Edwards Lifesciences Corp (EW) — Q4 2020 Earnings Call Transcript

Thanks, Diego. Good afternoon and thank you for joining us everyone. 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 fourth quarter 2020 financial results.

Thank you, Mark. Before we discuss fourth quarter's results and our expectations for 2021 and beyond, I want to spend a minute reflecting on 2020. Structural heart patients were severely impacted beginning in March, experiencing significant difficulties entering the system, which also had a profound impact on second quarter procedures. Even though healthcare systems adapted to the challenge, the resurgence of COVID that began late in the year continues to impact structural heart patients who need care. Despite unprecedented challenges throughout the year, I'm proud of our team's steadfast dedication to our patient-focused strategy. We continue to invest in developing solutions that extend lives, improve the quality of life, and offer greater value for the healthcare system. Along those lines, we celebrated some exciting milestones in 2020 that directly impacted patients. In TAVR, despite headwinds, more than 100,000 patients benefited from treatment with SAPIEN valves worldwide.

Hey, thanks a lot, Mike. Today, I'll provide a wrap-up of 2020 including detailed results from the fourth quarter as well as provide an update on guidance for the first quarter and full year of 2021. Despite the wave of COVID that began during the fourth quarter, we are pleased that we were able to achieve our sales guidance ranges across all product lines. Sales in the fourth quarter were flat year-over-year on an underlying basis and adjusted earnings per share grew 2% to $0.50 versus the prior year. GAAP earnings per share was similar at $0.49. For the full year 2020, sales increased 1% on an underlying basis to $4.4 billion, adjusted earnings per share was flat at $1.86, and we generated over $700 million of adjusted free cash flow. During 2020, we achieved cost efficiencies, but we intentionally did not take any actions to significantly impact our employees or reduce investments supporting our long-term strategy. I'll now cover the details of our results and then discuss guidance for 2021. For the fourth quarter, our adjusted gross profit margin was 75.3% compared to 75.8% in the same period last year. This reduction was driven by a negative impact from foreign exchange and incremental costs associated with responding to COVID, partially offset by lower performance-based compensation. We continue to expect our 2021 adjusted gross profit margin to be between 76% and 77%. Our rate should be lifted by an improved product mix, partially offset by a negative impact from foreign exchange. Selling, general and administrative expenses in the fourth quarter were $339 million or 28.4% of sales compared to $347 million in the prior year. This decrease was primarily driven by reduced spending resulting from COVID and lower performance-based compensation, partially offset by the impact from foreign exchange. We continue to expect full year 2021 SG&A as a percentage of sales, excluding special items, to be 28% to 29%, which is similar to pre-COVID levels. Research and development expenses in the quarter grew 1% to $196 million or 16.4% of sales. This small increase was primarily the result of higher investments in TMTT and costs associated with discontinuing our SUTRAFIX program, partially offset by reduced performance-based compensation. For the full year 2021, we continue to expect R&D as a percentage of sales to be in the 17% to 18% range, similar to pre-COVID levels, as we invest in developing new technologies and generating evidence to expand indications for TAVR and TMTT including enrolling seven clinical trials. Taxes, our reported tax rate this quarter was 13.1% or 13.9% excluding the impact of special items. This rate included a 350 basis point benefit from the accounting for stock-based compensation. Our full-year 2020 tax rate, excluding special items, was 12.5%. We continue to expect our full year rate in 2021 excluding special items to be between 11% and 15%, including an estimated benefit of 5 percentage points from stock-based compensation accounting. Foreign exchange rates increased fourth quarter reported sales growth by 150 basis points or $18 million compared to the prior year. At current rates, we now expect an approximate $100 million positive impact or about 2% to full year 2021 sales compared to 2020. FX rates negatively impacted our fourth quarter gross profit margin by 150 basis points compared to the prior year. Free cash flow for the fourth quarter was $287 million, defined as cash flow from operating activities of $400 million, less capital spending of $113 million. Now turning to the balance sheet, we have a strong balance sheet with approximately $2.2 billion in cash and investments as of the end of the year. In addition, we have an undrawn line of credit of up to $1 billion. We have public bonds outstanding of about $600 million that don't mature until 2028. Average shares outstanding during the fourth quarter were 632 million, relatively consistent with the prior quarter. We now expect average diluted shares outstanding for 2021 to be between 630 million and 635 million. So before turning the call back over to Mike, I'll finish with financial guidance for 2021. We are maintaining all of our previous sales guidance ranges for 2021. For total Edwards, we expect sales of $4.9 billion to $5.3 billion. For TAVR, we expect sales of $3.2 billion to $3.6 billion. For TMTT, we expect sales of approximately $80 million. We expect Surgical Structural Heart sales of $800 million to $900 million and Critical Care sales of $725 million to $800 million. For the full year 2021, we continue to expect adjusted earnings per share of $2 to $2.20. For the first quarter of 2021, we project total sales to be between $1.1 billion and $1.2 billion and adjusted earnings per share of $0.43 to $0.50. And so with that, I'll pass it back to Mike.

Thanks, Scott. While a year like 2020 could threaten to cause persistent disruptions, our strategy of patient-focused innovations remains unwavering. As we look to 2021 and beyond, I'm as excited as ever about the work happening at Edwards and more importantly what we envision for the future of patient care. I continue to believe we are poised for success and that our innovation and cultural imperative to put patients first will drive strong organic sales growth and create long-term value.

Thanks a lot, Mike. With that, we're ready to take questions. 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 re-enter the queue and Management will answer as many participants as possible during the remainder of the call. Diego?

Great and good afternoon. Mike, I was wondering, since we just met in December, if you could comment on maybe just two quick things. The first question would be just how different is the selling environment out there right now versus what you were seeing at the time of the Analyst Day? On the margins, are things getting a little worse, are they getting a little better? Just would love some thoughts on that topic, and then I have one quick follow-up.

Yeah. I would say in general, it's been a little worse. It was already trending negative, and we anticipated it was going to be a tough winter, and it certainly has turned out to be that way, but probably a little worse since that time.

Okay. And then the other thing I'd love to get your quick comments on is just thinking a little bit long-term on the tricuspid opportunity. The reason I ask is that obviously, Abbott has reported some numbers too, and their tricuspid business is already annualizing at over $50 million. If you just take the results this quarter and multiply it times four, it looks like some pretty robust interest in tricuspid repair right off the bat, so I would love your thoughts on that market and how quickly you think that could develop and what hurdles might be. Thank you.

Yeah. Thanks, Bob. It's interesting. The tricuspid market size in terms of the number of patients is very large. It’s certainly as big as the mitral opportunity, and we've talked about the fact that that patient group is greatly underserved. So in terms of people actually getting procedures, you're talking about 1%, 2%, 3%—very low numbers. So if we can actually develop a great solution for them, it's going to be an important deal. They don't have great answers. Therefore, the burden is going to be on us to develop great solutions and to create evidence that we are actually doing that. We have a high level of confidence that we can do it; of course, mitral is going to be bigger here in the near term. It's got an earlier start, but we think there is a lot of potential in this. The patients themselves are very diverse, and that's why we think, when it's all done for tricuspid patients, it's going to require a portfolio.

Great. Thanks for taking the question. Mike or Scott, I just want to follow up here on guidance for a second. Obviously, resurgence trends have probably trended more negatively than when you sort of gave earlier guidance in December. So while things are trending more negatively, you're still sort of holding things that are really going to drive even more significant inflection points, if you will. Of course, we've got a great team, a nice reputation, and some really differentiated products, but the data is going to be the bigger issue, and again it's got much more potential than this in the long run.

Okay. Well, thanks for all the continued interest in Edwards. Even though COVID is challenging right now, we do see better days ahead, and we're very optimistic about the future of Edwards Lifesciences. So Mark, Scott, and I welcome any additional questions by telephone. And with that, back to you, Mark.