Edwards Lifesciences Corp (EW) — Q1 2020 Earnings Call Transcript

Thanks, Victor. Good afternoon and thank you all for joining us. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, Chief Financial Officer. Just after the close of regular trading, Edwards Lifesciences released its first quarter 2020 financial results. During today's call, management will discuss the results included in the press release and accompanied financial statements, and then use the remaining time for Q&A. Please note that management will be making forward-looking statements that are based on estimates, assumptions, and projections. These statements include, but aren't 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 the date on which they are made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties including but not limited to those associated with the COVID-19 pandemic 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 the press release, our 2019 annual report on Form 10-K, and Edwards' other SEC filings, all of which are available on the company's website at edwards.com. Finally, a quick reminder that when using terms underlying and adjusted, management is referring to non-GAAP financial measures; otherwise they’re referring to GAAP measures. Reconciliations between GAAP and non-GAAP numbers mentioned during this 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. Before we discuss our first quarter results and updated 2020 outlook, I want to provide a broader perspective on the company's response to COVID-19 during these challenging times. Our primary focus has been to continue serving patients who rely on us, support our clinical partners, and ensure the safety of our employees. We aim to maintain consistent access to our lifesaving technologies and offer support to those in hospitals. I want to express our appreciation to our clinician partners and the global healthcare community for their unwavering dedication to patient care during this time. Their leadership and commitment to patient care is commendable, and we are committed to supporting them as they navigate this global health crisis. I am heartened by recent signs of stabilizing and declining COVID-19 infection rates and deaths in many parts of the world, but we acknowledge that healthcare workers on the frontline are still facing unprecedented challenges. As Dr. Craig Smith from Columbia University said, I am confident that we will get through this together over time. I also want to acknowledge the outstanding efforts of our 14,000 employees globally who are overcoming the unique challenges posed by COVID-19. Edwards is proud to be part of the essential healthcare infrastructure, and I admire the adaptability, resourcefulness, and dedication of our employees as they continue their vital work for patients and also volunteer in their communities during this difficult period. Thanks to our global supply chain team and our partnerships with governments and regulators around the world, our manufacturing operations have continued to deliver, allowing us to supply our technologies to more than 100 countries. Our dedicated manufacturing workforce has consistently met the global demand for our structural heart technologies. As mentioned at our December investor conference, we have focused on enhancing the capacity and agility of our global production facilities, and this focus has proven valuable at this time. In Europe, we are experiencing an increased demand for our pressure monitoring products in critical care, and we are grateful to our employees for making significant strides to double our production to meet this need for critically ill patients. Our third-party suppliers are an essential part of this infrastructure, and we work closely with them to prevent any disruptions. We are proactively managing capacity, exploring alternative logistics options, and carefully overseeing the supply of components. Our team's commitment to delivering lifesaving technologies to patients is steadfast. I also want to commend our clinical field teams for providing real-time support to patients and frontline clinicians when it is needed most. In March alone, Edwards supported TAVR procedures in all 50 states in the U.S. and in almost 60 countries worldwide. Throughout this period, we have implemented crucial safety measures for our employees while continuing our vital work to provide lifesaving technologies for patients. We will continue to rely on trusted global health sources, government guidance, and local hospital policies to guide our decision-making. With our strong team and patient-focused culture, I have complete confidence in our ability to navigate this unprecedented global crisis successfully. Lastly, I want to recognize the significant role and impact of our charitable partners in addressing both local and global community needs amid the pandemic. In response, the Edwards Lifesciences Foundation has provided emergency grants to over 20 partner organizations and communities where our employees live and work. Additionally, Edwards is donating critical care technologies during this crisis to assist physicians in caring for underserved patients. We will remain closely connected to our charitable partners to explore additional ways to support our communities. In the first quarter, our foundation fulfilled its goal of screening and treating over 1.5 million underserved individuals in more than 35 countries through our Every Heartbeat Matters initiative. This remarkable achievement by our charitable partners deeply inspires me. We are leveraging insights from the first phase of Every Heartbeat Matters to set a new ambitious goal of improving the lives of 2.5 million more underserved structural heart and critical care patients by the end of 2025. Before we discuss our results, I want to mention that it was 20 years ago this month that we debuted at the New York Stock Exchange, marking the spinoff from Baxter and initiating our journey as Edwards Lifesciences. It has been an extraordinary journey, and we have more ahead of us. As we continue to monitor COVID-19 and its potential effect on our business, we remain assured about our long-term patient-centered strategy and innovation pipeline. There are still many patients in need, and I have strong confidence in our global team and culture that once we overcome this crisis, we will achieve many more successes together. Now, turning to our first quarter results, despite the challenges posed by COVID-19, we reported $1.1 billion in sales this quarter, representing a 14% increase in sales. In Transcatheter Aortic Valve Replacement (TAVR), our global sales reached $742 million, a 25% growth on an underlying basis. Our global TAVR sales growth through early March aligned with our robust fourth quarter growth rate. However, this was significantly impacted in the last weeks of the quarter as procedures declined due to COVID-19 disruptions. Procedure volumes varied widely in March, even between hospitals, as patients and providers prioritized the pandemic. Estimating TAVR procedure growth is now more complex than ever. We expect to gain a clearer picture of TAVR procedure growth and our competitive share once the global situation starts to stabilize. Overall, average selling prices remained stable. In the U.S., TAVR sales increased approximately 30% year-over-year in the first quarter, maintaining the momentum established through early March. We experienced a marked decline in procedures during the last few weeks of the quarter, which was highly variable across the nation. The rollout of SAPIEN 3 Ultra continued positively, with clinician feedback on improved paravalvular leak performance remaining excellent. Ultra accounted for more than 30% of our U.S. and European TAVR volumes as we exited the first quarter. To ensure the safety of our employees and clinical partners amid COVID-19, we have decided to pause training for centers not yet familiar with the device. We plan to resume the SAPIEN 3 Ultra rollout once we witness a return to a more stable environment. As you may recall, we committed to tracking the PARTNER 3 patients for 10 years, and in March, we presented the two-year follow-up at the virtual ACC Conference. We were extremely pleased that clinical outcomes for SAPIEN 3 in low-risk patients continue to be excellent at the two-year mark. Outside the U.S., TAVR sales grew in the mid-teens year-over-year on an underlying basis in the first quarter. In Europe, our growth surpassed expectations through early March before being affected by a notable slowdown in procedures due to COVID-19. However, we were encouraged by the strong adoption of TAVR across most countries. In Japan, TAVR adoption was quite positive, and first-quarter procedures there were largely unaffected by COVID-19, though we expect Q2 sales to be negatively impacted. In conclusion, based on what we know currently, we anticipate the greatest impact of COVID-19 on our TAVR sales to occur in the second quarter, followed by a gradual recovery in the third and fourth quarters, aligning with our original sales expectations. While recent news about improving infection rates is encouraging, we understand the significant uncertainty regarding hospital procedure volumes. We now estimate global TAVR sales growth for 2020 to be flat compared to 2019, with a range of minus 5% to plus 5%, a decrease from our previous expectation of roughly 15% growth. Nevertheless, we are certain that the prevalence of severe aortic stenosis is relentless, and Edwards remains committed to delivering essential solutions for these patients despite the extraordinary challenges presented by COVID-19. We are confident that the market opportunity will exceed $7 billion by 2024. In transcatheter mitral and tricuspid therapies (TMTT), first-quarter global sales were approximately $10 million. Commercially, we saw strong momentum and a swift adoption of PASCAL in Europe. We continue to be pleased with PASCAL's acute clinical outcomes, and physician feedback has been positive. We were on track to meet our expectations until the last few weeks of the quarter, when sales fell sharply due to COVID-19. As previously stated, we have temporarily paused new enrollments in our active pivotal clinical trials for mitral and tricuspid therapies. We are working closely with trial investigators, and decisions regarding the resumption of enrollment will be made in consultation with them. We remain focused on transforming care for patients with mitral and tricuspid valvular disease by developing innovative therapies supported by strong clinical evidence. We continue to gain valuable experience and make meaningful strides in our portfolio, and you can anticipate informative updates on PASCAL, Cardioband, and EVOQUE at the upcoming EuroPCR medical meeting. In Q2, we expect a significant negative impact on transcatheter mitral and tricuspid procedures as healthcare systems prioritize responding to the pandemic, given that these procedures require general anesthesia and an ICU stay. We anticipate a recovery beginning in Q3 and remain committed to ensuring procedural success and improved patient outcomes through our high-touch support model. We are revising our revenue expectations to between $30 million and $45 million for the entire year from our previous projection of $50 million to $70 million. We are confident that we are well-prepared to navigate the unprecedented challenges with our long-term strategy and dedicated team. We estimate that the global TMTT opportunity will reach approximately $3 billion by 2024, and we are eager to provide solutions for these serious diseases and enhance patients' lives worldwide. In Surgical Structural Heart, first-quarter sales of $193 million represented a 9% decline on an underlying basis. This was anticipated, driven by the rapid adoption of TAVR, and the headwinds faced by U.S. surgical aortic valve procedures continued into the first quarter. In the last few weeks of March, we saw a sharp decline in procedures due to COVID-19. Nevertheless, we remain encouraged by the ongoing adoption of our premium INSPIRIS RESILIA aortic valve, which is capturing an increasing share of surgical aortic valve procedures. Owing to favorable patient outcomes and positive feedback from physicians, it's no surprise that the INSPIRIS valve has become the number one implanted surgical aortic valve in both the U.S. and Japan. In Europe, we have commercialized HARPOON, our mitral valve repair system designed for beating heart surgery, and we plan to launch it as market conditions stabilize. Additionally, we are pleased to share that we recently received FDA approval to start our U.S. pivotal IDE study and anticipate that enrollment will begin in the latter half of 2020. Recall that HARPOON aims to facilitate earlier treatment of degenerative mitral valve disease, leading to faster recovery and more consistent outcomes for surgical patients. In summary, due to COVID-19's impact, we now expect Surgical Structural Heart sales for 2020 to decline by 5% to 15% compared to 2019, adjusting from our previous expectation of 0% to 3% growth. We expect the lower case rates seen at the end of Q1 in both the U.S. and Europe to persist into Q2. We anticipate that our Q4 sales will return to positive growth, driven by the market uptake of our latest technologies. As we emerge from COVID-19, and as transcatheter technologies continue to advance, we are excited about our potential to offer innovative surgical treatment options for more patients and further solidify our leadership in premium Surgical Structural Heart technologies. To summarize, for TAVR, TMTT, and Surgical, as the disruption from COVID subsides, there are structural heart patients who have delayed treatment and will ultimately seek care. Regrettably, we expect that some of these delays will result in worsened conditions and potential loss of life, considering the severe nature of these chronic diseases. While it's challenging to quantify the exact impact on patients at this time, data from the Journal of Thoracic Surgery suggests that patients awaiting aortic valve replacement face a 4% mortality risk at one month, 8% after three months, and 12% following a six-month wait. This is an incredibly difficult time for structural heart patients as they balance the risk of COVID-19 against the severe consequences of progressing heart valve disease. In Critical Care, first-quarter sales of $183 million increased by 1% on an underlying basis. Growth in this quarter was driven by higher demand in Europe, primarily for our TruWave disposable pressure monitoring devices, which was slightly offset by decreased demand for our enhanced surgical recovery products. Recall that our Critical Care product line assists two distinct patient groups, with the larger one needing hemodynamic monitoring during surgery and a smaller group needing ICU support. While the pandemic remains in effect, revenues from our enhanced surgical recovery products will be considerably lower, although this will be partially balanced by an uptick in demand for ICU products. We have also noted some delays in HemoSphere orders in the U.S. as hospitals restrict capital expenditures to focus on COVID-19. In summary, considering the uncertainty brought on by COVID-19, we now project Critical Care sales growth for 2020 to remain flat compared to 2019, with a range of minus 5% to plus 5%, revising down from our previous expectation of 6% to 9% growth. Now, I'll turn the call over to Scott.

Hey thanks a lot, Mike. Today I'll provide a perspective on the first quarter along with some additional directions on how the rest of the year may unfold based upon what we know today. I'm very pleased with the overall financial results in Q1, including our sales of $1.1 billion. Appreciate that our results reflected two very different periods during the quarter. Through early March, our total sales were running a little ahead of our expectations, with notable strength in TAVR in Europe. Pre-COVID we were running at underlying growth rates closer to the fourth quarter of 2019 than to our Q1 guidance expectations. The second phase of the quarter was when we felt the impact of COVID in Europe and the U.S., and sales in the last few weeks of March were substantially lower than we originally expected. Our sales in April remain depressed, even though COVID admissions appear to be plateauing. While our sales in Q1 were lower than expected, so was our spending, so that adjusted earnings per share in the first quarter were $1.51, which was within our guidance range. GAAP earnings per share was $1.47. A full reconciliation between our GAAP and adjusted earnings per share is included with today's release. Now, I'll cover the details of our first quarter results as well as discuss guidance for the balance of the year. For the first quarter, our adjusted gross margin was 76.7%, consistent with the prior year quarter. This year's rate benefited from a favorable product mix offset by lower foreign exchange hedge gains and spending in support of the new European Medical Device regulations. COVID didn't have much of an impact on our GP rate in the first quarter. Although we'll see the negative impact from COVID later this year as the higher cost inventory is sold. Regarding operating expenses, first quarter expenses were lower than expected primarily as a result of the COVID impact. Some expenses declined naturally due to less travel and meeting expenses, as well as delayed clinical trial activity. We are implementing cost control measures. And at the same time, we have intentionally not implemented actions to significantly reduce our investment plans supporting our long-term growth strategy. Our priority has been to keep our people safe, secure and focused on helping patients. Selling, general and administrative expenses in the first quarter were $308 million or 27.3% of sales compared to $280 million in the prior year. This increase was driven by additions we have made in field clinical personnel to support TAVR cases in the U.S. and TMTT in Europe. Research and development expenses grew 9% to $187 million, or 16.6% of sales, compared to $171 million in the prior year. This increase was primarily the result of continued investments in our transcatheter mitral and tricuspid therapies. As we announced previously, we made a strategic decision to pause TMTT clinical trials in response to the urgent COVID-19 response around the globe. This will have a moderate negative impact on sales and results in a corresponding reduction in planned research and development spending for the remainder of the year. Turning to taxes, our reported tax rate this quarter was 14.8%. This rate included a 270 basis point benefit from the accounting for employee stock-based compensation, which was 230 basis points, or $0.04 unfavorable to our guidance expectation. Our rate this quarter also benefited from a favorable tax audit settlement. As a result of increased uncertainty, we now expect our full year 2020 tax rate, excluding special items, to be between 11% and 15%. Foreign exchange rates decreased first quarter sales growth by approximately 0.9% or $8 million compared to the prior year. At current rates, we now expect an approximately $50 million negative impact or about 1.5% to full year 2020 sales versus 2019. Foreign exchange rates negatively impacted our first quarter gross profit margin by 30 basis points compared to the prior year. Relative to our January guidance, FX rates positively impacted earnings per share by about a penny reflecting our effective currency hedging program. Turning to the balance sheet, we have a very strong balance sheet with approximately $1 billion in cash, cash equivalents, and short-term investments at the end of the quarter. In addition, we have an undrawn line of credit up to $1 billion, and our public bonds don't mature until 2028. Additionally, we continue to generate healthy cash flows. Consistent with our practice of opportunistically repurchasing shares, we purchased 3 million shares for $615 million during the first quarter. We started buying back stock in the open market in February. In March, shares were purchased by a bank on behalf of Edwards through a pre-established 10b5 program. This program automatically went into effect when Edwards’ stock price declined with the market sell-off. We still have remaining share repurchase authorization of $625 million. Average shares outstanding in Q1 was 211.7 million, and we are updating our guidance for average shares outstanding for the full year to 210 million to 212 million, down from 212 million to 214 million. Please note that we will host our Annual Shareholder Meeting virtually this year on Thursday, May 7th. As outlined in our proxy statement filed last month, one of the proposals to be voted on by our shareholders will be to increase the number of shares outstanding for the purpose of effecting a 3 for 1 stock split. We expect to make split-adjusted financial information available under our Investor Relations website following the execution of the split. Adjusted free cash flow for the first quarter was $125 million defined as cash flow from operating activities of $207 million less capital spending of $82 million. Our first quarter free cash flow is traditionally our lowest quarter during the year. We are not updating our free cash flow guidance for the year. Although we expect it will fall short of our original expectation of $1.0 billion to $1.1 billion. Now I'll turn to the guidance for full year 2020. As you know, we cannot accurately predict the progression of COVID nor the timeline or extent of the disruption to hospital procedures utilizing the therapies Edwards provides. As a result, there is a wide range of potential outcomes for sales and earnings and we will provide a wider-than-usual range of 2020 guidance based upon what we know today. We have modeled multiple scenarios based on the pace at which hospitals return to more normal treatment rates. Our guidance assumes the impact of COVID to be most severe in the second quarter followed by a gradual recovery during the course of the third quarter and a fourth quarter that comes close to our original expectations. Based upon our recovery assumptions, Edwards’ sales growth for the full year is estimated to be flat to 2019 with a range of minus 5% to plus 5%. That reflects TAVR and Critical Care growth of flat to 2019 with a range of minus 5% to plus 5%; Surgical, minus 15% to minus 5% versus 2019; and TMTT revenues of $30 million to $45 million. The recovery of our structural heart businesses will be influenced by many factors and tempered by the time it takes for patients to seek and receive treatment. It's common for the screening process alone to take two to three months. 2020 sales guidance for the total company is now expected to be $4.0 billion to $4.5 billion versus our previous range of $4.6 billion to $5 billion. For the second quarter, we estimate sales of $700 million to $900 million. We've also modeled more conservative recovery scenarios versus our base case, such as a recovery beginning later in the year or a recovery followed by a resurgence in COVID that extends these conditions into 2021. We are not providing financial guidance related to those scenarios. But we are prepared to operate under those conditions if necessary. Our guidance does not anticipate a second wave of COVID-19. So overall, while providing guidance that’s subject to an abnormally high level of risk, we're providing you a transparent view of our forecast. We'll obviously continue to provide visibility into how our thinking evolves in the quarters ahead.

Thanks, Scott. So whether you're new to our story or you follow the company since we went public 20 years ago, you know that our talented and dedicated team at Edwards has always put patients first. Never has this been more important than today. As we stand together with the global community, I'm grateful for our extraordinary team and our partners, and I'm optimistic about the future of continuing to deliver innovations to patients around the world. And with that, I'll turn it over to Mark.

Thank you, Mike. We're ready to 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. Victor?

Thanks, Mike. So glad to hear everybody is well and congratulations on the strong results. I guess my first question is just on the guidance that you're providing. It seems like the Q2 guide at the midpoint is down about 25% year-over-year. Just curious, is that the run rate that you're on currently or is your current run rate a little worse than that?

It varies by geography and business. I can summarize it this way, Bob. Q2 is going to be a really tough quarter. It's declined significantly, and we're experiencing that now. Even the numbers we're providing for Q2 are probably somewhat better than the current situation. I should note that our structural heart businesses are feeling the impact even more than our critical care business.

Thank you for that follow-up regarding the Q4 guidance. Mike or Scott, could you share what factors you considered and what informed your belief that we will fully return to a normal quarter in Q4, despite the unprecedented event we are currently experiencing? I am interested in knowing the data points that inspired your confidence in this return to normalcy by Q4.

That's a great question, Bob. It is indeed difficult to make predictions about revenues. We are beginning to observe encouraging signs. There is a noticeable shift in how people are preparing for recovery, although we understand that this process will take time. The medical conditions we address are quite serious and cannot easily be postponed. Many patients who would have received treatment in the first and second quarters may instead be treated in the fourth quarter. Given these factors, we believe it’s likely that we will see a return to more typical volume levels in the fourth quarter, though there is a wide range of potential outcomes.

Victor, next question, please.

So one kind of just follow-up question and I’ve a quick second one. Mike, just thinking of the fourth quarter recovery and not really talking about 2021 yet, but a lot of investors are fixated on if fourth quarter is going to be normal, it probably implies some sense of procedure recapture. But given the age of these patients and as you think about the low-risk referral channel, to what extent do you think about or to what extent should investors be concerned about disruption to that referral channel, just considering the age of that patient and their willingness to sort of re-access the system in a post-COVID world? And then a quick follow-up for you.

Yes, no, it's very real. One thing for sure David is our patients were scared. They're afraid of COVID, and it's meant that they have in many cases decided to stay home. So, there are many factors that influence the recovery. But if you do think of it as a bowl, as a funnel, there's been a bunch of patients that are waiting. So beginning the screening process again, that really needs to begin months in advance of the fourth quarter, is going to be key. It's going to be a big effort by the whole community. But I think the community is going to come to grips with the fact that these heart valve patients, and AS patients in particular, really need to be treated and that they're in a dangerous situation, and we think that they are going to respond to that. So right now, the screening rates have not returned to prior levels, not even close. But we're anticipating that that's going to happen. And that's what will cause Q4 to be what it is.

Victor, next question please.

A couple of questions here. I wanted to spend a moment on the ACC data. What did you think about the two-year data? We did get some pushback comments from investors that at the two-year mark the TAVR versus SAVR results close the gap a little bit. I would like to see your thought or hear your thoughts on that? And then I just want to go back to your comments on procedures. I'm trying to get my head around this concept of a catch-up in terms of the patients that are being delayed. Did you dial that in, in your thought process for sort of a normal fourth quarter and/or are these patients ultimately just left out of the system? Thank you.

Yes. I would like to follow up on your second question, Joanne, and address your first one. Overall, we were extremely pleased with the two-year outcomes of SAPIEN 3 in low-risk patients. This was originally a one-year trial with a one-year endpoint, but we decided to follow these patients for 10 years, allowing for annual snapshots in the future. While the numbers are getting closer together, it's important to note that TAVR remains superior to surgery at two years and continues to show numerical advantages. The numbers are quite small at this point, meaning just a few deaths or strokes can shift the results from statistical superiority to being viewed as equivalent. Although there are small differences, we remain very encouraged by the findings. Regarding your second question about catching up and resuming normal treatments, are you asking about patients who were not treated in 2020?

Yes. Because we have been trying to think about, okay, patients who are deferred now, at what stage should they come back into the system and the answer may be at the end of the year, 2021 or sadly never?

Yes. So if this is a really tough time for patients. And ultimately, there may be some structural heart patients who’ve delayed their treatment, who never get treated. And just because of the deadly nature, some are not likely to survive. If you just run the numbers here, it gets to be an extraordinarily large group of patients, and that distresses us greatly. It's just difficult times, the disease is clearly progressive. And so we know about some patients already anecdotally who have passed away on the waiting list, which is very sad. But no, this is a tough time as the world has turned their attention to COVID. It's not a great set of conditions for structural heart patients.

I guess from that line of thinking, I was just hoping you might give us some color that you're getting from your customers, or that you're thinking about in terms of supporting them through kind of the different phases of recovery? Have you talked to your possible customers about how they're going to manage in triage some of the structural heart cases in the early phases of recovery and how they'll move to more normal operations to kind of inform some of your assumptions here?

Yes, thanks. Yes, we certainly have had a lot of conversations about that. So what I'll share here will be somewhat anecdotal. It varies a great deal by region. You can imagine the situation in New York City is very different than what you might see in other parts of the U.S. and in other parts of the world, frankly. In the U.S. there are many people that are turning their attention to trying to get back to doing procedures again. You know hospitals are very dependent on doing procedures to be able to maintain their income and they also know that there are patients out there with real needs, and so they want to get back to it. There are various state regulations that they need to work through, and then there's just a lot of machinery to start again. And in our case, we have to influence patients to come in and get screened again and begin that whole process. And so when procedures stop, screening also stops. And so that's the restarting of the system that's going on right now. And it's going to take some time, but I think people are clearly motivated to get it going, and it is going to be highly variable, depending on where you are.

Just one follow-up. I know you've paused the TMTT trial, which makes sense. Do you have any sense for in your framework that you laid out here when you might be able to get those restarted?

Yes, that's a difficult situation for us. Given the pause, we will open individual centers as they are ready. If you're asking us for a general timeframe, it will likely be around two quarters. The restart will happen on a site-by-site basis. However, I think it's reasonable to expect that we would be disappointed if it took much longer. We understand that many motivated clinical investigators are eager for us to resume, and I believe they will continue to support us in getting started again.

Hi, Mike. A couple of questions. One bigger picture to start with. And you've touched on this a little bit, but as you reflect on - as I start to reflect on a post-COVID environment, and again, you've highlighted that patients are going to be anxious coming back to hospitals, etc. It seems to me there's an argument that the post-COVID recovery environment actually accelerates TAVR adoption, given the desire to get patients better, faster, get them out of the hospital quicker. The opposite side of that coin obviously is that could accelerate pressures on surgical valve growth outlook. Is there any merit in that accelerated TAVR and pressure on surgical valve thought?

Yes, thank you, Rick. As you can imagine, there are many possible outcomes. While it's difficult to predict, I believe there will be several individuals motivated to restart TAVR procedures. The short hospital stays and the fact that it doesn't require an ICU could inspire more people to pursue this treatment, especially given the seriousness of AS. Therefore, there is a possibility that TAVR adoption could pick up more quickly. However, we also need to recognize that we've seen the system come to a standstill, so this will be a process of restarting. Patients are apprehensive, and getting them to return—whether to hospitals or to spaces created by hospitals where they can feel at ease—will be crucial for revitalizing the system. There are just so many different possibilities to consider.

As a follow-up question, you mentioned several times that there will be informative updates, which sounds quite significant to me at EuroPCR regarding PASCAL, Cardioband, and EVOQUE. Can you share your thoughts on what these updates may entail and what we should be anticipating? Thank you.

Yes. Thanks very much, Rick. Yes, there are going to be a number of things accompanying probably a late-breaker and some oral abstracts and some posters, but probably two of that we call your attention to, on EVOQUE in the tricuspid position. I believe the early experience is going to be shared, which I believe is going to be 19 patients at 30 days. And so that will be the first time that the community has had a chance to see how that valve performs. And then in PASCAL, the CLASS study, actually the CE Mark study that evaluated both DMR and FMR patients, we will have 62 patients at one year and 109 patients at 30 days and six months. So it will be a nice informative update on those product lines for sure.

So Mike, how are you thinking about the pace of recovery for TAVR and maybe SAVR compared to other types of procedures? Do you think valve procedures will come back faster because they're more medically necessary or do you think the advanced age of the patients makes them reluctant to go to hospitals? How do you think about that dynamic? And I had one follow-up.

Yes. Thanks, Larry. I don't have a strong view on other procedures. You know us, we're so focused on structural heart diseases, that's where we really put our energy. What we do know is that AS is particularly deadly and there is some data that reinforces that. And so that makes us think that there is going to be a strong motivation for people to do this. And at a time when hospitals really want to get back to providing the care, and also I think they're frankly concerned about their economics, here is something that they can do that I think is really good for patients and it also helps them get back on their feet again.

That's helpful. And then, Scott, just on the guidance, just to put a finer point on it. Q3, should we be thinking about that as basically kind of flattish year-over-year or actually maybe down a little bit? Thanks for taking the questions.

Yes. Thanks for the question, Larry. It's tough to say, and we've intentionally not tried to breakout Q2 versus Q3 versus Q4. What we know is that our assumption is based upon second quarter being the most severe followed by a gradual recovery in the third quarter and a fourth quarter that ultimately better resembles our original expectation for sales. But where that crosses from being below our original expectations to meeting our expectations, there is something that we just can't put a fine point on it at this point.

Yes. Thanks for taking the question. I wanted to follow-up on Bob's question about the second quarter. So we pretty much have one-third of the quarter in the bag here and $700 million to $900 million. I was hoping you could give us a little bit of what has to happen from this point to get to $700 million, what has to happen to get to $900 million? I know there is a wide range of outcomes. But just help us understand what hits the bottom end from here, what hits the top end? Thanks.

Yes. We're not accustomed to slice it by month, Robbie, but I'll try and give you a little bit of color here. So a lot of it is going to depend on what COVID does itself and whether COVID keeps receding or not. Based on what we've seen so far, there needs to be improvement from where we are today to get to the middle of the range or certainly the top of the range. If we continue where we are today, we're going to be much closer to the bottom of the range. And it's just a wide range of possibilities in terms of how this quarter will play out. We probably never had a quarter that has a greater level of uncertainty as the second.

Got it. And Scott, I love hearing when companies do right by their employees during tough times. I was wondering if you help us think about some of the moving pieces down the P&L here for gross margin, SG&A and R&D, it sounds like you're investing in R&D. But maybe just help us put it all together down the P&L and how you reach the EPS? Thanks.

Yes, sure. So on gross margin, there are a number of things that are really unusual that are happening right now, and it includes obviously starting with reduced manufacturing volumes. We're proactively managing our capacity and our supply chain. We are looking for alternatives in terms of logistics and trying to offset expedited freight that will show up in our gross margin in a negative degree. And we just got other extra costs that are involved in supporting our manufacturing operations in our seven facilities around the world. So there will be pressure on gross profit. In terms of SG&A, we've had some natural declines just in travel and conferences and the timing on headcount growth because we're still a growth company. But there are just some natural headwinds to being able to complete those investments on the time schedule that we had originally envisioned. In R&D, most of it is just delays in clinical trial enrollment that we've talked about, and that's what's going to a certain extent gate our ability to invest in that R&D growth. And then you get into tax and shares outstanding, which we've talked about a little bit. I'm not sure those are really as dependent upon the recovery or specific to Q2 being so soft. Does that get to your question?

Yes. And I just might add that we have tried to really focus on prioritizing and protecting our employees and their jobs, and we're not planning layoffs associated with this pandemic. And as I said earlier, we continue to support cases in every state and the countries around the world and we're going to do everything we can to continue to be a great partner through this entire process.

Thank you for having us. I have a couple of follow-up questions. First, Mike, could you discuss the new centers? This has been an important trend for market development and expansion across the U.S. What are you observing and what do you anticipate in the next couple of quarters as the system begins to restart? I also have one more follow-up.

Yes. I don't have specific data on that. We currently estimate there are more than 700 centers, and after the NCD that was approved last year, we anticipate reaching around 850 in total. I don't know the exact number at the moment. Since the onset of COVID, we've paused training and are focusing on the existing sites, which may affect the adoption rate to some degree. However, the key factor influencing the way Q1 was progressing before COVID was the influx of new patients, which wasn't limited to new sites; it was widespread.

That's helpful. Thank you for that. And then just the other on sort of some of the other geographies, and we're all quite focused obviously on what's happening in the U.S. and the hopeful signs that some hospitals that you mentioned are starting to open back up or thinking about opening back up to more like the surgeries. But in other geographies, can you give us some sense of either re-improving or reemerging elective procedures or the ability anywhere else in the world or how would you compare the rest, let's say, Europe and Asia to what you're seeing here?

Sure. So we would say in Europe, we saw a phenomenon that was very similar to the U.S., which is a strict drop-off in March. Within Europe, some countries got hit much harder than others. But the net-net effect was Europe wasn't so different than the U.S., and we actually think that the recovery in Europe and the U.S. may not be so different. Interestingly enough, procedures in Japan in Q1 were not meaningfully impacted by COVID-19. We think that there is going to be a more pronounced effect in Q2. And it just seems from our perspective that the kind of the wave of COVID-19 patients in Japan is trailing what's happening in the U.S. and Europe by a matter of maybe weeks of some sort tough to know for sure. Those are the biggest markets. I mean there are other places around the world where TAVR is still young, like Australia and Latin America where there is still growth and not much impact from COVID. But those are kind of small numbers by comparison.

I just wanted to build on these comments you made about the fourth quarter and getting back to where you thought you would have been kind of prior to this. And so when one thinks about kind of 2021, right, do you think about a growth rate in 2021 that is kind of normalized or do you think we actually will be at kind of a heightened growth rate in that year as we maybe make up some of these lost procedures in 2021? When do you expect the fall-off to be as significant on a dollar basis as we're going to see here in 2020?

Yes. I apologize, Raj. It's too early for us to provide extensive details about 2021, but you can infer that when we mention starting to see recovery in the fourth quarter, it suggests that we should have favorable comparisons in 2021. Therefore, I expect that to be the case.

Understood. And maybe just as a follow-up, a little bit of a follow-up to the last question. Germany is getting set to open up in a broad way, I guess the entire country in just next week. Have you picked up anything in terms of in anticipation for procedures to start to ramp in Germany or any early feedback as that country gets ready to open up again?

Yes. We don't have anything broad at this point, Raj, but we do hear anecdotal comments. I mean the physicians there are very active researchers and many of them want to start conversations about getting going again. So there are a few anecdotal conversations about that, but really no hard data about how Germany will start up.

Thanks for squeezing me in, and I'll try to ask both of them at the same go. One, Mike, back to ACC, your competition was making some noise on bicuspid data in low risk. Just curious to get your views on have you seen any impact in the market? And related, on the competitive front, any update on the mitral litigation side? Thank you.

Sure. Yes, thanks, Vijay. So there's a lot of data on bicuspid and there has been some extensive published real-world experiences. At Edwards, you know we're not contraindicated for these patients that we treat bicuspid patients with SAPIEN valves all the time. And our real-world outcomes in these patients have been outstanding with the balloon-expandable SAPIEN 3. So we think that body of evidence is just going to grow and we expect there will be more data at cardiology conferences in the future. Your other question was about the IP. Yes, so big picture, I think we believe that our IP positions and we're prepared to defend them. We don't believe litigations necessarily in the best interest of patients, and we're going to hope that we can move through this. But there is a lot of litigation going on in a lot of countries with a lot of dates. And so it will be a continued source of noise at this point.

I have one question regarding the recovery and the comments about losing some patients. I understand these patients are very sick, but in my research, I’m hearing that the most urgent cases, where their disease will progress to the point of being re-hospitalized or not surviving in the coming months, are being addressed. So, will these patients necessarily be lost? I’m feeling more optimistic about the recovery curve, as you may have noticed with my upgrade. I’m trying to gauge your confidence that this situation will indeed unfold as expected, because it seems to me that many of these very ill patients are actually being taken care of. Thank you.

So you're right, Danielle. Certainly, there are very sick patients that aren't being done, right, we're not doing zero. But it's much lower than we expected to be doing at this time. And what I was trying to express, if you just think about it in a growth sense and it's a little bit dehumanizing. But if you think about what we were going to do and how many patients we're going to be treated during 2020 compared to the number of patients that we believe we're going to treat now, it's a much smaller number, and that's a deep concern. We know that many AS patients do not get treated. And that's why that's actually one of the reasons why we are so enthusiastic about our work because we can get after this population that's not treated. So that pool of untreated patients just gets bigger, and we know that there is mortality associated with that. Thanks for your continued interest in Edwards. Scott, Mark, and I welcome any additional questions by telephone.

Thanks for fitting me in here. I guess, I'll just keep it to one. Just in terms of your outlook for the competitive landscape, when a competitor is in the market, potentially a new competitor with an approval later this year, any change in terms of all in terms of the competitive headwinds, because we just imagine that getting cases proctored and moving forward with the launch could be a little bit challenging for the competitors. I just wanted to hear your thoughts on that? Thanks again.