Q4 2019 Earnings Call

Greetings and welcome to the AD words life Sciences fourth quarter 2019 results conference call.

At this time, all participants are in listen only mode.

A question and that's recession will follow the presentation if anyone should require operator assistance during the conference Press Star Zero on your telephone keypad.

Please note this conference call is being recorded.

I'll now turn the conference over to our host Mark well today, Vice President Investor Relations. Thank you you may begin.

Thanks Diego.

Good afternoon, and thank you all for joining US with me on today's call are making solid chairman and Chief Executive Officer, and Scott All Chief Financial Officer.

Just after the close of regular trading at work Life Sciences released its fourth quarter 29 team financial results. During today's call management will discuss the results included in the press release and accompanying financial schedules and then use the remaining time for Q1 I.

Please note that management will be making forward looking statements.

That are based on estimates assumptions and projections.

These statements include but are limited to financial guidance and expectations for longer term growth opportunities regulatory approvals clinical trials litigation reimbursement competitive matters and foreign currency fluctuations. These statements speak only as of today on which they were made and Edwards does not undertake any obligation to update.

Them. After today. Additionally, the statements involve risks and uncertainties the could cause actual results to differ materially.

Information concerning factors that could cause these differences and important safety information may be found in the press release, our 2018 annual report on Form 10-K , and Edwards other FCC filings all of which are available on the company's website at Edwards Dot com.

Finally, a quick reminder, that when you think terms underlying and adjusted management is referring to Nongaap financial measures otherwise, they're referring to GAAP measures reconciliations between GAAP and non-GAAP measures mentioned during the call are included in today's press release with that I'd like to turn the call over to Mike Mussallem for his comments Mike.

Thank you Mark [noise].

2019 was a year of major milestones and significant investments for Edwards groundbreaking partner three clinical trial results demonstrated superiority of our SAPIEN three valve technology I'd love to U.S. regulatory approval for patients at Lowe's surgical risk.

We also initiated our European introduction about Pascal unimportant. Early addition to our portfolio of Transcatheter, mitral and tricuspid therapies or T. M T T.

We extended our leadership position in surgical heart valves and implemented valuable additions to our smart monitoring technology in critical care with the growth of Hemisphere, and the addition of cares about most importantly, and 2019, even more patients benefited from Edwards life saving technologies than ever before I'd like to.

Touch on several full year financial highlights before I get into the quarterly details.

Underlying sales increased 15% 20, $19 billion to $4.3 billion, including double digit organic growth in each region.

Floating special items were able to achieve 19% growth in earnings per share, while increasing R&D by 21%.

A significant increase that R&D investments is sure help fuel important breakthrough innovations to strengthen our longer term outlook.

As you heard at our Investor Conference last month, we are convinced as ever about the tremendous opportunity to enhance patients' lives through the treatment up life, threatening conditions and bringing significant value to the health care system.

Now turning to our quarterly results were pleased to report strong fourth quarter underlying sales growth of 19% our sales growth. This quarter was significantly higher than we expected led by Transcatheter aortic valve replacement or tougher.

Now, let's take a closer look at travel full year 2019, global sales up 2.7 billion increase 21% on an underlying basis over the prior year significantly exceeding our original guidance of 11% to 15% growth.

Stronger than expected 2019 growth was lifted by.

Increased awareness of the benefits of TAVR therapy with SAPIEN three following the strong partner three clinical results presented and published in the first quarter the year.

The U.S. national coverage determination released late in the second quarter also resulted in improved access for more patients suffering from severe aortic stenosis.

In the fourth quarter Global tower sales were $763 million, an increase of approximately 30% on an underlying basis with impressive strength in the U.S., we estimated global Tempur procedure growth was comparable with our growth in the fourth quarter.

Globally average selling prices were stable and we maintained our disciplined pricing strategy.

In the U.S., we estimate total TAVR procedures grew approximately 40% on a year over year basis and that Edwards growth was comparable.

Stronger than expected growth in the fourth quarter continued to be driven by the step up in talbert treatments. Following the strong partner three evidence that led to the recent F.D.A. indication expansion for our SAPIEN three I'd say beyond three ultrasystems.

Fourth quarter growth was broad based across more than 700 centers in the U.S.

Outside the U.S. and the fourth quarter, we estimate total TAVR procedures grew in the high teens on a year over year basis, and Edwards growth was comparable I, particularly gratified to see the meaningful impact that our dedicated employees are having on helping so many patients around the world.

In Europe Edwards growth was in the mid teens and we estimate our competitive position was stable. We continued to be encouraged by the strong adoption of tapper, especially in countries where therapy penetration is still low. It's also worth highlighting that in the fourth quarter Edwards became the first company to receive.

CE Mark in Europe for the treatment of patients diagnosed with superiority <unk>, who are at low risk for open heart surgery.

Lastly, the rollout of SAPIEN three ultra is well underway in the U.S. in Europe early <unk> clinician feedback on the ultra Val related to improve Paravalvular leak performance has been outstanding we feel this is a significant step forward, especially for low risk patients.

In summary, based on our momentum and Tapper, we now expect our 20 Twond <unk> underlying sales growth to be around the top of the 12% to 15% range that we shared at our Investor Conference.

As previously noted while we expect this healthy trying to continue we expect the growth rates will be lower as the year progressive and we annualize the stepped up procedure growth following the partner three presentation.

We continue to believe those large global opportunity will exceed $7 billion by 2024, which implies a compounded annual growth rate in the low double digit range.

Turning to T M T T.

We're on track to achieve all of the milestones discussed at our recent Investor conference, including executing for pivotal studies, we continue to invest aggressively at our portfolio and you could expect to hear important updates at medical meetings. This year. In addition, we're pleased to announce but the evoke.

Tricuspid replacement valve system as recently received FDA.

Approval for an early feasibility study and a breakthrough device designation a program intended to help patients receive more timely access to designated medical technologies.

Full year 2019 sales of $28 million came in below our original guidance of approximately $40 billion. As we continued to execute a disciplined introduction and premium pricing strategy of Pascal, which have moderated European site activation.

Fourth quarter revenue of $7 million was negatively impacted by the voluntary Pascal field corrective action completed in the quarter.

Importantly, we were able to minimize disruption to physicians and patients in need despite the slowdown of our launch cadence Pascal acute clinical outcomes are excellent and physician feedback is positive.

As we expand the rollout we will remain focused on procedural success and differentiated patient outcomes.

To further update our Transcatheter mitral therapies, we continue to enroll patients in the class two d. pivotal trial study of mitral valve repair with Pascal in degenerative mitral disease and are on track to complete enrollment by the end of the year.

In addition, we're also enrolling our class two.

Pivotal trial for patients with functional mitral disease.

In mitral replacement, we continue to gain experience with SAP you an M. Three Andy bulk and anticipate enrollment in our M. Three pivotal trial to begin in the second quarter early clinical evidence with both of these low profile Transfemoral <unk> delivered technologies has been encouraging.

Turning to Transcatheter tricuspid therapies, we are committed to providing solutions for patients with poor prognosis and very few treatment options. We've initiated enrollment in our class to tee, our pivotal trial to study Pascal and patients with symptomatic.

Severe tricuspid regurgitation.

As mentioned, we've made meaningful progress that are on our evoke tricuspid replacement program and in addition, we're continuing to gain experience with our Cardioband tricuspid system in select sites as we develop our next generation technology.

In summary, we were we remain committed to all of the milestones outlined at our recent Investor Conference and continue to expect T. M. T T cells of $50 million to $70 million for 2020 , we're optimistic that the global T. M. T T opportunity will grow to approximately 3 billion dollar.

Hours by 2024 and are passionate about bringing our portfolio of solutions to these life threatening diseases.

In surgical structural heart full year 2019, global sales of $842 million increased 1.5% on an underlying basis over the prior year inline with our original guidance of 1% to 3%.

Fourth quarter sales of $205 billion declined 3% on an underlying basis, reflecting lower surgical aortic valve procedures in the U.S. as TAVR adoption stepped up partially offset by our continued strong adoption of our premium high value technologies.

Despite the fourth quarter headwinds our innovative in spirits Val continued to be a growth driver in the quarter as it has been throughout the year.

We remain encouraged by the actions of our focus team has taken to advance leadership as the partner of choice for Surgeons are surgical portfolio strategy also position side words to generate sustained growth through innovation.

We're pleased to confirm that late in the fourth quarter, we received European regulatory approval for our harpoon, beating heart mitral valve repair system and are in the process of beginning our commercial launch Harpoon offers the potential for earlier treatment of degenerative mitral valve disease.

With faster recovery and more consistent outcomes for surgical patients.

In summary, and surgical structural heart, we continue to expect full year 2020 underlying sales growth of zero to 3%, we anticipate that surgical aortic valve procedure headwinds experienced in the fourth quarter will continue into 2020 with a return to positive growth.

Expected later in the year as we anniversary the 29, P.M. step up in tab or growth.

Even as TAVR adoption expands we're excited about our ability to provide innovative surgical treatment options for more patients and to extend our global leadership in premiums surgical structural heart technologies.

In critical care full year 2019, global sales of $740 million increased 9% on an underlying basis over the prior year exceeding our original guidance of 5% to 7% growth.

He must where are all in one monitoring platform grew faster than expected in 2019, following the global launch of that platform with our flow track sensor and our act human Hypotension prediction index software.

Fourth quarter critical care sales of $199 million increased 8% on an underlying basis driven by strong demand for hemisphere and continued growth in smart recovery.

Growth in the quarter was led by sales in the U.S.

Inline with our commitment to enhance our broad portfolio sensors, we initiated the commercial launch of fore sight, our cerebral oximetry technology on hemisphere in the fourth quarter as discussed at our recent Investor Conference. The integration of a full range of technologies on hemisphere creates a unique offering of it.

Hence recovery tools and predictive analytic capabilities to further strengthen our leadership in hemodynamic monitoring.

In summary, we continue to expect 2020 underlying sales growth of 6% to 9% and we remain excited about our pipeline of innovative critical care products.

And now I'll turn the call over to Scott.

Thank you like I'm pleased to report that our strong finish to the year enabled us to broadly exceed our financial guidance for 2019.

So today I'll provide a wrap up of 2019, including detailed results from the fourth quarter as well as provide an update on guidance for the first quarter and full year of 2020.

For the full year 2019 sales increased 15% on an underlying basis to $4.3 billion adjusted earnings per share grew 19% to $5.57 and we generated $1.1 billion of adjusted free cash flow.

We were pleased to generate strong margins during 2019, while still investing aggressively for profitable future organic sales growth.

With the repeal of the medical device excise tax at the end of 2019, we will be able to continue our aggressive research and development investments funded growing field clinical organization to support patient care and strengthen our global supply chain.

Sales in the fourth quarter grew 19% on an underlying basis and adjusted earnings per share grew 25% to $1.46 cents versus the prior year.

This reflects positive operating results, partially offset by our decision to accelerate strategic spending in the fourth quarter to drive therapy awareness as well as onetime costs associated with migrating cardioband production from Israel to Ireland.

GAAP earnings per share was $1.32 cents, which included a 41 million dollar or 19 cents per share noncash impairment of Cardioband intangible assets that we referenced at last month's Investor Conference.

A full reconciliation between our GAAP and adjusted earnings per share for these and other items included with today's release.

I will now cover the details of our results and then discuss guidance for 2020.

For the fourth quarter, our adjusted gross profit margin was 75.8% compared to 76.1% and the same period last year.

This reduction was driven by spending in support of the new European medical device regulations, and the migration from our Cardioband facility in Israel, partially offset by the benefit of the more profitable product mix.

We continue to expect our 2020 adjusted gross profit margin to be between 76 and 77%.

Our rate should be lifted primarily by an improved product mix offset by lower foreign exchange hedge gains and capacity investments.

Selling general and administrative expenses in the fourth quarter were $347 million or 29.6% of sales compared to $288 million in the prior year.

21% increase reflects additions, we have made and field clinical personnel to support TAVR cases in the U.S. and TMT T in Europe as well as the previously mentioned accelerated actions related to disease awareness in therapy adoption.

We continue to expect SGN, a excluding special items to be between 28 and 29% of sales for the full year 2020.

Research and development expenses in the quarter grew 19% to $194 million or 16.5% of sales. This increase was primarily the result of continued investments in our transcatheter structural heart programs, including spending on clinical trials.

For the full year 2020, we continue to expect R&D as a percentage of sales to be between 17, and 18% as we invest in developing new technologies and generating evidence to expand indications for TAVR and T. M T T.

Turning to taxes are reported tax rate this quarter was 11.2% or 12.3%, excluding the impact of special items.

Stock appreciation drove a 450 basis point benefit this quarter from the accounting for employee stock based compensation.

We continue to expect our full year rate in 2020 to be between 12, and 14%, including an estimated benefit of five percentage points from stock based compensation accounting.

Foreign exchange rates decreased fourth quarter sales growth by 40 basis points or $4 million compared to the prior year at current rates. We now expect an approximate 25 million dollar negative impact or about half a percent to full year 2020 sales compared to 2019.

Foreign exchange rates positively impacted our fourth quarter gross profit margin by 30 basis points compared to the prior year.

Relative to our October guidance FX rates positively impacted earnings per share by about a penny, reflecting our effective currency hedging program.

Free cash flow for the fourth quarter was $328 million. We define this is cash flow from operating activities of $399 million less capital spending of $71 million.

For the full year 2019, adjusted free cash flow was $1.1 billion, a 35% increase over 2018.

Turning to our balance sheet at the end of the year, we had cash cash equivalents in short term investments of $1.5 billion total debt was $594 million.

Average shares outstanding during the quarter remained relatively constant at 212.6 million.

We continue to expect average diluted shares outstanding for 2020 to be between 212 and 214 million.

Before turning the call back over to Mike I'll finish with updated financial guidance for 2020.

Momentum and TAVR sales has been stronger than we expected at the time of our Investor Conference.

As a result, we now expect higher sales in 2020, which would result in higher underlying full year growth rates. We now expect the TAVR underlying full year sales growth rate to be around the top of our 12% to 15% range and for the total company full year underlying sales growth rate around the top of our 10% to 12% range.

We continue to expect sales growth rates to decline as the year progresses as a result of higher prior year comparisons.

For TAVR, we're raising the bottom end of our range and now expect sales of $3.0 billion to $3.2 billion versus our previous range of $2.9 billion to $3.2 billion.

We continue to expect surgical structural heart sales.

Of 822 $860 million critical care sales of 782 $820 million and TMT t. sales of $50 million to $70 million.

We are raising the bottom end of our guidance range and now expect sales for total Edwards of $4.6 billion to $5.0 billion versus our previous range of $4.5 billion to $5 billion.

For full year 2020, we now expect adjusted earnings per share of $6 in 15 cents to $6 in 40 cents versus our previous guidance of $6.05 to $6.30.

For the first quarter of 2020, we project total sales to be between $1.15 cents.

And 1.2.

Billion dollars 1.15 billion and $1.2 billion and adjusted earnings per share of a dollar and 49 cents to one dollar and 59 cents and with that I'll pass it back to Mike.

Got it.

So in conclusion, how we're very proud of the significant progress we made in 2019.

Dancing, new transformative therapies and delivering strong financial performance.

We continue we expect continued growth and progress in 2020.

We're enthusiastic about the continued expansion of Transcatheter based therapies for the many structural heart patients still need which positions us well for longer term success. Edwards is fortunate to have was a strong leadership position focused on serving patients who today have few treatment options for law.

Longer and better lives, we believe our patient focused innovation strategy can transform care and bring value to patients health care systems and shareholders.

This year will mark the Twentyth anniversary of Edwards life Sciences, as a public company and acknowledgment of this milestone we will host our annual Investor Conference at the New York Stock Exchange on December 10th we'll share more details on that event as we get closer and with that let me turn it back over to Mark.

Thank you Mike.

Take questions now in order to allow for broad participation. We ask that you. Please limit the number of questions to one plus one follow up if you have additional questions. Please reenter the queue and management will answer as many participants as possible during the remainder of the call Diego.

Thank you.

At this time, we will be conducting a question and answer session.

If you would like to ask a question. Please press star one on your telephone keypad, a confirmation toma indicate that your line is in the question Q.

You mean press star followed by the number two if you would like to remove your question from the Q4 participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.

Our first question comes from Bob Hopkins with Bank of America Merrill Lynch. Please state your question.

Oh, Thank you and good afternoon, and congrats on a remarkable 2019.

Mike if okay like to start out with you I, just just sort of an obvious question here any more detail you can provide on the.

U.S. TAVR upside you experienced in Q4 kind of where it came from did you have a big pickup in.

The number of new centers and growth in those new centers just any further comments on the U.S. upside in tower would be great.

Yes, Thanks, Bob I figured it feels like it was a continuation of the momentum that we started to feel in the third quarter. It was broad across all segments. As we mentioned there are more than 700 sites at this point, but we saw that growth whether it was a new sites or some of our mature so.

Sort are quite large centers.

We think that it came across the risk spectrum and it wasn't just lou low risk patients coming into it but indeed it was patients have all risk profile and even though there was clearly a switch from surgery to tamper in a number of cases.

We think the predominant effect was due patients coming off the sidelines for treatment.

Okay interesting and then I also want to ask one quick one on TMT.

I'm just wondering if you could give us an update on on the litigation on Pascal just specifically.

Abbott has said that there could be a ruling on injunction in Germany for Pascal and in early March I wondering if you could just kind of confirm that guy that timeline and any other milestones in the first half of the year on on litigation.

Thanks, a lot as you know Bob. This is this litigation is playing out in several countries over an extended period of time, so there's going to be a lot of stories. In fact, there was a recently completed trial in the UK and there's a decision that's pending on that probably sometime in Q1 in Germany, there's going to be a couple of hearings I think the first.

One of started in March with results. The follow so and I think they'll be there's a possibility for a U.S. hearing beyond that.

Thank you.

Our next question comes from David Lewis with Morgan Stanley . Please state your question.

Good afternoon interest at two for me first Mike just sticking with the ex us growth rate. There was a different your team procedure growth in constant currency growth in the quarter of about five points was there any particular driver accounting for that was it Japan stocking maybe in the third quarter and then a quick follow up.

You know what I'm not I'm not sure that I'm tracking with you on the difference in the numbers. David. So maybe you are seeing something but I'm not but I can make some general comments anyway, although we did see a little bit in of stocking up the Japan in the third quarter. It was minor by comparison and we'd say generally O U S.

That the <unk> the procedure growth in the market and our growth was pretty comparable I mean, it's hard for us to be exact in predicting that but we think that they're pretty close to each other and there really wasn't appreciable difference in a SP either.

Okay. That's really helpful. And then my guess fee did hammacott investors are focused on as you're clearly seeing TAVR acceleration.

The ahead of plan, but yet you're sever guidance is unchanged could you share with US you know how you think we're seeing this very significant acceleration momentum in the U.S. tavern business, but yet.

Not seen a degradation in the savard business I think many people would've expected Ah. Thanks, so much.

Thanks, David well, if you were asked the folks who the surgical business. They would say, they're feeling about what's going on right now, but again, we think that bearers kind of a step up in procedures in power and we think the bulk of that step up as new patients coming off the sidelines as opposed to.

Switching from surgery hard to quantify that you know is the two third one third I don't know, but it's something that probably feels closer to that up from our perspective, so although we're going to feel it or we're feeling good today in surgical we feel like we rebound from that out as we kind of an anniversary.

This surge and growth.

Thank you.

Our next question comes from Raj Denhoy with Jefferies. Please state your question.

Hi, good evening I.

I Wonder if I can maybe just taking a little bit more to the new centers.

Are there any way you getting maybe parse out what percentage of group they might have added in the quarter such a strong quarters, there's got to be.

Some more detail you can provide for us.

Yeah. Thanks, Raj I mean, the the do centers added but it really was broad based there's I couldn't say that they were a primary driver of growth. We saw it across the board we saw than our large centers that were so a very first partner centers from the beginning of paper all the way through.

Every people that have started more recently and in between.

Okay.

Thank you just ask one on mitral then you know I noticed this quarter, obviously was a little bit mixed up with that Pascal issue had in Europe , but this is this pricing discipline strategy you have in Europe has there been any any.

Anything where you can offer on that you're seeing more receptivity amongst your customers to the premium price strategy. Pascal is we're moving here into 2020.

Yeah. So you know we were very committed to this we feel like we have differentiated technology, we have a high touch model and we're executing this price discipline.

And we're going to continue to do that we we know that there's not a lot of data out there today that but we think ultimately that will prove to be the case, we obviously I've competence in this strategy for us it's more important to build toward long term leadership, we're committed and feel confident in the.

But that we gave you that we'll have $50 million to $70 million of T. M. Two to sales and 2020, so hopefully that's a reflection of.

Now how we feel.

Okay. Good thank you.

Our next question comes from Larry Biegelsen with Wells Fargo. Please state your question.

Good afternoon, congrats on the quarter and thanks for taking the question paint Mike One Big picture question for you and M. A.

MTT question, So big picture, Mike you've delivered 10, plus years of double digit growth and you're on track to do it again in <unk> in 2020, but I think investors want to understand the durability of your growth. So my question is how important is it to deliver 10% growth each year to you and just how are you feeling about the durability of growth right now.

I would Edwards and I had one follow up.

Well thanks, Larry So two different things you know what is do we think it's going to continue and how important is a fraud words, you you know as pretty well by now we're not a financially driven.

Company that just as driven only to hit a number we really feel like when we focus on great therapies for patients. So we get that just right, but the numbers and off taking care of itself and it has played out on a long term basis, having said that I have a lot of competence in our future or would you start with our biggest product area of tab.

Her that continues to be one that has a lot of growth associated with your remember that we said more than $7 billion by 2024, which infers a double digit growth rate, we believe that T. M. T T, which was a brand. New addition to our portfolio has an up an opportunity for.

Overall market to be $3 billion by 2024, So when you think about us pursuing a 10 billion dollar opportunity out in 2024. It makes me feel pretty good about our prospects ahead.

Thanks, Mike and how much did to ship hold a impact TMT T cells in Q4, and and is that mitral transcatheter mitral market in general developing as you expected or little bit slower because of the mitral fr results. Thanks for taking the questions.

You know, it's it's a good question Oh, we started our sales in October it was interrupted a we are basically stopped supply during November and we were started in December .

If we wouldn't have had that you know we certainly would have had a higher sales growth and may be growing modestly off of Q3, you know overall, we feel good about the market opportunity.

You probably know there's been more growth in the U.S. than there has been outside the U.S. and so probably this mitral fr is having some kind of impact of Europe , but we hope that we'll be able to influence that as they get to see our as they get the see results from the Pascal system and again.

What do we look forward at our own results, we expect to regain momentum in Q1 and started focusing on new site activation again.

Thanks for taking the questions.

Thank you. Our next question comes from Kristen Stewart with Barclays. Please state your question.

Hi, Thanks, very much for taking my question I was just wondering if.

You could.

Maybe explain a little bit just about whether or not.

We would expect any data that could be coming out at the easy She conference coming up here. They expect to see to your data on the risk on any Pascal data that could be coming up here over the coming months at Atlas Hot.

Yeah, you know what I I can't tell you for certain on a number of a we expect there to be some data. So for example in two MTT, we expect there to be an update on some of the early class studies, so a bold longer term data and more patients added up maybe some data on path.

Pascal Tricuspid and Cardioband tricuspid, so there could be those in terms of a whether we'll see through your data on partner three it's too early to say I don't know that theres anything official yet so we really can't say anything until it is clear.

Okay, and then just with respect to this CPM and studying or that you had commented.

Okay that you pick out at the approval and break through.

Designation for that do you have any clarity on the trial design of that yet in any.

Timelines that we should expect farm, Rome, and I know, that's pretty critical it sounds like towards you starting to achieve the timelines forgetting to that Threed marine market opportunity along with Pascal as well.

Thanks, Chris you know what there there may be some confusion there I don't believe we ever indicated a breakthrough pathway for CP an M. Three what we said is that a we expect to be going through a clinical trial and what I just update it is that indeed is proceeding we expect to have our first patients in Q.

In Q2, but you know bigger picture, we're very excited about having two pretty impressive transseptal replacement program spoke that are transfemoral and small profiles ultimately those that three trial will go up on Clin trials Dot Gov, but there's still some details being ironed out.

Okay. Thank you very much congratulations on a good quarter. Thank you.

Thank you are next question comes from Kristen Stewart with Barclays. I'm. Sorry next question comes from Jason Mills with Canaccord Genuity. Please state your question.

Great. Thank you Mike we're taking the questions. So first big picture question TAVR years ago. When we were talking about developing the marketing model I don't think we ever discussed 700, plus centers and it was something less than that so could you talk about how we've got sort of got clarity here.

What's transpiring in the market to promulgate several hundred plus centers and where you think that could go now with the benefit of hindsight. They also maybe will then discuss whether that 700 to 750 centers.

The next to generate the type of growth.

Compound growth that you're projecting over the next couple of years or if you think that there needs to continue to be additions to the number of centers.

Yeah, Thanks, Jay said, well I mean.

Clearly, we wouldn't be where we heart today, if it was that for a greatly improved procedure. This procedure is really gotten to deliver incredible outcomes.

And it's also demonstrated to be a teachable procedure. So that people that are starting new are able to stay on on the shoulders of those the went before them and deliver really good results right from the beginning and with that acknowledgement a we've had some favorable rulings and in terms of the interpretation by see a mouse and.

With that came an updated NCD, which allows more centers to become qualified for it. If we were a look forward. We would say that maybe up to 850 have the ability to to qualify as a tower cetera again, what we're not sure that all those 850 are going to go for it.

So it depends on their own sites.

But bigger picture you asked the question you know can we get the kind of growth necessary with so for example, 850 centers in the U.S., We think absolutely, yes set or you know a lot of what has to change was not just center capacity, but the behavior of patients and physicians and the system.

And patients actually with severe aortic stenosis getting treated and there there are number places where the system is less than ideal we're trying to be in assist the that but we see it getting better on a regular basis.

Thank you for them I gets very helpful. And then more of a housekeeping item for Scott Scott when you come into a quarter and you see the press release and you see that kind of upside in and however relative to consensus estimates and guidance you expected to generate positive leverage and in one thing that you called out in the.

The press release was the one time spending associated with moving Cardioband and perhaps your other more one time things in nature, but would you care to help us understand maybe what that and how that impacted how those things impacted earnings quantitatively in the quarter Congrats on a great quarter.

Sure. Thanks, Jason So I guess you had two questions. One was leverage on increased sales the second was.

The impact of moving Cardioband on the first one so weve increased the midpoint of our sales guidance range by $50 million and we increased earnings per share midpoint range by 10 cents that gives you a sense of the leverage that we're putting through the piano, we are planning to accelerate some investments with some of the.

Expected incremental sales.

Regarding your second question about gross profit yeah, we've we've taken some decisions in the fourth quarter involving our production operations, including.

Migrating production from Israel, our Cardioband product to other Edwards facilities, including our new facility in Ireland, and so you saw that show up in the fourth quarter results, which were little bit lower than we expected and it's reflected in 2020, but our guidance for 2024 gross profit is unchanged at 70.

60% to 77%.

Thank you next question. Our next question comes from Robbie Marcus with JP Morgan. Please state your question.

Thanks, and I'll add my congratulations on the great quarter as well Scott to financial questions for you maybe I'll just add given both upfront.

You know I totally get the the reasoning for investing in the business here on such a great quarter, but maybe just help us understand exactly where the investments went in fourth quarter and you know how should we think about any potential benefit flowing through in 2020, and then second you ended the.

Year with about 1 billion and a half of cash on the balance sheet, you're generating north of 1 billion in free cash flow.

What's the updated plan for utilization at cashier texture. Thanks, So first question regarding.

Where we invested extra dollars.

Relative to I guess or expect to exceed expectations at the beginning of the quarter about two thirds of the incremental investment are reflected in operating expenses included things like.

Disease awareness and therapy adoption initiatives I'll just give you. One example, there was announcement by the American Heart Association, a November regarding and initiatives that they are undertaking that we're supporting and then we've also been adding field resources to support significant growth. You know you don't grow 40% in the U.S. for example.

NCD growth that we are expecting in Europe without also putting in resources to help support the high touch model that we have in place.

So those does probably two thirds and then the other third it probably showed up in cost of sales I mentioned those earlier, the a European medical device regulations and the migration of Cardioband production regarding our cash balance our our philosophy and our strategy for deploying capital is not changed we've got a number of priorities.

The first one is investing in our global supply chain to support the growth of Edwards second investing externally and things like acquisitions strategic alliances purchasing options to by other companies and then third managing the balance sheet. So we're going to continue to be a buyer of Edward stock overtime.

And opportunistically will be executing share repurchases to help offset dilution and overtime as all as well manage the share count down.

Thanks, a lot.

Next our next question comes from Matt Taylor with you'd be asked please state your question.

Hi, Thank you for taking the question. So I guess the first thing I wanted to ask about was the center growth and where do you have insight into how many centers could grow this year and do you still think that we're going to get towards about a 50 or is it possible that there could be more given how quickly they seem to be growing here.

Yeah, well thanks, Matt.

It's old tough for us to tell how fast the centers are going to join but we saw a pretty good growth in center I think the last time, we had reported on it we said more than 650. So you can see where we are now yeah. When we look forward and try and interpret the on CD. Our estimate is that about 850 centers.

I would be qualified to do it how many you do those actually go forward at how fast the ACA is hard for us to know if we're guessing we'd say, we get to that kind of 850 ish number maybe over the next year or two or something like that and so it gives you some insight, but we do we can't be certain.

<unk>.

Hoping you could give us some more insight or inside baseball in the trends in the U.S. <unk>. The growth was so strong in Q4.

It seems like you must be seeing that same kind of strong growth here in Q1, I think investors have some questions around how much of this is kind of a bolus versus sustained and you seem to be suggesting with your comments that it's growing across the board that it's more a sustainable can you can you talk a little bit about what you're seeing in Q1 and how can be sustained.

Yeah, Thanks, Matt well, you know how difficult it is for us to predict quarters, and we always hate to take one month and so do anything important with it well, but we'll just say this you can see what our.

Revenue assumption is for TAVR for full year 2020, and we think it is going to the growth rate is likely to decrease during the course of the year as we anniversary the growth rates you know in that assumption is that probably Q1, TAVR looks similar to Q4 and.

Terms of revenue dollars.

You'll have to remember there was a big step up in Q4 versus Q3, and we saw similar trend last year going from Q4 18 to Q1 19. So you know it's hard to know for certain but.

Maybe that's helpful.

Great. Thanks Congrats.

Thank you. Our next question comes from Vijay Kumar with Evercore ISI. Please state your question.

Hey, guys. Congrats on a really solid friend here, Mike maybe on that last comment on on the back half revenue growth in tower.

The underlying effect I guess the high end of 15% is the implication that down we sustained hold the line in double digits in the back half or maybe how should we think about the back half.

Yeah. It's a good question BJ you know it's difficult for us to know or do we stay at double digits do we dipped below it you know either those are certainly possibilities. The growth is so strong I mean, the good news is there going to be more towers done in the second half of 2020 than ever done in history, and so in terms of procedures.

Today those are gonna be records now how much growth is there over this year, it's not clear, but we've given you the the probably the best guidance, we can in terms of annual growth rates.

Gotcha, and then that Matt Yeah, one on the gross margins, However, I Scott.

He did the recall impact you guys on the gross margins for Q1, just excuse me Q4, how should we think about gross margin not progression throughout the year. Thank you.

So, it's a little bit difficult to predict gross margin progression throughout the year because a lot of it ends up getting tied to our TAVR performance, but maybe you can help at least with the baseline on Q4 and explain what happened in Q4 19 versus Q4, 18, where we had about.

30 basis points of higher FX and hedge gains in the fourth quarter 2019, we Didnt 18, we had about 40 basis points of mix benefit that showed up in the fourth quarter offset by those higher operating costs that we mentioned earlier in Israel and with European MDR. So if you look out to 2020 were expecting to.

Continue to get mix benefit that shows up on gross margin. It can be 50 to 100 basis points or even more.

But generally I think it's probably relatively flat during the course of the year at least for modeling purposes, that's right assumption at this point.

Thank you Scott.

Thank you. Our next question comes from Sea Raj higher with Oppenheimer and company. Please state your question.

Good afternoon, everyone, Mike Congrats and an excellent quarter.

So Mike the question about capacity and your growth assumptions and have or have been asked the deep sea. If I can come at it from a different way.

Our math to suggesting roughly 140 250 cases per year per center in the U.S.

Can you give us a perspective of what percent of the cases being done currently in the seven centers are independent in nature and how do you look upon capacity utilization within these centers.

Yeah I'm. Good question you know, we don't we don't look at it that way in terms of average number for center as you might imagine there is a <unk>. Those are great difference arrives between the amount of procedures done a in a very large center and one that small.

All so those are different the thing that has been remarkable the loss is the ability to centers to add capacity. They have found a way to manage a they add more cases per day, sometimes they add on a day actually it's been quite a test for our team and I'm. So proud of our team has found the ability you know we have a high touch service model.

So we're in every one of these cases, so as they grow for us they have the ability for example to flux in the U.S. and cover 40% growth versus prior year was a heavy lift for us, but you know what happens is more patient show up above or below ly into the the list gets to be pretty long.

And hospitals react to that by adding capacity and so far we've been impressed about their ability to do that.

Got it and finally, Mike forgive me I'm I'm, drawing a blank here did you mentioned in three comparator arm. Thanks for taking my question that congrats great quarter.

Thanks.

No we didn't mention the three comparator arm. So that that trial design is still one that has not been finalized and we just decided it's prudent for us not to communicate until it's really final. So at some point that will be published <unk> Clint trials Dot Gov, and you'll see it and so we'll let you know.

Thank you.

Our next question comes from Rick Wise with Stifel. Please state your question.

Hi, My cash got down China hasn't come up and I think your exposure there is small and maybe if I recall correctly, mostly favour in critical care, but can you remind is the impact and what you're assuming or how you're thinking about the situation what's reflected in guidance.

Yeah.

Thanks, Rick Yes, you know first of all obviously, our key concern as always for our employees and patients. We feel a you know we've been fortunate so far we haven't had any impact to employees inside Edwards that we're aware of and we've been able to maintain our supply line. So at this point you you're right.

China is not not really huge for us it's still just a small percentage of Edwards sales, but we don't expect there to be a significant change at this point from what's going on with the Corona virus, but we stay watchful.

Okay, and just as a follow up it's a strange question, maybe but you probably saw that Abbott Tendyne mitral device got approved for replacement in Europe today.

And my question is not about that as much as.

It's an important moment for the field does this how does this make you feel about the openness of European regulators to consider the mitral waves coming at them does it say anything that we can extrapolate a that that makes you feel better worse. The same. Thank you so much.

Yeah. Thanks, Rick what you know, we're big believers and the opportunity for Transcatheter mitral therapies, and so whenever there's movement and the new regulatory approval for for the whole field a that that's a positive. So we're glad to see that you know about our portfolio. We're very focused on it you know were.

Yes. Please we think what's gonna be most meaningful is one where we have these smaller transfemoral type systems. We think those are the things that really caused a change in behavior of patients and physicians and so we keep our eye on that but you don't have any kind of a favorable movement is good and I think a there is a a general openness through innovations with.

In the mitral within mitral disease.

Thank you.

Our next question comes from Danielle Antalffy with SVB Leerink. Please state your question.

Oh good afternoon, everyone. Thanks, so much for question congrats on a really strong year strong quarter.

Mike I was hoping you could comment on the competitive landscape that specifically in the U.S., what you're seeing out there.

Like your competitor had called out share a lot seems like you guys are holding onto a shared not losing share. So what are you seeing just doesn't really I'd be curious about what you're seeing it then you centers open up and how they're adopting balance today, just going with one player and so they're a little bit more protected from from care last just curious about how that thanks.

Yeah. Thanks, well so dialed you know as we indicated we believe that our growth was comparable to the growth. It was going on an overall procedures low that was in the U.S. are all U.S. So from our Brazil from our point of view not a lot of and no real change of significance in our share position.

A in the last quarter. Another may have been changes in share position with our between our competitors, but we really don't have clear visibility to it.

When we gave our guidance in December we indicated there was probably be some modest share loss in 2020, or so that's a yet to play out. We did we also expected that to happen in 2019, it didn't really and so it may have been just delays on the part of our competitors, but we know there's still early in their launch.

Process.

Thanks, just a quick follow up safe to say in Europe . It feels like things have stabilized there is that it sounds like that's what you're seeing tail kind of share perspective.

Seeing big share shifts, we obviously watching very carefully and that's not such a fast moving market that we don't feel like we have a reasonable had a lot of it. So yeah. It does feel reasonably stable at this point.

Thank you.

Our next question comes from Peto Chickering with Deutsche Bank. Please state your question.

Good afternoon, guys. Thanks for taking my questions. First question is just a dip a little more into the new centers is your market share in those centers similar to the market share of the more established centers.

That that's that's a good question a I'm not sure that I really have a date at my finger print a at my fingertips I'm out one Oh my sense is that it varies significantly there are some centers the probably start up that are primarily a edwards and there are others that based on.

It up with others are we just say when we look at our overall growth in the U.S. The 40%. There was a nice addition from those new centers, but again. It was just we saw I've kind of across the board.

Great then on the.

I guess, you named <unk> I understand that.

You know hiring field personnel in the U.S. for TAVR and TMC team in Europe makes sense relative to the gross there, but can you help us break out the marketing cost incurred in the fourth quarter in artist costs recurring at similar levels in 2020 or should they decrease thanks so much.

[noise], what our 2020 guidance looks like it S. DNA, yeah, I mean, we we try and stay one step ahead of what we see ALS procedure growth, we add resources that we think are commensurate and when we how fast growing businesses like tavern.

And what we anticipate into MTT, we try and stay a little bit ahead of that having said that you know we still think that there's probably a some leverage on the S. DNA line, we maintain a high level as you probably noticed the of case coverage and where we're in every case, but having said that.

You know maybe Scott your your best the comment what our guidance is for US you in a for 2020.

I guess, I'd say, 20% to 29% for 2020, but in addition to the field clinical support and selling resources around the field. We're also doing work around patient education regarding the severity of aortic stenosis and treatment options the benefits of tab.

Her.

And we're doing outreach to referring physicians on therapy options available today and so there are other activities and expenses associated with those activities beyond just the field resources, we talked about earlier.

Thank you.

Our next question comes from Matt Miksic <unk> with Credit Suisse. Please state your question.

Hey, Thanks for taking him a question here a in congrats on a really outstanding quarter in here.

A question I had was maybe just follow up on something it took a little bit about on your analyst day, a meeting or Investor day, and you've touched on here I think it in terms of investments to kinda support identifying patients and so on and Mike you talked a while back about tracking patients through the system. It sounds like maybe.

Part of the investments you've made around cardio care are helping to do that I think if I understand them correctly.

And maybe if you could just talk about you know how that's going how widely you you roll that out and to what degree or employing a you know are there other types of technology to help you kind of support this growth and identify these patients.

Yeah, Thanks, Matt and you know what does Scott started going down this path there, there's three broad <unk> or a few broad categories here.

One is educating patients themselves others trying to help the referral pathway.

Be better educated a that continues to be a priority for us. We also have a team that helps systems.

Oh, it have better echo findings and make sure that their referral pathways actually work, we have a benchmark program that allows centers to operate at maximum efficiency. So it's pretty broad base as Scott mentioned, we've got a new initiative with the American Heart Association, it's broad based I'd, rather be try and do.

Pell here you should know that that is a very up new investment.

That's great that's great and then just one follow if I could on on a on.

On the American <unk> moving into early feasibility study for.

If you could maybe just give us a sense of you know what what's the what should we expect in terms of I know the enrollment at some of these mitral programs. It takes a little while and what should we think about in terms of maybe getting enrolled and maybe getting.

The point would be seeing some data from that program.

Enrollment cadence looks like you know we're excited about the technology.

But we're not in a position yet where we're going to disclose timelines or predict how these early stage early feasibility studies and ultimately that a pivotal trials are going to enrol.

Fair enough. Thanks.

Thank you.

Ladies and gentlemen, we have a exhausted our lot of time for questions I'll now turn the call back to management for closing remarks. Thank you.

Thanks for your continued interest that had words and Scott Mark and I are welcome any additional questions.

Thank you.

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