Edwards Lifesciences Corp (EW) — Q4 2022 Earnings Call Transcript

Thank you very much, Diego, and good afternoon, and thank you all for joining us today. With me on today's call are Mike Mussallem, Chairman and Chief Executive Officer; and Scott Ullem, our Chief Financial Officer. Also joining us for the Q&A portion of the call are Bernard Zovighian, President of Edwards Life Sciences; Larry Wood, our Global Leader of TAVR and Surgical Structural Heart; Daveen Chopra, our Global Leader of TMTT and Katie Zimon, our Global Leader of Critical Care. Just after the close of regular trading, Edwards Lifesciences released fourth quarter 2022 financial results. During today's call, management will discuss those results included in the press release and the accompanying 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 are not 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 were made, and Edwards does not undertake any obligation to update them after today. Additionally, the statements involve risks and uncertainties that could cause actual results to differ materially. Information concerning factors that could cause these differences and important product safety information may be found in the press release our 2021 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 the terms constant currency, underlying and adjusted, management is referring to non-GAAP financial measures. Otherwise, they are referring to GAAP results. Reconciliations between GAAP and non-GAAP numbers mentioned during the call are included in today's press release. With that, I'd like to turn the call over to Mike for his comments.

Thank you, Mark. During 2022, our company stayed focused on the long term, making meaningful progress on strategic milestones with the potential of transforming patient care. While the challenging environment negatively impacted sales, we still grew 8%. Looking forward, we remain optimistic that the health care environment will gradually improve, and we expect 9% to 12% sales growth in 2023. We didn't pull back on investing in innovation because of the pandemic, and we didn't pull back because sales fell a little short. We continue to aggressively invest during this challenging period, which positions the company for sustained leadership in a new era of structural heart and critical care innovation. Looking back at 2022, in TAVR, we made important strides in executing our long-term strategy. We received approval and launched the innovative SAPIEN 3 Ultra RESILIA valve. In TMTT, each of our platforms demonstrated promising clinical performance, and we received approval for PASCAL Precision in the U.S. and Europe. In Surgical Structural Heart, we extended our leadership position through the launch of MITRIS in the U.S. And in Critical Care, we continue to drive adoption of our transformative smart recovery technologies. Although our initial sales expectations for 2022 anticipated a better environment, we delivered balanced contributions across each of our product groups and regions. We achieved 12% growth in adjusted earnings per share while maintaining R&D at more than 17% of sales, which reflects our commitment to driving durable organic sales growth. Consistent with our cash deployment strategy, we opportunistically repurchased stock at an accelerated level in 2022. We continue to invest in our production capacity in anticipation of future growth and made a series of external investments in promising early-stage technologies. Turning to our fourth quarter financial results. Consistent with our guidance, total company sales grew 7% on a constant currency basis to $1.3 billion. Our broad portfolio of innovative therapies drove this growth despite the health care disruptions in a number of our key geographies. In TAVR, full year 2022 global TAVR sales of $3.5 billion increased 7% on a constant currency basis, building on nearly 20% growth in the year ago period. Sales were below our original guidance of $3.7 billion to $4.0 billion due to foreign exchange headwinds and COVID-induced health care challenges in key countries. In 2022, we announced the approval of SAPIEN 3 Ultra RESILIA in the U.S. Separately, we continue to advance enrollment in our PROGRESS pivotal trial for moderate AS patients and gained significant learnings from our alliance pivotal trial to study the next-generation TAVR technology, SAPIEN X4. These transformative developments reinforce our long-term confidence in the strong growth of transcatheter-based aortic valve interventions. In the fourth quarter, our global TAVR procedures were comparable with Edwards growth. Our global TAVR sales of $868 million increased 5% year-over-year on a constant currency basis, consistent with our expectations. Sales were up slightly over Q3 in dollars and on a constant currency basis, and local selling prices were stable. In the U.S., Edwards fourth quarter TAVR procedures grew in the mid-single-digit range. As expected, our fourth quarter U.S. TAVR procedure volumes were impacted by the U.S. hospital staffing constraints and the holiday season slowdown. We estimate that our share of procedures was stable. Growth in the U.S. was higher in larger volume centers and in states with fewer COVID restrictions as measured by the Daxferns Containment and Health Index. We're encouraged by recent hiring trends, which suggests that hospital employment is rebounding. As we mentioned, we began the introduction of SAPIEN 3 Ultra RESILIA in the U.S. The RESILIA technology addresses one of the primary causes of reintervention following heart valve replacement and is demonstrating a strong track record of performance. As of now, this newest valve has been introduced in approximately 10% of U.S. TAVR centers and physician feedback has been encouraging. Outside of the U.S., in the fourth quarter, Edwards TAVR procedures also grew in the mid-single digits, and we estimate total procedure growth was comparable. In Q4, geographies outside of Europe and Japan grew even faster in the quarter. Long term, we see excellent opportunities for growth as we believe international adoption of TAVR remains quite low. In Europe, fourth quarter procedures grew in line with the global rate. Market growth continued to be impacted by a bump in COVID cases and staffing shortages, which reduced hospital capacity, particularly in larger countries such as Germany. And even though there are a broad range of competitors, our leadership position and local selling prices remained stable throughout the year. Importantly, a cost-effectiveness study published earlier this month demonstrated that TAVR with SAPIEN 3 was economically beneficial when compared to surgical aortic valve replacement in treating patients with low surgical risk. The data suggests that TAVR enhances quality of life and offers a cost-effective option over the long term. These findings are consistent with the cost-effective outcomes for the use of SAPIEN 3 in France, Italy, and Spain. In Japan, fourth quarter procedure growth was much slower than expected due to an extended COVID wave and continued restrictions, which limited hospital staffing and capacity. We expect these factors to diminish substantially over the course of 2023 and look forward to launching SAPIEN 3 Ultra RESILIA in Japan later this year. We remain focused on expanding the availability of TAVR therapy driven by the fact that AS remains a significantly undertreated disease amongst this large elderly population. In summary, our outlook assumes COVID-related challenges improve during 2023 as hospital resource constraints decrease. We remain positive in our outlook for 2023 underlying TAVR sales growth of 9% to 12%, consistent with the range we shared at our December investor conference. We remain confident in this large global opportunity that will double to $10 billion by 2028, which implies a compounded annual growth rate in the low double-digit range. Turning to TMTT. Since launch, we have proudly treated more than 10,000 patients with the PASCAL repair system. We achieved significant milestones in 2022 and made meaningful progress toward achieving our vision to transform care for patients with mitral and tricuspid disease. Following the Class II presentation at TCT and FDA approval in Q3, we initiated the introduction of the PASCAL Precision system in the U.S. Initial feedback from clinicians has been positive, and we're pleased with the patient outcomes to date. Class IID full cohort of 300 patients with 1-year follow-up will be presented in the second half of 2023. In Europe, the PASCAL Precision launch is ongoing with a focus on bringing this latest advancement to our existing centers as well as expanding into new centers. Also aligned with our commitment to generate high-quality scientific evidence, we continue to advance enrollment in our Class IIF pivotal trial for patients with functional mitral regurgitation. In mitral replacement, we're making good progress on the enrollment of the ENCIRCLE pivotal trial for SAPIEN M3 and expect to complete enrollment of the main cohort around the end of 2023. The sub French transfemoral valve leverages the SAPIEN 3 platform with a recapturable repositionable dock. Separately, we've completed enrollment in the MISCEND early feasibility study with the Eos valve and are incorporating the learnings from this early experience into our next generation. We believe the Eos platform has the potential to be an excellent option for mitral patients, who have a poor prognosis and limited treatment options. Shifting to tricuspid and our strategy of advancing the body of clinical evidence, we are currently enrolling two pivotal trials studying both tricuspid replacement and repair, TRISCEND II and the Class II TR. We prioritized enrollment in our TRISCEND II study, that study trial that's studying EVOQUE as it addresses the large population of patients who are suffering from debilitating symptoms and have few treatment options. TRISCEND II is on track for completion of enrollment in the first half of 2023, and we expect EVOQUE CE mark by the end of this year and U.S. approval around the end of '24. We're very pleased with the recent tricuspid data presented at PCR London Valves meeting, which we reported favorable results from both our TRISCEND study of EVOQUE and the TriCLASP post-market clinical follow-up for PASCAL. In Europe, clinicians are very positive about the performance of our differentiated PASCAL Precision system in their tricuspid patients, and we're looking forward to bringing this therapy to patients in the U.S. following the Class II TR trial. Turning to the sales performance of TMTT. Fourth quarter sales of $32 million were consistent with our latest guidance and driven by the continued adoption of PASCAL in Europe supported by the early initiation of PASCAL Precision in the U.S. Full year global sales were $116 million, up nearly 50% on a constant currency basis versus the prior year. In 2023, we expect TMTT sales of $160 million to $200 million. We look forward to advancing our vision to transform the lives of patients with mitral and tricuspid valve disease through the milestones outlined in our recent investor conference. We remain committed to bringing this differentiated portfolio of therapies to patients with these life-threatening diseases and believe our strategy positions us well for leadership. In Surgical Structural Heart, full year global sales were $893 million, up 6% on a constant currency basis versus the prior year. Fourth quarter 2022 global sales of $224 million increased 8% on a constant currency basis over the prior year. We are encouraged to see strong global growth driven by the increased penetration of our premium RESILIA products despite COVID challenges in certain regions. Although hospital staffing shortages continue to be a concern, we believe that heart valve surgery was prioritized. We have seen strong momentum of the RESILIA portfolio globally. We believe that surgeons value the features and benefits of this advanced tissue technology for both aortic and mitral surgical valve replacement procedures. We saw adoption of the MITRIS RESILIA valve in the U.S. increase in the fourth quarter. Built upon previous generations of proven mitral valve technology, MITRIS offers greater ease of use and is designed to facilitate potential future transcatheter interventions. We are growing the large body of RESILIA evidence with our new Momentis clinical study to demonstrate the durability of this tissue in the mitral position. Enrollment in this study was initiated earlier this month. In summary, we remain confident that our full year 2023 underlying sales growth will be in the mid-single digits for Surgical Structural Heart, driven by the adoption of our most advanced technologies and growth of overall heart valve surgeries. Turning to Critical Care. Full year global sales of $855 million increased 7% on a constant currency basis versus the prior year. Fourth quarter Critical Care sales of $225 million increased 13% on a constant currency basis over the prior year. Growth was driven by contributions from all product lines and regions led by HemoSphere and Smart Recovery. In our Smart Recovery portfolio, adoption of FloTrac and ClearSight sensors featuring our unique hypotension prediction index algorithm RECONNECT remains strong. Demand for our pressure monitoring devices used in the ICU due to elevated hospitalizations in the U.S. As discussed at our recent investor conference, we remain enthusiastic about our pipeline of critical care innovations, highlighted by smart recovery technologies designed to help clinicians make better decisions and get patients home to their families faster. And now I'll turn the call over to Scott.

Thanks a lot, Mike. Today, I will provide a wrap-up of 2022, including detailed results for the fourth quarter as well as provide guidance for the first quarter and full year of 2023. So as Mike mentioned, our sales of $1.3 billion in the fourth quarter grew 7% on a constant currency basis, despite the health care disruptions in a number of our key geographies. Our gross profit margin was healthy, even excluding the temporarily inflated rate due to FX. Combined with sales growth and disciplined spending, this resulted in adjusted earnings per share growth of 25% to $0.64. GAAP earnings per share was $0.65. Obviously, we were disappointed with our stock performance last year. The only upside to the poor stock price performance was that it provided an opportunistic time to repurchase shares more aggressively. During the fourth quarter, we repurchased $750 million of stock through an accelerated share repurchase program. And in total, we repurchased $1.7 billion of stock last year. Average shares outstanding during the fourth quarter fell to $616 million. We have approximately $900 million remaining under our current share repurchase authorization. For the full year 2022, sales increased 8% over the prior year on a constant currency basis to $5.4 billion. Adjusted earnings per share grew 12%, and we generated nearly $1 billion of free cash flow. We expect our sales growth rate to expand in 2023 with a gradual improvement in hospital staffing. Although still early in the year, we saw encouraging signals during Q4 and a good start so far in Q1, which reinforces our confidence about the 9% to 12% full-year range. We are maintaining all of our previous sales guidance ranges for 2023. Absent big moves in FX, we expect total company sales of $5.6 billion to $6 billion, TAVR sales of $3.6 billion to $4 billion, TMTT sales of $160 million to $200 million, Surgical Structural Heart sales of $870 million to $970 million, and critical care sales of $840 million to $940 million. For the first quarter, we're projecting sales of $1.37 billion to $1.45 billion, and adjusted earnings per share of $0.58 to $0.64. Now I'll cover details of our results. Our adjusted gross profit margin in the fourth quarter was 81% compared to 76.8% in the same period last year. This improvement was driven by the expected positive impact from our FX program which includes hedge contract gains and natural hedges that offset the negative sales impact from the weakening of the euro and the yen against the dollar. At current foreign exchange rates, we continue to expect our full-year 2023 adjusted gross profit margin to be between 76% and 78%. At current exchange rates, the reduction in this year's forecasted gross profit margin versus 2022 reflects 250 to 300 basis points of reduced benefit from FX plus some incremental inflation. SG&A expenses in the fourth quarter decreased 3% over the prior year to $411 million or 30.5% of sales, primarily due to the weakening of the euro and the yen against the dollar and partially offset by continued investments in the ongoing build-out of the U.S. TMTT commercial team and our high-touch model for TAVR. We continue to expect full-year 2023 SG&A expenses as a percent of sales to be between 29% and 30%. Research and development expenses in the quarter were consistent with the prior year at $232 million, or 17.2% of sales. We continue to expect R&D expenses in 2023 to be between 17% and 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT growth. Turning to taxes. Our reported tax rate this quarter was 13.3% and excluding the impact of special items, it was 14%. We continue to expect our 2023 tax rate, excluding special items, to be 13% to 17%. Foreign exchange rates decreased fourth quarter reported sales growth by six percentage points or $73 million compared to the prior year. At current rates, we now expect approximately flat year-over-year impact from foreign exchange to full-year 2023 sales. Foreign exchange rates positively impacted our fourth quarter gross margin by 230 basis points compared to the prior year. Finally, before turning the call back over to Mike, I'll finish with an update on our balance sheet and cash flow. We continue to maintain a strong and flexible balance sheet with approximately $1.2 billion in cash, cash equivalents, and short-term investments as of the end of the year. Free cash flow for the fourth quarter was $214 million, defined as cash flow from operating activities of $283 million, less capital spending of $69 million. In 2023, we expect free cash flow to grow to $1.0 billion to $1.4 billion. And with that, I'll pass the call back over to Mike.

Thank you, Scott. We've had solid financial performance and we expect higher growth in 2023 with a gradual improvement in hospital staffing. We believe our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. With that, I'll turn the call back over to Mark.

Thank you, Mike. Thank you, Scott. We are now ready to take your questions. Diego?

Great. And before I ask, Mike, we couldn't hear your closing remarks before. So I don't know if you're a little far away from the microphone or not.

Okay.

There we are. Okay.

If you like, I'd be happy to give you the conclusion, why don't I give that for a second. Thanks, Robbie, and we'll she’ll be first in line here. I just said, in conclusion, we're proud of the significant progress we made in advancing 2022 and the new transformational therapies for patients and delivering solid financial performance. We expect higher growth and meaningful progress in '23 with a gradual improvement in hospital staffing and growth across all major regions. And as the global population ages and cardiovascular disease remains the largest health burden, we believe that the opportunity to serve our patients will nearly double between now and 2028, and we're confident that our patient-focused innovation strategy can transform care and bring value to patients and health care systems worldwide. Thanks, Robbie. You're back up.

Great. Maybe to start, you talked about improving trends in TAVR and what you're seeing so far in the first quarter. Maybe you could spend a little more time and give us detail on exactly what some of those improvements were throughout the quarter, how the quarter trended, and what gives you confidence in the 2023 TAVR guide based on what you've seen so far?

Yes. I'm not going to get really deep into the quarter. As Scott mentioned, we had some really positive times during the quarter, where we saw some weeks that were really strong. We had the normal seasonality that we see in a quarter where things get soft around the holidays. But if I just elevate, I think what's on the mind of some of our investors that we had a few quarters of single-digit growth, but that certainly does not dampen our enthusiasm for our strategy. COVID just wasn't kind to structural heart patients. And we know that there are many consequences of COVID affected global growth companies, including Edwards. So if we just replay, 2020, COVID drove pretty much flat sales growth for us. In 2021, it was a big growth year. Edwards grew 18%. And in '22, although we experienced the lingering impact of COVID, tough comparisons, and all that we still grew 8%, and more importantly, in '23, we remain confident that sales are going to grow 9% to 12%. So we just think the environment is going to improve. We feel strongly that COVID's impact is transient and that treating these structural heart patients is going to again become a priority.

Great. And maybe as a follow-up, you're a couple of months into the PASCAL launch in the U.S. I'd love to get the initial feedback of what you're hearing from implanters from hospitals and how the first quarter has gone for you so far?

Yes. Sure, Robbie. This is Daveen. I'll take that question. So far at a high level, feedback from physicians in the PASCAL Precision launch has been really positive. I think people love the ease of use and the navigation improvements of this new system, and we know that we received early approval in the U.S. and Europe. So we're ramping the inventory to kind of improve these launches. And I think really in the U.S., our mantra is all about patient outcomes. We are really focused on our high-touch model. We're really focused on getting great clinical outcomes, gradual introduction, and we have a really strong training program. So, so far to date, we've been really impressed with that. And finally, I'll say, I think we've got great Class IID data that came out, obviously, at TCT. And we're convinced that they'll have a positive impact on the tier market overall, and we think that more and more physicians would be interested in using the PASCAL Precision system.

I wanted to start with a high-level question. Obviously, there's a lot of concerns on the U.S. TAVR market, Mike, as you mentioned earlier, among investors. I wanted to ask about next year '24, because it looks like you have three major trials being presented potentially early TAVR for asymptomatic, the unload trial for moderate AS, and TRISCEND II with EVOQUE for tricuspid. How do you guys rank these opportunities? And do you expect these three trials to accelerate your growth? And I have one follow-up.

This is Larry. Regarding early TAVR, I want to remind you that the trial has a 2-year endpoint. We have just finished the 1-year follow-up at the end of last year, meaning these patients have another year to go. Therefore, the data won't be available until 2024. The unload is in an IAS study, which is mostly beyond our control. We provide funding for that, but the timing of when the investigators present the data is up to them. I’ll now hand it over to Daveen for TRISCEND or Bernard.

Yes, I'll just make a comment on TRISCEND. So for the TRISCEND II study, we expect to obviously release the information in the second half of the year and release the information in the second half of the year. So we're excited about the data we think to help it. But as you pull up here, I think this all helps us make us feel good about this year and then driving into 2024.

Yes, this is Mike again, Larry. We are feeling optimistic about 2024. It is still early to provide guidance at this time, but looking forward, we believe that as the system adapts to COVID and it recedes, structural heart patients will be prioritized once more. We think there will be a strong desire to treat these patients. We are very pleased with our range of technologies and the clinical trials aimed at expanding indications. That is why we are confident about our outlook for 2028.

Yes. And just to add on to that, we did see, as Mike mentioned, we saw some weeks in Q4 that were really strong. And I think it's just evidence that staffing is gradually improving, maybe not as fast as we want. And we certainly saw some impact, especially around the holiday period, but we still have the SAPIEN 3 UR launch. We have other things that we're really excited about, and we feel very good about next year.

That's helpful. Just a quick follow-up. I didn't hear anything about the Alliance trial in Safety and X4, is there an update there?

Yes. No, we don't have any update there. I think what we said at the investor conference is we expect to be back in clinic this year, and we still anticipate that. But we don't have anything new to add.

I think for the first question, Mike, on the TAVR trends, I think U.S. was up mid-singles overall TAVR up mid-singles, implies international was mid-single. So maybe talk was there any China impact or what happened in international. And I think on the last call, you noted half the centers in the U.S. were up double digits, half then were flattish. Was that a trend that you saw this quarter as well? Or how are you thinking about TAVR progression here?

Yes. I'll talk a little bit about OUS and then Larry can get a little deeper in the U.S. So outside the U.S., procedures grew in the mid-single digits. And as we mentioned, outside of Europe and Japan, it grew even faster. In Q4, we experienced some challenges that resulted in sort of, if you will, the U.S. and Europe in mid-single digit as expected, Japan was worse than we thought, and the rest of the world was better than we thought. So that's sort of the way that things kind of netted out. We expect contributions from all the regions to be better in '23 as we are projecting that 9% to 12% growth rate. Your other question was trying to differentiate what was different in the U.S?

Sorry, half the centers were up double digits, I think, last quarter. Was there a trend that you saw this quarter as well?

Yes. We saw significant variation on a site-to-site basis. Clearly, some centers, and I think it maybe reflects kind of localized COVID restrictions. Some centers certainly did better than other centers. And gradually, we see that improving over time. But larger centers probably did a little bit better than the smaller centers. You had a question on China as well. China was certainly impacted, but for our TAVR business, it's such a small base. It's not a huge driver one way or the other.

That's helpful, Larry. And Scott, I have a quick question for you. It seems that the Q1 guidance at the midpoint is suggesting around 10% organic growth, approaching high single to low double digits. Can you explain what's contributing to the sequential acceleration from the high single-digit organic growth we observed in Q4? Has your visibility improved, or could you discuss the assumptions related to Q1?

Well, it ties to what we've been talking about so far on the call, our guidance for Q1 is $1,350 to $1,450 million, so call it $1.410 billion in sales at the midpoint of the range. Which is if you just sort of think about how the year is going to play out at the lower end of the 9% to 12% underlying growth rate guidance that we've given for sales. So your question is what happened between Q4 and Q1 and it ties back to we're just seeing generally a favorable environment, hospital staffing levels, and health care disruptions gradually getting a little bit better. And it's really very similar to what we talked about at our investor conference and reinforces our confidence about the 9% to 12% growth rate that we can achieve for the full year in 2023.

So I'll keep it to one question. Just on some of the comments that you talked about, Scott, I think in your comments around starting to see some encouraging trends early this year, gradual improvements maybe towards the end of Q4. Given the sort of many things that have been talked about as potentially having this sort of slowing impact on U.S. TAVR trends around staffing availability of nurses and the confusion around some centers being double digits and some being slower. Can you maybe talk about a few things that you are seeing that sort of bring you to sort of point out this encouraging trend? Which of these things are getting better? What gives you that encouragement?

Well, it's a good question. It's tough to isolate all the elements that are going into just the first couple of weeks of the year. But generally speaking, overall, it seems like the trends are favorable. This is what we expected to happen in 2023 with hospital staffing constraints abating, with overall disruptions in the healthcare system, getting a little bit better in the U.S. and outside of the U.S. And just the multiple different signals that we see and anecdotes that we hear give us confidence that we're on the right track. And again, looking to the 9% to 12% growth rate guidance for 2023. January, it's pretty early to say, but obviously, we wouldn't the signals that we've seen in January are reflected in the guidance that we've given in that $13.70 to $14.50 sales range for the first quarter.

I have two quick questions. It looks like you have an 81% gross margin in the fourth quarter, and your guidance for '23 relates to the reversal of your FX hedges. Can you explain if we should expect a straight-line decline over the next couple of quarters regarding that? Also, it seems like conditions are improving. Are you noticing wait lists emerging in various locations?

Why don't I take the first piece, and then I'll let somebody else jump in on the wait list question. Just in terms of gross margin, it's pretty simple. I mean there are a bunch of little moving pieces. We always get a little bit of benefit from mix. We get a little bit of benefit from all of the activities we have to improve efficiency in global supply chain. But really, the difference between the gross margin in the fourth quarter of 2022 and the full year 2022 versus the guidance we've given for 2023 and is all FX. FX hits us with both hedge contracts that we have as well as inventory valuations outside of the U.S., that's really the source of the decline from 2022 to 2023 gross margins.

And on the backlog question, Joanne, as we've mentioned before, we don't have great analytics on backlogs. A lot of it we just hear anecdotally from customers. But what we do here say, yes, indeed, there is backlog that's spotty and across the U.S. and other countries for that matter.

Mike, I wanted to go back to the COVID-related headwinds in the U.S. and one hypothesis that I think concerns investors what you guys really haven't talked much about is the idea that excess mortality in your patient population could have depleted your pool and that, that might take longer to normalize than something that's a little bit simpler like hospital staffing. Do you see that as a significant factor? Or do you still view it as a bottom of the funnel issue with capacity?

Yes. Just at the highest level, sadly, for these patients, it's true. There has to be some mortality that goes on. They just don't wait well. And we know that, that's a very serious consequence of the environment that we're in. Having said that, this isn't a small pool. It's a really, really big pool. And so even the sad mortality that comes from this is not close to really putting a dent in the number of patients that could legitimately use help through having their severe AS treated.

Okay. That's helpful. And then just one on mitral. Any line of sight into Class I and T completing enrollment of those studies have been going on for a while and I don't think you guys have provided a timeline there.

Yes, this is Daveen. I'll provide an update on Class II TR first and then discuss IIF separately. Regarding Class II TRs, we believe that while tier for tricuspid is important, EVOQUE may be even more significant for tricuspid patients. Given the large and diverse population, we need a range of options. We are committed to conducting two pivotal studies: TRISCEND II for EVOQUE and Class II TR for PASCAL. Many of our U.S. clinical sites are participating in both trials, and we've encouraged these sites to prioritize enrollment in TRISCEND II to complete it during the first half of 2023, as previously mentioned. Once that enrollment is finished, we will shift focus to driving enrollment for Class II TR, which we expect to pick up. Moving on to Class IIF, our functional randomized trial, we haven't shared expectations for approval or commercialization yet. This trial is currently enrolling and is crucial for us. Many sites that participated in Class IID are also involved in Class IIF. Initially, we asked them to concentrate on Class IID, which they did effectively and contributed to our approval. Now, we are asking them to prioritize Class IIF, which is a larger trial enrolling 450 participants. That sums up the updates on these two trials.

I would like to ask a follow-up question regarding TAVR in Japan. How are you planning to approach it in 2023 following some recent challenges? Additionally, could you discuss how the inclusion of low-risk patients and the RESILIA rollout may impact your strategy and pricing in that market?

Maybe I'll start out with Japan and then turn it over to Larry for the others that he can sort of complete the thought. Japan had been a real lift to our growth rate for the past few years and even earlier this year. But when that wave of COVID came through in Q3, it really was a setback for that health care system. The way that the Japanese system deals with it is to implement a lot of restrictions. And so that really had some pretty big impact in Q3, and that continued into Q4. It was even more dramatic in Q4 than we expected. The situation is much better in Japan. So we see a very solid, substantial improvement during the course of 2023. Therefore, we expect Japan to be a real contributor to growth going forward. Larry?

There are many reasons to be optimistic about Japan. Alongside the general recovery that Mike mentioned, we have the S3 Ultra RESILIA set to launch, likely in Q2, and we will start the rollout then. The low-risk approval is also significant, as we recently received approval for TAVR-in-TAVR, which is a major development for Japan. We are genuinely looking forward to their recovery and a return to more historical growth rates.

Great. And if I could follow up to just RESILIA in the U.S., you talked about 10% center penetration at this point, but can you speak to just your strategy adoption interest in Q1 and how you think about at this point, the cadence of converting centers over the next few quarters?

We are very pleased with the launch so far. The approval came earlier than we expected, which resulted in us building up a significant amount of inventory for the rollout. We are on track with our plans and expect the rollout to continue throughout the year. Overall, we are satisfied with the results to date, and the feedback from physicians has been positive, which we believe is beneficial for us. Additionally, we are planning a price increase for the first time since the launch over 10 years ago. The increase will be modest, less than 5%, but we feel it reflects the innovation and value that our RESILIA technology provides.

A quick clarification and was on FX. I think the revenue guidance stayed the same, but FX was $100 million better. Just wanted to make sure I understood the moving parts on that? And then the question was also on U.S. TAVR. It's hard to tell exactly, but it looks like U.S. TAVR was down versus Q3. So I don't know if there's anything to call specific headwinds in Q4 that maybe weren't in Q3 and if it was actually down in Q3 versus Q4? And then how to think about Q1 in the U.S., can that still be up sequentially and grow kind of year-over-year in that 9% to 12% range?

Sure. So on the first question about FX, yes, you're right. We originally anticipated about a $100 million headwind to sales based upon recent currency moves, we now think it's about flat. We do think there will be a headwind to sales in the first half. There will be a tailwind to the sales in the second half of 2023, but it averages out to flat for the full year.

If the rates stay though.

Regarding TAVR, no, there was actual growth in TAVR in the U.S. over Q3, and we're expecting more growth in Q1 over Q4. So we're seeing sequential growth and year-over-year growth expansion in U.S. TAVR and global TAVR.

Okay. Great. I'll recheck the model on that. And then on SAPIEN 3 RESILIA. You mentioned a little bit of color on the launch. Curious how it's gone like price uplift versus volume discounts, you're actually getting all the price? Because I think the guidance is assuming stable pricing. So I just want to make sure I'm clear on how to think about pricing impact this year and maybe the pricing comes more in 2024?

Yes. So we are going for a price increase, and we're going for a price increase across the board. What ends up happening with pricing is as volume goes up, we have rebates, and those were built in, whether it was SAPIEN 3 pricing or whether it's SAPIEN 3 UR pricing, but we are going for a net increase on every SAPIEN 3 UR valve that we have. Again, it's about $1,500 less than 5%, but we are going for that across the board.

I want to start with a question about the surgical valve business, which grew faster than the TAVR franchise in the fourth quarter. I would like to gain a better understanding of the prioritization of heart surgeries that you mentioned. Do you anticipate this trend will continue, and could you clarify the balance between price and volume growth for the surgical valve business in the fourth quarter? I also have one follow-up question.

Sure. Well, I'll start and then if I have trouble on the call, my buddy here can help me out. But overall, the thing with surgical patients is they don't require the same amount of work up as TAVR patients. So they can move through the system faster because they don't require things such as the CT for valve sizing where that's been intraprocedural for the surgeon, and so there's just much workup that has to be done for those patients. So maybe it's a little less impacted. I think there's also a mindset that when a patient needs open-heart surgery, that, that just is more urgency in the system and those patients can move through a little bit quicker. We'll see how that continues over time. But we continue to drive RESILIA on the surgical side as well. We have the MITRIS launch, which is going, and we continue to advance RESILIA on the aortic side as well with INSPIRIS and those continue. I don't know if you have anything to add, Daveen.

Yes. The only other comment I'll make is we talk about heart valve surgery being prioritized within hospitals. We see a bit that, as Larry said, in the food chain of kind of surgeries, we see that people generally if they're short in cardiac surgery resources help start moving resources to these really high acuity really important patients from other parts, other surgery departments. So you actually see a little bit of resource moving, which I think has helped cardiac surgery keep its volumes overall. That being said, the macro picture, we always expect that TAVR is going to increase in aortic valve replacement. But we also expect, at the same time, the AVR market is going to continue to grow, and there'll always be these patients with complex disease that need surgery.

And just a follow-up on the early TAVR results are not in the very near term, but thinking about the asymptomatic severe aortic stenosis bucket and just the percentage of total severe aortic stenosis patients in the United States. You guys have any new kind of estimates in terms of is that a 30% of total, 40% of total or lower? I just wanted to better understand what early TAVR could unlock?

Yes, it’s a challenging question because the available literature on this topic varies significantly, and the studies are not particularly strong in terms of how they are examined. Many studies suggest that for every symptomatic patient, there is likely an asymptomatic one, which may be on the higher end of estimates. Other studies indicate it could be somewhat lower. However, what’s most important is how this impacts patient flow through the healthcare system. Patients may visit their doctor and report feeling fine on that particular day, even though they were struggling just two weeks prior, and that can be overlooked. If we could eliminate the need for patients to assert their symptoms, and if an echocardiogram indicates severe aortic stenosis, patients could move straight to therapy. This would fundamentally change the way patients are managed. That’s part of the reason we initiated the EARLY TAVR trial; we believe it's critical to gather definitive data on what happens when we conduct stress echocardiograms on these patients and closely monitor asymptomatic patients. This trial aims to explore that, as we see a substantial opportunity to transform the treatment of aortic stenosis.

The first question is on ACC, which is coming up in a couple of weeks. I'm wondering if there's anything that you'd call out from an Edwards standpoint in terms of notable clinical data. And then there's a competitor study in the tricuspid space with TRILUMINATE. Do you think that study could potentially catalyze the transcatheter tricuspid market, both repair and replacement? And then I had one follow-up.

Yes, this is Daveen. I want to touch on the tricuspid trial, particularly the TRILUMINATE study. We would not be surprised if TRILUMINATE yields positive results and receives approval around the ACC conference. This would be a fantastic opportunity for patients to gain more data and improve treatment. In Europe, we see that clinicians are quite optimistic about our PASCAL Precision device and how well it performs for tricuspid patients. We look forward to introducing this technology to the U.S. in the future. Overall, we believe that more data enhances patient care.

And then at a high level, we'll be at ACC in full force. It's a chance for us to be close to customers. But we don't have any real groundbreaking trials that are going to be introduced at that time.

Okay. And then just for a quick follow-up. One actually on capital allocation. And clearly, you're going to remain focused within structural heart. But I also think you've talked recently about having interest in a potential new adjacency. And I think referring to heart failure, you have an internal atrial shunt program, and you also have some investments in external assets. So when should we expect to learn more here about these initiatives and just the broader path forward?

Yes. Thanks for that, Adam. We don't end up talking about these until some of the risk has been taken out. At these early stages, these are big transformative therapies that have big potential, but they also have pretty big risk at the early stage of the program. We feel like it's more appropriate to share it with investors when we have more uncertainty. So for example, like we're already in human trials. So we're not likely to talk about this for competitive reasons, but it is something that's very much a priority for our company. We think the kind of skill sets that Edwards has could be applied really, really well to this big group of patients that's the #1 health care burden and cost and mortality both.

And thank you for the color on the quarter-over-quarter growth, U.S. TAVR expectation in 1Q. But I'm hoping to just parse out the expectation around cadence for improvement U.S. versus international in three seems like international, a little bit more kind of COVID surge impacted maybe a little more visibility into the turning of the tide there. U.S. more hospital staffing it feels more gradual. A, is that correct? And do you think it's right for us to be modeling a little bit faster recovery and acceleration perhaps in 1Q and the first part of the year internationally and then maybe a little bit more of an acceleration for the U.S. in the back half and keep it more gradual in the first half? Is that a good way to think about it? And do we have the pieces right around your visibility?

So Rick, first, on the sequential growth. I want to go back to something Travis asked about before. Q3 to Q4 and 2022, there are sequential growth globally. I said U.S., it was true globally. Q4 through Q1 in 2023, sequential growth in the U.S. and globally. As it relates to the full year 2023 I'll start and then others can chime in. We're expecting contributions both in the U.S. and outside of the U.S. It's tough to pin down exactly which regions are going to grow what rates. But we think that we're going to get contributions from all of our major regions to that 9% to 12% underlying growth in '23.

That's right. I mean if we just look at what's happened here in the recent past, whether it's the U.S. or Europe or Japan, our three biggest regions, they've been lower than what they should be based on the struggles that they've had with the aftermath of COVID, and we expect that to improve throughout 2023.

Okay. It seems that you don't have better insight into the two factors. The impact of the COVID surge in your challenging areas in Germany and Japan provides better visibility compared to hospital staffing. It appears you anticipate all of them to move more or less in the same direction?

Yes. I would say we have similar visibility on all of them. We're very close to our customers, very close to our centers, and we feel like we know what's happening on a center-by-center basis. And we just feel that the environment has and will continue to improve.

Okay. And just following up to BJ's question, are half of your centers still doing double-digit growth in the U.S. I know it's variant, but do you still see that level of growth from at least a cohort or half of your centers?

Yes. I don't know if I could pin it down exactly to a percentage. But certainly, we see a large portion or a large section of our centers that are still doing double-digit growth. And again, I think it's not so much COVID, but it's the COVID restrictions that happen. I think the parts of the country where those restrictions have been released sooner. I think we see those centers doing better. But we expect the rest to come along. I mean if you look broadly, those restrictions are easing really across the globe, and I think that's what is one of the things that helps us in 2023.

Yes. And Larry, you might add that you saw some weeks during Q4 where there were some significant volume, though and made us feel good about the fact that there must be some capacity out there, right?

Yes. We had some of the biggest weeks that we've had in our history in Q4. So a week doesn't make a year, but the fact that they were able to do it for several weeks indicates that staffing is getting better and capacity is coming back into the system, and it's one of the things that gives us confidence in our guidance for 2023.

Okay. Well, thanks all for your continued interest in Edwards. Scott, Mark and I welcome any additional questions by telephone. And with that, thanks for participating.