Edwards Lifesciences (EW) Earnings Report: Q Conference Call Transcript

Transcription

1 Edwards Lifesciences (EW) Earnings Report: Q Conference Transcript The following Edwards Lifesciences conference call took place on April 26, 2016, 05:00 PM ET. This is a transcript of that earnings call: Company Participants David Erickson; Edwards Lifesciences Corporation; Investor Relations Mike Mussallem; Edwards Lifesciences Corporation; Chairman & CEO Scott Ullem; Edwards Lifesciences Corporation; VP, CFO Other Participants Rick Wise; Stifel Nicolaus; Analyst David Lewis; Morgan Stanley; Analyst Michael Weinstein; JPMorgan; Analyst Larry Biegelsen; Wells Fargo Securities, LLC; Analyst David Roman; Goldman Sachs; Analyst Jason Mills; Canaccord Genuity; Analyst Raj Denhoy; Jefferies LLC; Analyst Bruce Nudell; Credit Suisse; Analyst Kristen Stewart; Deutsche Bank; Analyst Matt Miksic; UBS; Analyst Danielle Antalffy; Leerink Partners; Analyst Glenn Novarro; RBC Capital Markets; Analyst MANAGEMENT DISCUSSIO N SECTIO N Welcome to the Edwards Lifesciences Corporation first quarter 2016 earnings conference call. (O perator Instructions) As a reminder, this conference is being recorded. I will now turn the conference over to Mr. David Erickson, Vice President of Investor Relations. Thank you Mr. Erickson, you may begin. David Erickso n (Investor Relations): Welcome and thank you for joining us today. Just after the close of regular trading, we released our first quarter 2016 financial results. During today's call, we'll discuss the results included in the press release and accompanying financial schedules, and then use the remaining time for Q&A. O ur presenters on today's call are Mike Mussallem, Chairman & CEO; and Scott Ullem, CFO. Before we begin, I would like to remind you that during today's call, we will be making forward-looking 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 1 of 20

2 statements that are based on estimates, assumptions, and projections. These statements include, but aren't limited to, financial guidance and current expectations for clinical, regulatory, and commercial matters, as well as therapy trends and foreign currency movements. 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, these 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 2015 annual report on form 10-K, and our other SEC filings, all of which are available on our website at Edwards.com. Also, a quick reminder that when we use the terms underlying, adjusted, and excluding special items, we are referring to non-gaap financial measures. O therwise, we are referring to our GAAP results. Additional information about our use of non-gaap measures is included in today's press release and our website. Now I'll turn the call over to Mike Mussallem. Mike? Thank you, David. Pardon the sketchiness of my voice. I'm just getting over a cold, but if my voice gives out, I'll ask for Scott to help me out. So let's jump into it. We are very pleased to report a strong start to 2016 with first quarter sales of $697 million, representing an underlying growth rate of 20%. Significant transcatheter heart valve sales once again drove the majority of this quarter's growth, with solid performance in our core businesses, in particular Critical Care. We are also pleased to report strong bottom-line results while aggressively investing in new therapies that can have meaningful future impact. And most importantly, even more patients are benefiting from our life-saving therapies than ever before. In Transcatheter Heart Valves, global underlying sales were $366 million, up 38% over the prior year. Growth was led by continued strong therapy adoption in the US. Globally, average selling prices remain stable. In the US, underlying THV sales for the quarter were $215 million and grew 64% versus the prior year. O ur performance was driven primarily by strong procedure growth, which continue to exceed our expectations. We saw this growth across both large and small TAVR sites and it was fueled by the recent US launch of SAPIEN 3. We estimate modest share gain also contributed to our results. Following the end of the quarter, at the American College of Cardiology meeting, data from intermediate risk cohorts of two clinical studies were presented. The large randomized PARTNER II trial, which compared to SAPIEN XT Valve to surgery, met its primary endpoint to two years and demonstrated noninferiority when compared to surgery. The second trial showed that SAPIEN 3 TAVR demonstrated clinical superiority to surgery at one-year on a composite endpoint, and also on individual assessments of all cause mortality and stroke. We are very proud of these robust data and believe they provide powerful evidence in favor of expanding the SAPIEN 3 technology to a broader population of patients with aortic stenosis. We remain on track to submit the final intermediate risk data sets to the FDA in the next couple of weeks. Based on the strength of these data, it's possible for the approval to come earlier than expected, although it's difficult to predict regulatory timelines. We are now modeling an approval and launch at the beginning of the fourth quarter TheStr eet, Inc. Al l R i ghts R eser ved Page 2 of 20

3 As a reminder, intermediate risk patients continue to be treated with our continued access protocol of the PARTNER II trial, which has been tracking at about $10 million in sales per quarter. This would end as commercial sales begin. Enrollment in our PARTNER III trial began recently. This randomized trial will study SAPIEN 3 in more than 1200 low-risk patients and enrollment is expected to continue in We are pleased to receive a pulmonic indication for SAPIEN XT this quarter. This will allow for the treatment of adult and pediatric patients in the US who suffer from either a narrowed pulmonary valve or regurgitation caused by congenital heart disease. O utside the US, underlying THV sales grew 13%, driven by ongoing therapy adoption in Europe and Japan. Also, our SAPIEN 3 valve was approved in the first quarter in Japan and we are currently in the process of training sites on this best-in-class valve in preparation for a rollout beginning next month. In Europe, we estimate the procedures continue to grow more than 20% in the first quarter compared to last year. We saw a strong growth across most countries and total procedures are becoming more disbursed throughout the region, with other countries growing faster than Germany. Edwards grew at a slower rate, and we estimate our market share decrease as competitors continue to broaden their product offerings. While difficult to estimate, we believe that more recent competitive entrance collectively realized a significant year-over-year growth rate, but account for approximately 15% or so of total procedures. As we previously mentioned, we plan to use our US intermediate risk data to expand our CE Mark indication. These data will be submitted to European regulators in the next few weeks, with the expectation for approval of an expanded label in late 2016 or early Because some European countries have already been aggressive adopters of TAVR technology, overall, we expect the strong data reported at ACC to have a limited impact on European treatment rates until guidelines are updated, and where applicable, reimbursement is modified to cover the broader label. O ur SAPIEN 3 Ultra System is still on track for CE Mark in the fourth quarter of this year. This new system, featuring and on-balloon delivery system and next-generation sheath technology, is expected to enhance ease-of-use, further reduce possible complications, and shorten procedure time. In summary, we continue to believe that TAVR provides an important and compelling therapy option for a large number of untreated elderly patients. Based primarily on the continuing strong therapy adoption of TAVR, we are increasing our 2016 sales guidance by $100 million, to $1.4 billion to $1.6 billion. We now expect our underlying sales growth to exceed 25%. Turning to Surgical Heart Valve Therapy product group, sales for the first quarter were $196 billion, up slightly over last year on an underlying basis. Globally, sales were lifted by an increase in surgical heart valve units, which we believe was primarily driven by greater aortic disease awareness that prompted a larger number of surgical procedures. O ur growth was offset by the ongoing exit of non-strategic cannula products. Sales of our premium products contributed to solid heart valve performance across the US, Europe, and Japan. Worldwide surgical aortic units grew approximately 7% and global average selling prices saw a slight decline. In Japan, we recently launched our tricuspid surgical valve repair product and have seen strong interest in this therapy. We have been in discussions with the FDA regarding approval of our rapid deployment INTUITY Elite Valve and believe we remain on track for a mid-2016 launch in the US. Additionally, in 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 3 of 20

4 response to our application for a new technology add-on payment for INTUITY Elite, CMS has expressed concern that the technology may not meet certain eligibility criteria and our team is preparing a formal response. In summary, we are pleased with the strength of our premium surgical heart valve products. We continue to invest in this area and believe that surgery will continue to have a vital role for patients, even as TAVR expands. We are reiterating our 2016 underlying sales growth expectation for the total product group of 3% to 6% as we expect stronger second-half growth from INTUITY Elite launch in the US and a diminishing impact from the exit of non-strategic cannula products. In the Critical Care product group, sales for the quarter were $134 million and grew 9% on an underlying basis. O verall growth for the quarter was strong in our core products and our enhanced surgical recovery program, which once again recorded double-digit underlying sales growth across most regions. O ur sales this quarter benefited from the announced discontinuation of our legacy monitor that lifted replacement monitor sales. O ur recent investments in US sales resources also stimulated stronger adoption of our market-leading products. O verall, we are pleased with the continued adoption of enhanced surgical recovery and the strengthening of our core products and we continue to expect Critical Care underlying sales growth of 2% to 4% in Turning to our investments in structural heart initiatives, we continue to make progress on our FO RMA system for reducing tricuspid regurgitation and on our CardiAQ Edwards transcatheter mitral valve platform, or TMVR, which we expect to be the first of multiple generations. In our early generation CardiAQ Edwards platform, we are already in the process of implementing several enhancements and we expect clinical updates to be presented later this year. Learnings from our experience in the US early feasibility study now underway have informed our first CE Mark trial, called the Relief trial, which is still on track to begin middle of this year. We remain committed to developing this therapy and, although commercialization timelines are still unclear, we continue to believe that innovative structural heart therapies will ultimately benefit patients with mitral valve disease, who aren't well served today. And with that, let me turn the call over to Scott. Thanks, Mike. This quarter, our underlying sales were $696 million and grew 20% on an underlying basis, which exceeded our expectations for two reasons. First, strong THV sales drove performance to the top end of our guidance range, and second, strengthening foreign currencies since last quarter's guidance, contributed over $10 million. Reported sales, including the effects of foreign exchange and the sales return reserve grew 18%, to $697 million. We have made strategic decisions about how to utilize savings from the two-year suspension of the medical device excise tax. The suspension provided us flexibility to reinvest in research and development, for example, by accelerating investments in structural heart initiatives. We also made a special $5 million contribution to the Edwards Lifesciences Foundation, in support of the Every Heartbeat Matters initiative. This initiative is focused on addressing the global burden of heart valve disease in underserved people. The $5 million contribution is reflected in the O ther expense line of our income statement. Adjusted earnings per share in the quarter grew 25% versus prior-year to $0.71, primarily driven by our 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 4 of 20

5 THV sales performance and reflects solid leverage. This growth was partially offset by the unfavorable impact of foreign exchange, increased research and development investments, and our charitable contribution. I'll now cover the details behind our results, including guidance for the remainder of the year. For the quarter, our gross profit margin was 74.1%, compared to 77% in the same period last year. This decrease, which we expected, was driven primarily by the foreign exchange impact from inventory sold internationally and higher spending in our global manufacturing operations, partially offset by a more profitable product mix. To accommodate our increased sales demand going forward, we are investing in manufacturing capacity, which will negatively impact our gross profit margin for the remainder of Combined with a lower than expected benefit from FX contracts, we now expect our full-year gross profit rate, excluding special items, to be between 73% and 74%. First quarter selling general and administrative expenses increased 5% over the prior-year to $213 million, or 30.5% of sales. This increase was driven primarily by sales and marketing expenses related to transcatheter valves and personnel-related expenses. This was partially offset by the suspension of the medical device excise tax, as well as the favorable FX impact on our expenses outside the US. We continue to expect SG&A, excluding special items, to be between 30% and 32% of sales for the full-year. Research and development investments in the quarter increased 19% over the prior-year to $102 million, or 14.7% of sales. This increase was primarily the result of continued investments in our transcatheter mitral and aortic valve programs and a lower than normal spend in the prior-year quarter. The suspension of the medical device excise tax provided additional flexibility to accelerate investments in structural heart initiatives this quarter. We continue to expect our research and development investments, excluding special items, to be approximately 16% of sales for the full-year. During the first quarter, we recorded $12.2 million in intellectual property-related expenses, which have been excluded from adjusted earnings per share. The expenses include the resolution of an IT matter and expenses related to ongoing litigation against Neovasc in the United States, and with Boston Scientific, where we now have multiple litigation matters in the US and Europe. O ur reported tax rate for the quarter was 22%, down from 24.1% in the prior-year period. This decrease was driven largely by our manufacturing sourcing strategy. We now expect our full-year tax rate, excluding special items, to be between 22% and 23%. Foreign exchange rates decreased first quarter sales by $9 million compared to the prior year. At current rates, which have been volatile, we now estimate minimal impact to full-year 2016 sales, compared to the prior year. This is $55 million less than the impact we estimated last quarter. Compared to our February guidance, foreign exchange rates had less than a $0.01 impact on our earnings-per-share in the first quarter. Free cash flow generated during the quarter was $79 million. We define this as cash flow from operating activities of $107 million less capital spending of $28 million. Turning to the balance sheet. At the end of the quarter, we had cash, cash and equivalents, and shortterm investments of approximately $950 million. Total debt was approximately $600 million. In February 2016, we entered into accelerated share repurchase agreements for $325 million. Upon entering into the agreements, we received and retired an initial delivery of 3.2 million shares. As a result, average shares outstanding during the quarter declined to $218 million. We continue to expect average 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 5 of 20

6 diluted shares outstanding for 2016 of $216 million to $220 million. Turning to our 2016 guidance, we now expect full-year sales to be between $2.7 billion and $3 billion, an increase from last quarter's guidance of more than $100 million at the midpoint of the range. This increase reflects an anticipated $55 million of improvements from foreign exchange, as well as higher expectations for THV, as a result of strong momentum in the first quarter, the strength of the PARTNER II data presented at ACC, and a planned earlier US indication expansion for SAPIEN 3. We now expect THV sales of $1.4 billion to $1.6 billion. O ur sales guidance for surgical heart valves in Critical Care remain unchanged. We continue to expect sales for surgical heart valves within the range of $780 million to $820 million and for Critical Care within the range of $510 million to $550 million. With today's increase in sales guidance, we now expect our adjusted earnings-per-share to be between $2.67 and $2.77. We expect the earnings-per-share drop through of today's sales guidance increase to be lower than last quarter's, due to a lower benefit of foreign exchange contracts, increased performance-based compensation, and increased expenses associated with the expansion of manufacturing capacity. For the second quarter of 2016, at current foreign exchange rates, we project sales to be between $700 million and $740 million, and adjusted earnings per share to be between $0.67 and $0.73. Finally for fullyear 2016, given our expected improved operating performance, we now expect free cash flow, excluding special items, to be between $500 million and $600 million. With that, I will hand it back to Mike. Thanks Scott. In conclusion, our strong start to 2016 positions us well for another successful year. We're enthusiastic about the continued expansion of transcatheter-based therapies for the many structural heart patients still in need, and we are confident in our outlook for strong sales growth, and we remain passionate about developing impactful therapies to help more patients around the world. And with that, I'll turn it back over to David. David Erickso n (Investor Relations): Thank you, Mike. In order to allow broad participation in the Q&A, 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 hour. O perator, we're ready for questions please. Q UESTIO NS & ANSWERS (O perator Instructions) Rick Wise of Stifel Nicolaus & Company. Rick Wise (Analyst - Stifel Nicolaus): Good evening, Mike. Congrats on another terrific quarter. I guess for question one, are you going to submit the final intermediate risk data soon to FDA? Are you 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 6 of 20

7 now thinking potential approval at the start of the fourth quarter? Can you talk just a little more -- have you had any dialogue with the FDA? And if approval does come earlier as I think everybody would hope it would, would you be ready, how quickly could you be ready to fully rollout an intermediate risk program? Or would you be ready instantly once the product is approved? Yes. Thanks, Rick. I appreciate it. Yes, it's tough to predict the FDA. What we have said is for modeling purposes to assume an O ctober 1 launch. That's what's in our guidance estimates and you can take it from there. Of course, we are talking to the FDA all the time and we don't get into the specifics of that, but one of the things to be thinking about here is that when you say they are going to give us the approval early - the approval is likely to come, I think as we suggested, it's tough to know, we have regular dialogue with the FDA about it. Remember that this is a product that is already approved and in the hands of hospitals. So given that is the case, this is only an indication expansion. We will be training our team and our sites on how to handle that to make sure that they indicate the proper patients for this. But other than that, we expect to be ready for the launch. With the big production increase, of course, that's a bit of a strain on our manufacturing operation, but we expect to be able to handle all that. Thanks. Rick Wise (Analyst - Stifel Nicolaus): Just one follow-up for Scott if I could? Scott, maybe talk a little more about the inventory drag because of the O US inventory. When does it run off and when will the manufacturing investments realize maybe gross margin expansion benefit? Thanks. Sure. So it's inventory outside of the US that have been replaced by higher value inventories with the strengthening of the US dollar. So recall last year in 2015, we had protection as foreign currencies weakened. And so our gross profit margin rate was higher than it would have otherwise been. Now that we have depleted those inventories and they are being replaced by US dollar-denominated inventories, we are now seeing that come through in our lower gross margin. And just to give you some detail on that, our gross margin was about 290 basis points lower. 380 basis points of that was related to this inventory phenomenon. There was another 70 basis point reduction from operations, including manufacturing capacity expansion, and then the mix improvement helped gross margin by about 200 basis points. Rick Wise (Analyst - Stifel Nicolaus): Thank you. David Lewis of Morgan Stanley TheStr eet, Inc. Al l R i ghts R eser ved Page 7 of 20

8 David Le wis (Analyst - Morgan Stanley): Good afternoon. Maybe two questions, maybe one for Mike and then give Mike a rest and give one to Scott. But Mike, just thinking about revenue guidance for the remainder of the year, I guess the first question is have you seen any appreciable change in the market for the post- ACC and if you think about the guidance, which obviously was raised yet again, it still implies somewhat of a deceleration into the backhalf of the year. Is there anything we should be thinking about, other than the difficult time under the FDA approval? And then I have a quick one for Scott. Yes, thanks David. I'm not sure we could say we really saw anything change post-acc. Think about the quarter we just reported with a 64% growth, and we said the bulk of that is a growing market. So the US market is growing fast and it's tough to pick out whether it's changed very much. When we say that there is a pickup, when we added $100 billion to Transcatheter Heart Valves, you know there were several things in there. Some of that includes the earlier FDA, but also we do expect that the momentum coming out of Q 1, and just the positive data out of ACC, also contributed to that. So that's all rolled into our guidance if that's helpful. David Le wis (Analyst - Morgan Stanley): O kay perfect. And Scott, we come back to a question we've asked several times, just around SG&A and the gaps between SG&A and revenue growth widened again this quarter. I think it was nine points in 2015 and widened again here in the first quarter. I guess, what narrows the gap in the nearterm? Or is it just going to be a lumping where we see a widening gap between revenue growth and SG&A growth during market expansion periods and then the opposite thereafter? David, we are trying carefully to manage growth in SG&A expenses, as you know, and the longer we can do that and the longer we can maintain that difference between growth rate in sales and growth rate in SG&A, the better. That said, we do have some headwinds coming at us in 2016 relating to SG&A and so we are trying to manage through those, but generally we think we are on the right trajectory. David Le wis (Analyst - Morgan Stanley): O kay, thank you very much. Mike Weinstein of JPMorgan. Michael Weinstein (Analyst - JPMorgan): Mike, sorry to hear you're not sounding so good, but hope you feel better. So Mike, the question people care about most is what is going to change post (inaudible) and in addition to the feedback that you've 2014 TheStr eet, Inc. Al l R i ghts R eser ved Page 8 of 20

9 gotten from the clinical community, just number one to the overall results and your thoughts about the treatment of intermediate risk patients and to the willingness to change treatment patterns or practice patterns prior to the actual FDA label change. Yes, thanks for that and thanks, I actually feel better than I sound. So post-acc, people are obviously feeling very good about it. We've got an incredible amount of very positive feedback from clinicians and much of what they appreciate most is that they've got this really solid, large piece of high quality data that they can rely on for decision-making, and I keep hearing that over and over again. I don't know what it changes in day-to-day practice. I think because there is an NCD in place, people try and stay pretty disciplined, but as we know, there is not a bright line between high-risk patients and intermediate--risk patients, and we wonder if, in these borderline patients, if these heart teams won't decide to say, hey, you know what, that's a good thing. I think that person is close enough to high-risk and that we would deem it that way. So I would expect some of that to happen, but as I point out the market, the market is already growing at a pretty hefty pace here and we have taken guidance up more, so it tells you about our confidence in the future. Michael Weinstein (Analyst - JPMorgan): Let me ask just on the guidance update and Mike, you'll get a rest on this one. But the $0.10 increase in guidance, if I incorporate the beat on the quarter relative to the midpoint of your range, let's call that a $0.04 beat versus the midpoint, so $0.06 increase in guidance for the balance of the year. How much of that is the increase in your tariff projections and what is the impact from FX versus your guidance after the fourth quarter call? Thanks. Sure, so in terms of sales, TAVR increase is $100 million. In terms of total sales increase, it's about $55 million of FX, due to the weakening of the US dollar since February. So in terms of earnings, the benefit of that THV sales growth is falling through to the bottom line, but it's offset by several different factors, some in cost of sales, and some in SG&A, but principally, the improvement to the bottom line, Mike, is due to the THV sales increase. Michael Weinstein (Analyst - JPMorgan): O kay and Scott, so if I look at the incremental operating margins on your revenues this quarter and think about it over the balance of the year, should that incremental drop through increases or decreases in your view? So there's going to be a decrease drop through in the later part of the year because some things have changed since our first quarter. As we've looked at the incremental boost that we see and the momentum we see in TAVR, we have decided to take some pretty aggressive action around increasing our manufacturing capacity. And I'll give you a couple of specific examples. We are really actively, in all of our facilities around the world now, accelerating our recruiting and our hiring and training, we are running significant overtime costs, and we're also investing in the infrastructure in each of our locations to meet demand. So these are a couple of reasons why we are getting less drop through now than we did the first quarter. We have also decided to pull forward into 2016 some expenses to start a new Greenfield production facility for valves TheStr eet, Inc. Al l R i ghts R eser ved Page 9 of 20

10 Thank you. Larry Biegelsen from Wells Fargo. Larry Bie ge lse n (Analyst - Wells Fargo Securities, LLC): Good afternoon, thanks for taking the question and congratulations on a good quarter. Sorry Mike, I have a couple questions for you. I apologize. Okay. Larry Bie ge lse n (Analyst - Wells Fargo Securities, LLC): The O US TAVR sales were about $150 million off the bat, I think you said 13%. What does the guidance assume for the rest of the year for international TAVR growth? And does the intermediate risk data, the Ultra launch later this year I believe, when Sentera launches later next year, accelerate that in 2017? Basically, my question is how should we think about your OUS TAVR growth going forward and I had a follow-up. Thanks. O kay, thanks Larry. We've anticipated probably that those O US growth rates stay relatively consistent for the rest of the year. The good news is Europe is still growing at, in our estimation, more than 20% and we are seeing a nice expansion in Japan. But we don't think that you are going to see a lot of people aggressively treating intermediate risk patients. We've had some people that are already aggressive adopters, like in Germany, that probably have already gone to the place where they ignore Euro-score and focus more on Heart team judgment and consider age as a factor when they consider risk. But in the other countries, we believe that they are going to probably wait for the indication expansion, for the changing of guidelines, and particularly in places where reimbursement exists, that will be a factor because, unless reimbursement expand, it will limit the expansion. So we are a little conservative about that having any really quick uptake OUS. Larry Bie ge lse n (Analyst - Wells Fargo Securities, LLC): Mike, I am trying to understand more broadly your OUS growth has slowed a little bit. And so if we look even beyond 2016, do you think you can accelerate sales again or are we getting to the law of big numbers here where it's good growth, but it might just taper off over time? I think what happens, Larry, is it probably does flatten to some extent, but where it gets the lift is when there is an indication expansion. So for example, we formally get intermediate risk, we think that will be a pickup in the growth rate OUS, and as a matter fact, later on, when we think we get lower risk patients, that will be another kick up, but we think that those will happen in steps, if you will, and that we are at a point now where we have had high risk approved for a number of years OUS. Larry Bie ge lse n (Analyst - Wells Fargo Securities, LLC): So Mike, I really apologize for asking another question, but I hope you understand the spirit of the question. O ne of the most common questions, the stock is up about 40% year-to-date after a few good years of performance, it is well appreciated now I think that the intermediate risk data was strong and the opportunity is large. So probably the most common question I get nowadays is why should I buy the stock 2014 TheStreet, Inc. All Rights Reserved Page 10 of 20

11 now after such a great run? So my question for you is, Mike, what do you say to investors who don't own the stock today and say I missed it and all the good news is (inaudible)? Thanks. We have indicated, Larry, that we think that the transcatheter aortic valve market, first and foremost, is more than a $5 billion opportunity once you get out just a few years from where we are right now. We think that there is more and more evidence to believe that that is real, and we are on a pathway to, we think, clearly get intermediate risk before the end of this year, and then just a few years out, we would like to think that we are going to be successful for our low risk trial. I think broadly, and this has been consistent over the years, there has been an underestimation of the number of people that don't have their aortic stenosis treated, and if those people will continue to come off the sidelines, as you have a really effective and safe procedure for them, and that is first and foremost. Beyond that, we love our core businesses and surgical heart valves and Critical Care, we think they are going to grow nicely at above-market rates, and we've got quite a pipeline filled with really exciting new opportunities, that's albeit will have risk, but also have very big market opportunities. All these opportunities to be able to treat structural heart disease with catheter-based technologies. And those are significant, each by themselves, and we will get a chance to play that out. So we are very bullish about our future, and even though we've had a great run, I don't think that we are close to having all of the potential good things that could happen be reflected in our value. Larry and will add one additional perspective from a financial point of view, which is even despite all of the investments we're making to expand the market, expand Therapy,, development, growth, required capacity, meet demand, we're still getting good P&L leverage, and so we expect that the earnings power of this Company will continue to improve and we are generating significant cash flow. Larry Bie ge lse n (Analyst - Wells Fargo Securities, LLC): Thanks for taking the questions guys. David Roman of Goldman Sachs. David Ro man (Analyst - Goldman Sachs): Thank you and good afternoon. I just wanted to clarify one of the responses you gave to Larry's deluge of questions on international. When you said growth rates are flattening out, are you just referring to the rate of growth or are you actually expecting your international TAVR business to flatten out before you see reacceleration from a new indication? I guess all I was indicating is it's already flattening compared to what we had seen in the past. When we try to be consistent here, we have been talking about Europe that is growing plus 20%. So that's pretty substantial growth rate. And that has flattened out from where it was not long ago. That's all I was indicating David. David Ro man (Analyst - Goldman Sachs): Okay so just the rate of growth TheStreet, Inc. All Rights Reserved Page 11 of 20

12 Yes. David Ro man (Analyst - Goldman Sachs): And maybe a follow-up on your comments around the US market. I think as we look back to the February call, your view around the strength of the US market may be turned out to be more related to your own performance of the sector markets that were gained by the time Medtronic reported. It sounds like your commentary here is similar to what you provided in February. Can you maybe just help us understand, now that you have the benefit of looking back over the past several months, how much of this do you think is market share gain versus what would appear to be an acceleration in market growth from what was reported in the fourth calendar quarter? David, we believe that the vast majority of the growth that we enjoyed was procedure growth, so broadly across the market. We say there is some modest share gain in the US but that's really the principal story. David Ro man (Analyst - Goldman Sachs): O kay, and then lastly just on the margin side for Scott. Understanding that you are pulling forward some of these investments in manufacturing to build out capacity, when do we reach a conclusion on that? Because the dynamic run favorable product mix, it would seem like your gross margin should be able to get out of the range it sure seems stuck in, but we just haven't seen that on a reported basis now. That's a good question. We expect that we would get more leverage in cost of sales as some of these remediation investments that we made last year started to roll off, and we are almost through all those remediation activities that were shorter term in nature. But now with this significantly increased expectation around sales and volume requirements, we are really having to invest heavily in facilities capacity and all the expenses I mentioned earlier around labor. So I'd like to say that this is all going to go away, but I think for the foreseeable future, we are going to continue to invest in order to support the top line growth. David Ro man (Analyst - Goldman Sachs): Understood. Thank you very much. Jason Mills with Canaccord Genuity. Jaso n Mills (Analyst - Canaccord Genuity): Thanks guys for taking the question. I apologize for the background noise, I'm traveling. Scott, thinking of the operating leverage question, back to the envelope and I'm probably off a little bit here, but it looks like you are taking the opportunity to spend away perhaps as much as 100 to 120 basis points of operating margin this year that you maybe could have captured vis-a-vis the TAVR upside that are spending in these investments that you've talked about. As you think about moving forward, and I understand that you are not going to give guidance for 2017, do you start to capture some of that leverage that you are taking away from the business this year vis-a-vis the investments next year or does it take longer than that? 2014 TheStreet, Inc. All Rights Reserved Page 12 of 20

13 I think we are early capturing it, which is why you are seeing a significant drop through from sales growth into earnings-per-share. And obviously we want to make that wider and really leverage our scale around these investments that we're making in both gross margin and SG&A. So I won't say that those investments are going to stop and all the sudden we are going to have a materially different P&L. But I will say that we are continuing to get leverage out of these investments and are really trying to control growth and expense as we control revenue. Jaso n Mills (Analyst - Canaccord Genuity): Got it, but is it fair to say that you are making investments that otherwise your operating margin, the top end of the guidance right now looks to be somewhere around 28%, would be 100 to 120 basis points higher? Is that math in the ballpark Maybe I can answer it this way. I think overall operating margins from 2015 to 2016 should go up by around 100 basis points, and so without trying to break it down quarter-by-quarter or by line item, SG&A versus R&D, that may be one way to get at your question. O kay thank you and then Mike, just as a follow-up for you, what did you see in terms of new centers that commenced SAPIEN practices during the quarter, whether you want to talk about US or globally, and could you also preview for us some things to come at Euro PCR? Thanks for taking the questions guys. Congrats on a great quarter. Thanks Jason. I think what we said before is that we expect that around 400 sites we expect to increase maybe 10% or 40 sites during I think we are on a path to do that. So I don't know the precise number for Q1, but I think it's pretty consistent with that sort of a ramp. In terms of PCR, I don't know that you're going to see anything like you saw at ACC, where you are going to see those kind of large trials. I'm sure there are going to be a lot of transcatheter heart valve papers and news, but I'm not expecting anything that's major that really is going to cause a really change in terms of behavior, at least not in my mind. Jaso n Mills (Analyst - Canaccord Genuity): Thank you. Raj Denhoy of Jefferies. Raj De nho y (Analyst - Jefferies LLC): Hi, good afternoon. I wonder if I could maybe ask a bit about mitrals. You gave a little bit of an update in terms of still beginning the trial this year, but also that you're looking to make some changes to the valves of the CardiAQ valve. I'm just curious if you know in the last few months if your thoughts have changed really on the timing or how long it will take to get a viable valve to market. Thanks Raj. I have to say going into this year, I would consider it a major victory if we could stay on path to begin a CE Mark trial by the mid-year, so a I was pleased to report that we are actually doing that. There's an awful lot that goes on behind the scenes as we try to indicate, we're implementing a number of enhancements to that CardiAQ platform TheStreet, Inc. All Rights Reserved Page 13 of 20

14 It's really one of our earliest versions of this transcatheter valve, but we still have a lot to learn, so we are going to be jumping in this trial. We are enthusiastic about getting into the trial, but we have to admit, we are on a steep learning curve and we're putting a priority on getting that clinical experience, because as we get that, it gives us so much more guidance in terms of how we ought to be running the program. So, as we've tried to say, a lot of uncertainty and timelines at this point because of how early it is with these programs, but we are pleased with where we are right now. Raj De nho y (Analyst - Jefferies LLC): O kay, maybe I could just ask one about Europe as well. You did mention competition remains or is even getting worse there and pricing seems like it's getting worse as well. Maybe you could just offer a bit about how you are doing in that environment. For a while, when you commanded a premium or was still able to hold a premium price in a lot of European markets, is that still the case? Do you expect you're going to have to start to concede a bit on price in order to hold share there and maybe some thoughts about the European market would be helpful. Yes, thanks for that. What I tried to indicate in the prepared remarks Raj was that we indicated that the newer entrance, we estimate, and it's really hard to estimate because there is not any really good external source so we piece together a lot of things, but we estimate that somewhere in the neighborhood of 15% of that European share that these competitors would have, I think when we reported that number in Q 1 of last year, so year-over-year, it was around 10%, so there was about a 5% movement there. That's what I was trying to reflect in my remarks. In terms of how we are behaving, we are really not changing our pricing practices. O ur pricing has been very stable, we do have some very small downward drift but that is purely based on volume discounts and has been consistent with what we have been doing and we continue to have a substantial price premium versus competitors. I don't know where it is, but our estimate is in the 10% to 20% range. Raj De nho y (Analyst - Jefferies LLC): Great, thank you. Bruce Nudell of SunTrust. Bruce Nude ll (Analyst - Credit Suisse): Good afternoon. Thanks for taking the call. Scott, a question for you and then a follow-up to Mike. You know, we did some math today and looked at what you guys have spent on structural hearts and PVT acquisition. It looks like $1.5 billion to $2 billion through 2015 and could you just give us how you think about that in the context of ramping up a mitral and tricuspid program, and what that means and how you will gate it with regards to either keeping R&D as a constant percent of revenue or keeping the absolute dollar amount in check. It's a little bit of both. We are very deliberate in how we stage and sequence investments in these new growth platforms and opportunities. So, similar to the development of the SAPIEN platform and the family of valves, we investing significantly on the way in developing clinical evidence, while also investing in actual new product design and we are intending to do the same thing when you look at things like our transcatheter mitral valve program and even FO RMA on the tricuspid side. And so our strategy is really 2014 TheStreet, Inc. All Rights Reserved Page 14 of 20

15 unchanged. It is to be very disciplined, but also to be long-term oriented in the way we invest in new product technologies, and then commercialize those and really generate topline growth that turns into earnings. Bruce Nude ll (Analyst - Credit Suisse): And Mike my follow-up -- go-ahead I'm sorry. I was just going to pile on a little bit to your question. When I think about the $1.5 billion, part of what encouraged us to make that investment is we saw a lot of green lights along the way. And when you see an opportunity this significant, then it would encourage us to do that spending. If we didn't see that, obviously we are not obligated to have that kind of sense, so this was incremental spending, each step of the way. Bruce Nude ll (Analyst - Credit Suisse): Sure, but just looking forward Mike, to Europe, once again, everybody is focused on it, do you feel that Sentara or some other product innovation, or maybe just the strength of your clinical data will enable you to hold share in Europe, which is a pretty robust market still? As you point out Bruce, it's a very competitive marketplace. There's at least five or six competitors and we have by far a strong share leadership. We are very proud of that and we expect that to endure over time. And as you say, part of the way that we are going to do that is with our new product introductions, so SAPIEN 3 has been fantastic, but we are certainly not going to stop there. Behind that is Ultra, and then more yet, and as you properly point out, Sentara. So we don't intend to stop improving this therapy. We think there is still a long way for it to go, and we think that's going to separate us. I think it's going to challenge our competitors to be able to keep pace. Bruce Nude ll (Analyst - Credit Suisse): Thanks so much. Kristen Stewart of Deutsche Bank. Kristen Stewart (Analyst - Deutsche Bank): Hi, thanks for taking my question. I was wondering if you could just focus on the surgical valve business, or surgical heart valve therapy business, and if you could just break out what the impact of discontinued was. I'll take that Kristen. So recall last year, we had guided to $10 million to $20 million in total discontinued sales. And by the end of last year, we had achieved about $15 million of that. There is probably another $5 million or so to come in We are to the tail end of it and we will probably show up most in the first half, less in the second half, but that's how the discontinued operations are proceeding. Kristen Stewart (Analyst - Deutsche Bank): 2014 TheStreet, Inc. All Rights Reserved Page 15 of 20

16 That's just like $2 million dollars a quarter or so? Not that significant? It's not significant and again it's more first half weighted than second half weighted for the remaining $5 million or so to be discontinued. Kristen Stewart (Analyst - Deutsche Bank): O kay, and then more broadly, can you maybe speak to the different dynamics in the US versus Europe and if you've seen any change in surgical heart valve patterns, whether it be in Germany or not? Just growth rates as transcatheter valves have rolled out? Anything you have seen thus far in accounts? Maybe I can make a quick comment here Kristen. So overall, I think as you pointed out, aortic units were great once again this quarter. I think it was up around 7% and they were up in a combination of US, Europe, and Japan, so the big geographies are still growing. I think it's probably most impacted in Germany, but even in Germany, the surgical valve business remained robust for us and we feel like the addition of a product like INTUITY, which we have there, helped us continue to maintain a growth rate. Kristen Stewart (Analyst - Deutsche Bank): O kay, so the reason why that line I guess is only growing modestly, is it more pricing then? Should we think about it in that context? What is growing modestly, I'm sorry? I will take it. The actual valve business grew about 7% in the first quarter. It was offset by discontinuation of the non-strategic cannula products. So the core valve business continues to grow nicely. Kristen Stewart (Analyst - Deutsche Bank): In sales dollars? In sales dollars, yes. Kristen Stewart (Analyst - Deutsche Bank): And units. O kay. Both. It's sales and units. Pricing in surgical valves is generally over the years has been stable. So we are seeing still attractive unit volume growth. Kristen Stewart (Analyst - Deutsche Bank): Okay, perfect. Thank you TheStreet, Inc. All Rights Reserved Page 16 of 20

17 Matt Miksic of UBS. Matt Miksic (Analyst - UBS): I had a couple of longer-term questions, Mike, if you could, just to maybe help sketch out how the opportunity is unfolding and what some of these other opportunities might be longer-term. So the first on these category segments of patients that we have talked a lot about, high risk intermediate and low and how I think most folks, yourself included as you sketched out in December, talked about maybe less than 25% high risk and maybe one third is intermediate and maybe half is low. As we get into this, you also mentioned that high risk is, as we are discovering, maybe a bit bigger than we thought, patients coming in or patients are sicker, mid- single-digit STS, but they are actually quite sicker. Do you see any of that happening here as we get into intermediate risk and could we start seeing a larger front half of the market, if you will? And maybe an easing back half, if we want to think about it that way? And then I had one follow-up. I don't know that this is going to unfold over a matter of months, but we've watched it unfold over a matter of years and I wouldn't be surprised if there is much more life to this, Matt. We defined people with (inaudible) by looking at people that received open-heart surgery to have their valve replaced. And now that we have this catheter-based option, we learned that there's many more patients out there and we are still learning that it's a disease that is under-diagnosed and in many cases, even when it's underdiagnosed, is under-treated. And so we are still on a steep learning curve there. We think that that could go on for a while and we are still continuing to find an upside, if you will, that could be very meaningful. The key is for us to have a very safe procedure. When we talk about this, the past notions were you had to have severe aortic stenosis and symptoms. I think everything will be challenged in the future when you have a procedure that is under 1% mortality and 1% stroke at 30 days, it starts getting interesting to say what should be my course of treatment? Matt Miksic (Analyst - UBS): That's helpful and the follow-up is on this question of durability. Another long-term question for the market. And clinicians we have spoken to seem to increasingly be bringing up the idea of valve and valve as the potential answer to long-term durability, much the way it's the answer for surgical tissue valves over time. And just wondering if that is something we will hear more about in terms of your clinical programs or product designs or how you think about that, the idea of replacement TAVR over the longterm being part of this market. Yes thanks for that Matt. I think, as has been demonstrated, valve and valve really is a good option down the road for a number of patients, but that's not the way we are really approaching this. We'd really like to demonstrate that Transcatheter Heart Valves, and hopefully, as we continue to introduce valves, we are able to do this, to have them last a long time. We are fortunate to say that now in tens of thousands of patients have been in studies, we really haven't seen a signal that indicates that structural valve deterioration is an issue. So we are encouraged by that. But we still have a ways for it to play out, but no I don't think the primary answer is going to be valve and valve. I think that we should be able to develop valves that have some pretty reasonable durability. Matt Miksic (Analyst - UBS): 2014 TheStreet, Inc. All Rights Reserved Page 17 of 20