cash flow to be at the higher end of our original guidance range of 700 dollars to $775,000,000 For the Q2 of 2018, at current foreign exchange rates, we project total sales to be between $950,000,000 $1,000,000,000 and adjusted earnings per share of $1.05 to $1.15 excluding special items.
And with that, I'll hand it back to Mike. Thanks, Scott. We're 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 put as we pursue multibillion dollar market opportunities.
And with that, I'll turn it back over to David.
Thank you, Mike. 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 Jason Mills with Canaccord Genuity. Please proceed.
Hi. Thank you for taking the question, Mike. Can you hear me okay?
Yes. I hear you fine, Jason.
Super. I'd like Mike, if we could start by talking about the U. S. TAVR market coming out of the 4th quarter result. It was somewhat surprising in a lot of ways the strength just coming a couple of months after your Investor Day in which you gave your guidance, which you reiterated today, Q4 results were stronger.
And you talked about some of the end of quarter trends that you saw as well as strength that sort of surprised us in the lower volume centers, which you reiterated here today. So today's result was seemingly roughly in line with your expectations. I think many of us on the street got a little excited after your Q4 results, so a little over than hours. Maybe you can talk about the U. S.
Tablet market within the context of what you saw coming out of Q4 and what you saw during Q1? And then maybe what you might expect as the year progresses with the cap for PARTNER 3 coming through, as well as the commencement of the trial for Symtara, which you announced today?
Okay. Let me try and recap that, Jason. There's quite a few little pieces in there. But bigger picture, the THV growth globally of 12.4% was something that was very consistent with our overall expectation. The U.
S. Was very consistent with our expectation as well. And as I mentioned, we continue to expect to be at the high end of 11% to 15% for the full year. Now a couple of things that people may not have remembered or not taken account for. The Medtronic royalty changed at the start of the year per the contract.
And so that's expected to be $15,000,000 to $20,000,000 less that affected the Q1. And Q1 a year ago, you might have considered a tough comp. There's the seasonality is always difficult for us. You know quarters vary from one to another. The 4th quarter was quite strong, whereas the Q1 probably had some impact of Easter in it.
So there may have been a little bit of an atypical seasonality pattern. But by and large, we felt that these results were consistent with what we expected.
Thanks, Mike. I'll follow-up sticking with the U. S. I guess maybe give us an update on the number of centers you have in the United States? And you talked last quarter about the lower volume centers.
And clearly, over the last, call it, 18 months, there's been more centers added with respect to the TAVR program than many of us expected. How do you see that trending going forward? And I guess just as a follow-up to your comments about the T3 cap, how much of an impact do you think that that will have? I guess the question is more with respect to any inkling you have about pent up demand within that low risk cohort ahead of a late 2019 approval? I'll get back in the queue after that.
Thanks.
Okay. Thanks. Well, I think last time we reported it was around 5 75 centers. So we add sites as they qualify and I think that typically turns out to be 20 to 40 over that period of time. The thing that we found interesting is it seems to bring new patients into the system.
Maybe it's because patients are in narrow networks and when we add a hospital even though it might be a smaller one that it opens that up. So we've continued to see that trend. As it relates to the CAP program, FDA wanted to give sites the ability to continue to process patients that were already in their queue. But it wasn't it's not an unlimited CAP program. Matter of fact, it is quite limited by site, by over a certain period of time.
Even if we max that out this year, it would contribute less than 1% to our sales growth. So it's helpful, but kind of minor in the total scale of things.
Thanks, Mike.
I'll get back in queue.
Thank you. Our next question comes from the line of David Lewis with Morgan Stanley. Please proceed.
Good afternoon. Mike, just a question for me on the U. S. And a follow-up on international, if I could. So Mike, your confidence in 11% to 15%, you mentioned it several times this call.
To get from the 12% to the upper end of 11% to 15%, can you just kind of talk to us as you progress through the balance of the year, your confidence in that? I mean, the comps do get easier. You have some incremental product launches. There's some seasonality. But how do we get from the 12% to the upper end of the 11% to 15% across the quarters?
Well, thanks, David. I think you just answered the question. Those are exactly the points. The comps in the second half of the year certainly aren't equivalent to the comps that exist in the first half. We are in the process of launching CENTERA and we'll have hopefully have Ultra here toward the end of the year.
So those will be helpful. And we just generally have momentum. We continue to believe that we have the most competitive product line and that we've got a real growing marketplace. The more we study this marketplace, the more we believe and have confidence in the fact that there are many untreated patients.
Okay. Maybe I'll ask you a more complicated question about the ex U. S. Markets then that I won't answer. But 2 part question Mike for ex U.
S. 1, you talked about share dynamics ex U. S. Can you just talk about the share dynamics you referred to? Was that product positioning, pricing and kind of related as we think about the IP dispute with Boston as you mentioned?
Are you planning any inventory stocking in the Q2 in anticipation of disruption? And as you think about the Ultra Skirt you also mentioned, do you see that it's differentiated from S3 from an IP perspective? And I'll stop at that. Thank you.
All
right. There's quite a few little questions in there. Let's see if I get to them, David. First of all, I think you asked about the share shift, then we said we had a share shift that occurred to our largest competitor. You know that Edwards sells at a significant price premium to competitors.
And what we feel like has happened is that there was a 2 to 3 point share point difference from year over year to our largest competitor. We think actually it's been pretty stable quarter over quarter. We look forward to getting the SAPIEN 3 Ultra and the CENTERA valves to strengthen our leadership positions. When Ultra is different probably from an IP perspective. We don't feel like SAPIEN 3 infringes.
We think it's even probably a bigger stretch for Ultra. And just to your other question about do we plan any stocking programs? No, we don't have any stocking programs planned at this time. We'll share those, if we feel like that's the right thing to do.
Okay. Thanks so much.
Thank you. Our next question comes from the line of Bob Hopkins with Bank of America. Please proceed.
Thanks for taking the questions and good afternoon. I had a question for Scott, but before I got there, I wanted to ask one quick one on just sort of the dynamics around the Medtronic royalty. Thank you for the $15,000,000 to $20,000,000 I'm just curious, should we think about it as being sort of evenly paced throughout the year or is that $15,000,000 to 20,000,000 sort of front end loaded here in the Q1?
That might be the best. Sure.
It's probably a few $1,000,000 of that $15,000,000 to $20,000,000 was realized in the Q1 and the rest should be fairly evenly distributed during the rest of 2018.
Okay. Thank you for that. And then just a couple of questions on the earnings guidance. First, can you just walk through the dynamics sort of the pacing of the year, why Q2 earnings is lower than Q1? Obviously, the Street is a little bit higher than the guidance you're giving for Q2 earnings.
And then maybe talk a little bit about in terms of the full year earnings guidance versus the previous guidance. So, wondering if you could just quantify the impact of the tax rate, FX, the extra spending. So, I guess, two questions in there. 1, just understanding cadence and why Q2 is a little lower and then understanding what's changed?
Sure. So let's start with the Q1 and how it varied from our February guidance where the midpoint of our range was $1.09 We beat that by about $0.13 on a non GAAP basis and it was driven roughly 1 third from each of some delays in spending. So some expanding that we expect to hit in SG and A and R and D we expected in Q1 that will now be pushed out to later quarters. The second, third would be foreign exchange and it's specifically related to the new tax legislation. And then the 3rd piece that drove better adjusted earnings per share in Q1 than we originally expected was the benefit from the excess tax benefit from stock based compensation.
In terms of how our guidance for 2018 has changed since February, back in February, we expected $4.43 to $4.63 for the full year and that $0.07 gap from the midpoint of that range to our new range of $4.50 to $4.70 is really driven by a couple of things. 1, greater SG and A principally due to foreign exchange. So as we translate OUS expenses at current rates, we realize higher expenses from SG and A. The second is greater spending on research and development and both including some of the investments we funded with the tax savings as well as the new CENTERA trial that's driving higher R and D expense than we had factored in during our guidance last year last quarter. And the third one is, it's really more than offset by this greater excess tax benefit and the tax reform.
So all net net, it gives us a
little bit of pickup to
the tune of $0.07 at the midpoint of the range from February to today.
And then the Q2 dynamic?
So Q2 dynamics, it's part of it is just really the ETB, that excess tax benefit that was front end loaded. We had our stock price traded up significantly in the Q1. We also had additional option exercises that were not factored in. And so that was the lumpiest piece in Q1 that we are not modeling to finish in Q2. The other piece is just step up from spending from the tax savings in the second quarter.
Great. Thanks for the moving pieces.
Thank you. Our next question comes from the line of Larry Biegelsen with Wells Fargo. Please proceed.
Hi, guys. Thanks for taking
the question. 1 on the low risk indication, 1 on ULTRA. So Mike, the investor debate around low risk is, I think, less about the outcome, which people expect to be positive. It's more around the opportunity and adoption. Specifically, I think some people have questioned whether the low risk population is already penetrated.
And given your surgical heart valve business continues to grow, it would suggest to me that the answer to that is no. The other question is, will the greater importance of durability in the low risk population, will that slow adoption? So what are your views on these questions? And as I said, I have one follow-up on Ultra.
So, we think that low risk is a very significant opportunity. I think sometimes people get confused and they think that low risk means younger patients. And although that might seem to be the case, they're actually very there's a high number of low risk patients that are elderly, many in their 70s, 80s and more. It's just the way that the system works. And so I think you shouldn't underestimate what happens.
And I think TAVR would be the particular beneficiary of that. The more we study this, the more we find that there's real obstacles for patients to be treated. We think that the sites by and large do stay on label that they're very concerned about the payment policies and so that's important to them. And we continue to believe that the estimates that we put out about the size of the market in 2021 beyond are still, if anything, conservative.
That's helpful. Then on Ultra, Mike, I heard your comments on the U. S. And conversations with the FDA. What is required by FDA from a regulatory and clinical data standpoint?
And I'm asking because obviously what happened in Europe was a bit of a surprise to everybody. And my understanding is and perhaps I'm wrong that you're going to use overseas data for the U. S. Approval. So I'm asking you because we just want to understand why you're so confident in late 2018 approval for ULTRA in the U.
S? Thanks for taking the questions.
Yes. So we did as I mentioned, we did get surprised by the ultra approval process in Europe. We had initially believed and this was through conversations with regulators that we wouldn't require clinical data and that ultimately we did require it and so that was hit the timing. We've had an ongoing dialogue with FDA. We typically don't share the ins and outs of our regulatory process.
But as I said, we continue to be very confident in our ability to be able to get ULTA approved in the U. S. By the end of the year.
All right. Thanks for taking the questions.
Sure.
Thank you. Our next question comes from the line of Raj Denhil with Jefferies. Please proceed.
Hi, good afternoon. I wonder if maybe
I could ask a couple on the
mitral developments. You noted Cardioband still less than $1,000,000 in revenue in the quarter. So I guess I'm curious about the ramp there. You noted $15,000,000 for the year is still your target, but what's been the level of interest in that product? Are there a lot of clinicians in Europe that are looking to get trained?
And how quickly can you start to see a faster result out of that business?
Yes. Thanks, Raj. Actually, we've probably been the ones constraining ourselves. We felt a lot of interest on the part of clinicians. They have a lot of interest to want to join this.
And the good news is that the procedural success rate has been quite good. As I mentioned, we're integrating the supply chain into the Edwards Quality System. And that's taken us longer than we thought. And so it means that we have to be thoughtful in terms of the way that we dish out supply. Remember, we're also feeding clinical trials in addition to our commercial success.
And our goals in the near term really are not to maximize commercial sales, but to learn as much as possible and to make progress on our regulatory pathways.
And has there been any change or improvement in the treatment time or the procedure time with Cardioband yet?
Yes, there have been improvements. There's the procedure times have been coming down. Most of that I would attribute to learning curve. We're probably moving from procedures that were more in the 3 hour range to the 2 hour range. We've got bigger plans for ourselves in terms of next generation systems.
But even while we're within the existing system, there have been improvements in procedure times.
And maybe just lastly on the replacement side, you noted the positive data on the 10 patients on the M3 device. Have you sort of changed your thinking or is there a horse in that race now you're preferring between CardiAQ and M3 at this point or is it really yet to make any sort of decisions there?
Yes. It's early. We're just we're continuing to see good clinical programs for good clinical progress for both of those transseptal programs. So we're pleased with it. It's been going well and we're not trying to send a signal that we have a preference.
Great. Thank you. Yes.
Thank you. Our next question comes from the line of Isaac Ro with Goldman Sachs. Please
proceed. Good afternoon. Thanks. It's still a little early in earnings season. So I was trying to piece together kind of the commentary we've seen from various companies and wondering if you thought there might have been any impact to TAVR volume from whether it be seasonal items like flu or just the deductible dynamic in healthcare leading to fewer inpatient days?
And anything really that would at the margin explain some incremental headwind that you didn't have in the same period last year?
Yes. It's very difficult for us to say, Isaac. I can understand your question. So for example, in the Q4 of last year, we felt like we saw more activity than we would have anticipated sort of in that last week or so of the year that's normally affected by holidays. Did that have any impact on Q1?
I don't know. We had the Easter holiday that actually crept into the very end of Q1. So those things probably had some impact here on the margin. Our folks that count selling days say, hey, there might have been a 1% difference between 1 and the other. But if that's helpful.
Sure. That's helpful. Thanks, Mike. And then maybe a follow-up on the pricing environment. I imagine that there's not a big change there, but curious if you could maybe communicate kind of what transpired in the quarter from a pricing standpoint, if there was anything notable?
Yes. Generally, when we talk about pricing, Isaac, we're talking about it in constant currency. So that was pretty flat. You go right around the globe. And usually what we're most susceptible with is what happens in terms of the geographic mix.
Actually, the thing was kind of interesting this quarter is the very favorable trend that we saw in Europe. And so because the euro strengthened, it actually made what the sales prices that we realize in dollars are much higher out of Europe and actually would have ended up affecting the global rates if we would do it on an actual basis, but we try and stay out of that.
Okay. Thank you.
Thank you. Our next question comes from the line of Vijay Kumar with Evercore ISI. Please proceed.
Hey guys, thanks for taking my question. So maybe I'll start one with the TAVR volume C versus so U. S. I think I heard you guys say international was low double digits. That would imply the U.
S. Volumes growth of 14%. I just want to know, one, is that math correct? And second, when you talk about the impact from Medtronic royalty rate, where was that being recognized? Was that being recognized in U.
S. TAVR revenues or OUS international TAVR revenues? Thank you.
Maybe I'll start with Scott with the answer to your second question, which is we realized the Medtronic royalty revenues in our U. S. THP business. And as I flip it back to Mike, could you just repeat the first part of your question?
So the volume growth, I think I heard you guys mentioned 10% in international for TAVR. That would imply 14% growth for U. S. Is that the right numbers? Okay.
Yes. So I think what we said was OUS procedure growth was low double digits. And we said THP procedures in the Q1 in the U. S. Were in the mid teens versus prior year.
So I don't know, does that help Vijay?
No, that's helpful, Mike. Just maybe one last one on gross margins. It looks like it was a little light for this quarter. When you look at the guidance range for the year, $74,000,000 to $76,000,000 Maybe can you just help us on what are some of the moving factors as you progress sequentially? It looks like this is now coming in below the midpoint for the year.
So I just want to understand what drives in the back half? Is this FX or something else going on or is this pricing? Thank you.
Sure. So maybe we've lightened up a little bit as you model
gross margin for the rest of
the year, something like 20 basis points, but it really gets lost in that range of 74% to 76 percent. Using the middle of that range is still probably a good modeling assumption. In the Q1, you're right, FX was a big piece of it. And the other difference from Q1 of 2017 was continuing manufacturing investments. Both of those were partially offset by mix.
So as you know, we've been continuing to see a pickup in mix and gross margin as a result of the faster growing THP business.
Thank you, guys.
Thank you. Our next question comes from the line of Glenn Novarro with RBC Capital Markets. Please proceed.
Hi, good afternoon guys. Two quick clarifying questions and then I had a quick one on CENTERA. So first, Mike, outside the United States, you talked about growing below the market. So that's share loss to your largest competitor, that's Medtronic. But if you add up Abbott in Boston, they're starting to trend in that $100,000,000 range.
So I'm wondering if you're seeing any share loss to Abbott or Boston Scientific in Europe. And then as a other clarifying question, you said in the SAPIEN three low risk cap, even if you maxed out the cap this year, it had 1% to growth. Were you referring to just TAVR growth or overall company growth?
So on the first question, I wouldn't say that we saw anything notable from Boston and Abbott. I don't know if Boston is back to where they were. But I think those smaller competitors are probably in the mid teens growth sort of market share rate. So it hasn't changed a lot over a pretty substantial period of time. Will you repeat the second part of the question, Glenn, so
I make
sure I have it?
Yes, yes. You said that the SAPIEN three low risk continued access program in United States, If you maxed it out this year, you said it would add 1% to growth. I'm assuming you meant 1% to TAVR growth, correct?
Yes. And actually, what am I specifically, I said less than 1%. Less than 1%. Yes, yes, I'm talking about TAVR growth. Great.
Just want to clarify. And then just a quick one on CENTERA. You gave us details, 1,000 patients enrollment starting sometime midyear. Should we assume a year to enroll, a year of follow-up and a year through the FDA, meaning FDA approval if all goes well in 2021. Is that a reasonable assumption?
Yes. It's pretty early for us to be assuming. I mean, there's I think I don't think there's any reason to assume that this is going to be particularly slow. There seems to be a lot of excitement amongst our clinicians. So we'll see and we'll keep you informed.
Okay, great. Thanks, Mike.
Yes.
Thank you. Our next question comes from the line of Rick Wise with Stifel. Please proceed.
Good afternoon, everybody. I also want to touch on Centara, if I could, Mike. You talked about Centara launched sort of a targeted launch in Europe. Maybe help us understand the thinking behind your decision to do this sort of the targeted approach. We've continued to do ongoing dock checks and everybody is saying incredibly stable deployment, incredibly high device success, low needs for recapture repositioning.
I'm hearing great feedback. The pushback is on price. So maybe just update us in your thinking about why the targeted center approach? Are you continuing to get this kind of feedback? And could this be a preview of how you'll roll out CENTERA in the United States?
Yes. So I mean the short answer, Rick, your observations are correct. We also have heard a lot of enthusiasm about CENTERA and there's a real demand for it. We have decided to price this valve at a premium. A matter of fact, even a premium to SAPIEN 3 and you know that SAPIEN 3 is at a premium to competitive valves.
And so I think and that's for very it's country specific. And it's just reflective of the fact that this is our latest technology and we think highly differentiated from what others see. And that's the strategy that we're deploying. So we're being very thoughtful about what centers we go to and how fast and focused on really high level of procedural success.
And in Japan, just a briefer question. Obviously, a smaller market, but you highlighted the it's one of your better growers in TAVR. Where are we in penetrating the market? Let's say, number of centers or How much more is there to go in terms of expanding centers or gaining share? It seems like one of your bigger incremental growth drivers ahead, if that's the right way to characterize it?
Thanks.
Yes. We think Japan is a big opportunity. It is the fastest growing PHV region again this quarter. Adoption is still very early. They could use a lot more centers.
I don't know what the number is. It's certainly less than 150. They could use a lot more to be able to really penetrate the opportunity and we think that demand is going to continue to be strong for quite a while.
Thanks.
Thank you. Our next question comes from the line of Robert Marcus with JPMorgan. Please proceed.
Thanks for taking the question.
Maybe I can start off, you did 12.5% underlying TAVR growth in the Q1 and you reiterated your confidence in the upper end of the 11% to 15% range. Maybe you could talk about, A, what gives you confidence and B, maybe some different plus or minuses as we think about the balance of the year?
Yes. As we mentioned, we think the market is growing in the mid teens and we're we think we have a highly competitive program. And so we would expect to also be able to grow in the mid teens for the rest of the year. We do have the headwind of the Medtronic royalty, which will cost us a little bit. We have a little bit of a tailwind, although it's small off the cap program.
But overall, we think we're well positioned to be able to attain that high end of 11 to 15.
And then maybe Scott, you reiterated sales guidance at the upper end of the $3,500,000,000 to $3,900,000,000 range and there's about an incremental $80,000,000 in FX this quarter. Should we be thinking about any changes to the underlying growth of the company? Would you have had to lower guidance this quarter without the benefit effects? Or how should we be thinking about that?
For underlying growth, remember originally we expected somewhere in the 9% to 10% range. Now we're more in the area of 10% to 11% range of underlying growth. So FX is helping the nominal sales, but there's also strength in the underlying business. Sorry, Robbie, you also asked about $80,000,000 It's $80,000,000 in FX tailwinds for the year. I think you might have said the month, so the quarter.
So it's $80,000,000 or call it about 2% of total consolidated sales in FX tailwinds.
All right.
Thanks guys.
Thank you. Our next question comes from the line of Bruce Nudell with SunTrust. Please proceed.
Good afternoon. Thanks for taking the question. Mike, just to clarify, should we continue to expect mid teens procedure growth for TAVR in the U. S, low double digits ex U. S?
And could you just elaborate on the cause of share loss in Europe? And I have a follow-up.
Yes. So overall, I think those are reasonable assumptions. We're like you watching it very closely, but I think those are reasonable assumptions. The bigger picture here is this disease is undertreated and there's every opportunity for us to be able to do that. And we're focusing even more efforts on disease awareness.
But I think those kind of market growth rates are healthy. Now, did you say you wanted to talk about the share shift?
Yes. Just any causal explanation you could proffer.
Yes. I mean, what we're talking about is specifically in Europe, we think there's economic pressure on customers. And so that causes the difference in THV pricing to be a source of pressure. And we think that's a relatively tough issue for some customers. What I also indicated though is when we're able to add products like SAPIEN 3 Ultra and CENTERA that really helps us because those products are highly differentiated and the clinical performance there, we expect to be significant.
So again, what we tried to relate earlier is that the share shift, it was a year over year share shift, not a quarter over quarter share shift. So I'm just trying to put it in perspective.
Perfect. And my follow-up is regarding COAPT. COAPT is coming up at the TCT. Do you suspect there'll be a positive signal as to clinical benefit either with death or rehospitalization or both? And if it doesn't occur, how impactful will negative results be for market development?
Yes.
I'd rather not comment in terms of whether I think it's going to be favorable or not. If it's favorable, I think it would be very beneficial to the opportunity because it would just build confidence. Conversely, if it's negative, I'm going to guess that a lot of clinicians look at it and suggest that the problem was the trial endpoint design. And so, I don't know that it's really going to be much of a negative for the opportunity. I can tell you ourselves, we work very closely on trial designs in TMTT.
And there's going to be a number of data sets over the next year, COAP certainly be one of them. But I think you're going to see more data than ever before and we continue to be very optimistic about the opportunity.
Thanks so much, Mike.
Thank you. Our next question comes from the line of Chris Pasquale with Guggenheim. Please proceed.
Yes, thanks. Mike, first, can you provide any details on
the complications
you saw in the HARPUNE study?
Yes. What was reported, Chris, was the return of mitral regurgitation. So we're digging into that and trying to really understand it. It's early in our evaluation and we don't really know the cause of it at this point. But that's what the clinicians call to our attention and that's why we decided to pause here and make sure that in the abundance of safety here that we understand what's going on.
Okay. And then do you still expect to get back in the clinic with the form a tricuspid spacer sometime this year? And then lastly for me, just anything you want to highlight coming up at PCR? Thank you.
Yes. So we did resume treating some patients this quarter, just a few of them. And so we're we got some real procedural learnings and the learnings have been helpful. So we're still evaluating that therapy. You're going to see probably more in the it's still early.
You're probably going to see more coming from Cardioband tricuspid in the near term in terms of data sets.
And PCR, anything you guys want to highlight next month?
Yes. So at PCR, we expect Cardioband, both the mitral and tricuspid data sets to be presented. They'll be early, but there should be presentations there.
Great. Thank you.
Thank you. Our next question comes from the line of Joanne Wuensch with BMO Capital Markets. Please proceed.
Good afternoon and thanks for taking my questions. A couple of housekeeping items. First, the tax rate guidance for this year, should we consider that a go forward rate also?
So, yes, it's Scott. I think probably not, simply because we had such extraordinary tailwinds benefit from this excess tax benefit from stock based accounting. So it's always really hard to predict, really impossible to predict because we don't know where our stock price is going. But I think if you look back to our original guidance for the year of 15% to 18%, that may be a better modeling assumption longer term and we'll keep you updated as more information becomes available. Also keep in mind, we've gotten continual updated guidance from IRS and Treasury about the impact and the interpretation of this new tax legislation.
And so that will also have an influence. And to that end, some of the tax reform benefit that we're realizing now will tail off, especially as it relates to some of the compensation related deductions.
And the Medtronic royalty step down this year, could you remind us when the next step down is, if there is one?
Yes, it's really without getting all the details of the settlement agreement from back in 2014, just you should model assume the $40,000,000 minimum and we'll let you know if that assumption should change at all in the years ahead.
All right. And then my last question is when you purchased Valtech, you had to really build out the sales force. Can you sort of give us an idea of where that is and how you're thinking about throwing other Mitro products into the sales bag? Thanks.
Yes. Thanks, Joanne. Yes, we're building that team up in Europe. And again, we expect to have a number of launches. We mentioned that we would have one mitral launch per year in each of the upcoming years.
And so our intention is to be able to use this clinical team. This is the team that's doing clinical trials. We have a separate team that's actually doing clinical supportive cases as well as salespeople. So that team has been developing nicely. We have it primarily focused in Germany at this point, but it's very consistent with what we had planned.
Thank you. Thank you. Our final question will come from the line of Josh Jennings with Cowen and Company. Please proceed.
Hi, good evening and thanks a lot. I was hoping to just ask first a follow-up on Larry's earlier question about the low risk opportunity and focus on the bicuspid registry. And assuming positive results, do you feel like that is enough from a clinical evidence standpoint for inclusion in the label? And then secondarily, is it good enough to convince the clinical community, particularly the surgeon community? And then lastly, on bicuspid, is anything within the design of SAPIEN 3 Ultra that could potentially provide a benefit in bicuspid cases?
And I just have one follow-up.
Yes, thanks. So this bicuspid registry, I think it's around 100 patients in this trial. And so we're glad to be able to do that. I think it sounds like you understand it pretty well, Josh. It's not contraindicated today.
And so people can do it and we have a number of clinicians that are real believers in treating bicuspid patients and they do it with SAPIEN 3. And I know that's all being accumulated in the TBT registry. So they are being treated today. Having more data is just going to be helpful. I think to be able to have a nice data set here that we can follow on an ongoing basis is just going to help reinforce it.
But I think the TBT registry is already a pretty positive support for treating bicuspid patients with SAPIEN 3.
Great. And is there anything that to SAPIEN 3 Ultra's design that could potentially be beneficial specifically for bicuspid cases or should we not be thinking that?
Well, I mean, we like not only the delivery system, but the design of the discret. And we think it is going to help potentially with tissue in growth and should even improve what's already a best in class leak performance for that valve. But I don't know that it should make a market difference in bightuspid. Great.
And then just lastly on early TAVR, any inkling on the enrollment pace? And just specifically, any data around screening of patients on the stress test kind of initial stage and whether or not you're seeing those patients screen in as actually symptomatic aortic stenosis patients? Thanks for taking the question.
Yes. Well, thanks a lot. No, we're not going to report any specific data on that, Josh. We'll just say generally, it's ramping up really nicely. There's a lot of enthusiasm on the part of the investigators and I'm sure the investigators themselves are going to want to share some of that detail in terms of what they're finding when they get to the right point of that trial.
Understood. Thanks again.
Sure.
Okay. Well, thank you very much for your continued interest in Edwards. And Scott and David and I welcome any additional questions by telephone after the fact. So back to you, David.
Thank you for joining us on the call today. Reconciliations between GAAP and non GAAP numbers mentioned during this call, which include underlying sales and growth rates and amounts adjusted for special items, are included in today's press release and can also be found in the Investor Relations section of our website at edwards.com. If you missed any portion of today's call, a telephonic replay will be available for 72 hours. To access this, please dial 877 660-6853
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