Edwards Lifesciences Corp (EW) — Q2 2023 Earnings Call Transcript

Thank you very much, Diego. Good afternoon, and thank you all for joining us. With me on today's call is our Chief Executive Officer, Bernard Zovighian, along with our Chief Financial Officer, Scott Ullem. Also joining us for the Q&A portion of the call are Larry Wood, our Group President of TAVR and Surgical Structural Heart; and Daveen Chopra, our Global Leader of TMTT. Katie Szyman, our Global Leader of Critical Care is out of town today, but she'll be with us on future earnings calls. Just after the close of regular trading, Edwards Lifesciences released second quarter 2023 financial results. During today's call, Management will discuss those results included in the press release and accompanying financial schedules 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 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 2022 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 constant-currency 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 this call are available in today's press release. And with that, I'd like to turn the call over to Bernard for his comments. Bernard?

Thanks, Mark, and hello, everyone. I am pleased to share with you the work that our team did to help more patients than ever before with our life-saving therapies. Today, I'm going to talk about the strong second quarter performance across product groups, our progress in advancing our patient-focused innovation strategy, and our confidence in the outlook for Edwards in the years ahead. In the second quarter, we achieved double-digit sales growth, driven by increased adoption of our innovative therapies. Total sales of $1.53 billion grew 12% on a constant currency basis, slightly higher than our expectations. We experienced broad-based growth across all of Edwards' portfolio. Given the improving healthcare staffing and our first half performance, we continue to expect strong results in 2023. As a result, we have lifted our full-year 2023 sales and EPS guidance. Longer-term, we are confident in our focused and differentiated strategy given heart valve failure is largely underdiagnosed and undertreated. We remain committed to increasing our wellness and providing innovative life-saving therapies so even more patients can benefit. Now, I will provide an overview of the second quarter sales performance by product group. In TAVR, we continue to see strong demand for our leading SAPIEN platform with sales of $992 million, up 10% year-over-year on a constant currency basis. Our U.S. and OUS sales growth rates were comparable. Local selling prices were stable. In the U.S., our second quarter TAVR sales were aided by improved hospital staffing levels and the continued successful launch of SAPIEN 3 Ultra RESILIA. We estimate that total procedure growth was in-line with our sales growth. Additionally, we will be restarting enrollment this quarter in our pivotal trial, ALLIANCE, designed to study the next-generation TAVR technology, SAPIEN X4. Outside of the U.S., we had positive constant currency sales growth from all regions. In Europe, Edwards' sales growth was driven by broad-based adoption of our SAPIEN platform. Our sales in Japan grew sequentially and year-over-year on a constant currency basis, although our results continued to be impacted by lower-than-expected market growth and competitive trialing in the first half of this year. As a result, we estimate overall OUS TAVR procedure growth in Q2 was slightly higher than Edwards' OUS TAVR growth. During the quarter, at the EuroPCR medical congress, data from the Benchmark study were presented on 2,400 patients treated with SAPIEN valves across 28 European centers. It was very encouraging to note that patients experienced a 33% reduction in the median hospital length of stay while maintaining 30-day clinical outcomes. This study showed that by implementing best practices with the SAPIEN platform, centers can be more efficient without compromising patient outcomes. Turning to TMTT, we remain focused on three key value drivers to unlock this opportunity: a portfolio of differentiated therapies, positive clinical trial results to support approvals and adoption, and favorable real-world clinical outcomes. TMTT second quarter global sales of $48 million increased nearly 17% on a constant currency basis versus the prior year. Growth was driven by continued strong overall procedure volumes, adoption of our differentiated PASCAL Precision platform, and activation of more centers across the U.S. and Europe. We continue to hire, train, and grow the field team to deliver on our high-touch model as we expand. In mitral, enrollment is ongoing in the Class IIF pivotal trial for functional mitral patients. We are also pleased with the enrollment in the ENCIRCLE pivotal trial for the SAPIEN M3 mitral valve replacement and remain on track to complete enrollment around the end of this year. In tricuspid, the Class IITR pivotal trial with PASCAL continues enrolling well. With the completion of TRISCEND II enrollment, continued access for EVOQUE allows U.S. centers to continue to offer this therapy for tricuspid patients. We remain on track for European approval by the end of 2023 and U.S. approval around the end of 2024. In Surgical, second quarter sales of $256 million increased 13% on a constant currency basis, driven by the adoption of our premium RESILIA products across all regions. Physicians and patients value the features and benefits of this advanced tissue technology for both aortic and mitral surgical valve procedures. Patient enrollment continued in the second quarter for our MOMENTIS clinical study designed to demonstrate the durability of the RESILIA tissue in the mitral position. We expect that confidence from our recently presented seven-year data of our upcoming clinical trial will continue to support adoption of our RESILIA family of products. In Critical Care, second quarter sales of $235 million increased 13% on a constant currency basis, driven by contributions from all product lines. Growth was led by our Smart Recovery portfolio and healthy adoption of our Acumen IQ sensor. Sales momentum for our HemoSphere monitoring platform was also positive in the second quarter with a healthy pipeline of future opportunities. Before I turn it over to Scott, I also want to mention our expectation for the upcoming TCT Conference in October. During the conference, we expect several important presentations regarding our transcatheter technologies. In TAVR, we are expecting a presentation of five-year clinical data from the PARTNER 3 low-risk pivotal trial. In TMTT, we anticipate the presentation of a one-year full cohort of the CLASP IID pivotal trial results. Additionally, we anticipate the presentation of the planned interim analysis of the TRISCEND II randomized cohort. I look forward to seeing many of you at the Investor Event we plan to host at TCT. Our Investor Relations team will communicate details as we get closer to the event. And now, I will turn the call over to Scott.

Great. Hi, thanks a lot, Bernard. We are pleased with our sales performance in the first half of the year, posting our second consecutive quarter of double-digit constant currency growth. All product groups grew double digits and sales were balanced across regions, with the exception of Japan, which was impacted by the trialing of competitive TAVR products. We achieved total sales in the quarter of $1.53 billion, which represents 12% year-over-year constant currency growth. We achieved adjusted earnings per share of $0.66. Contribution from our better-than-expected sales performance was partially offset by higher performance-based compensation and investments in our transcatheter operations in support of our growth strategy. Our GAAP earnings per share of $0.50 were impacted by the intellectual property agreement I commented on last quarter. We previously had a long-term Intellectual Property Agreement with Medtronic that expired last year, and in consideration for the new agreement, we paid $300 million, approximately half of which has been expensed, and the other half will be amortized over the next 15 years. A reconciliation between our GAAP and adjusted earnings per share for these and other items is included with today's release. I'll now cover some additional details of our second-quarter sales results and full-year 2023 outlook by product group. A continuation of double-digit global TAVR growth reflected a more stable hospital staffing environment, as well as strong adoption of the SAPIEN family of valves. U.S. TAVR sales growth was driven by the launch of SAPIEN 3 Ultra RESILIA, which remains on track to represent the majority of our U.S. TAVR sales before year-end. In Europe, Edwards' sales growth was driven by the continued demand for our SAPIEN platform and was broad-based by country. We still see some health system capacity challenges, but are encouraged that centers are adapting to continue to treat their patients. In Japan, although growth was below our expectations in Q2, we anticipate that growth rates will improve, driven by the ongoing launch of SAPIEN 3 Ultra RESILIA. For global TAVR sales, we are adjusting the low-end of our outlook slightly higher to $3.85 billion to $4.0 billion. We now expect full-year TAVR growth to be 10% to 13% on a constant currency basis versus previous guidance of 10% to 12%. TMTT growth in the second quarter was driven by strong procedure volumes, adoption of our differentiated PASCAL Precision platform, and activation of more centers across the U.S. and Europe. Overall, we're pleased with our continued progress toward bringing a portfolio of TMTT therapies, combined with contemporary clinical data, in order to achieve our vision of transforming the lives of patients with mitral and tricuspid valve disease. We now expect full-year 2023 sales of $180 million to $200 million versus our previous expectation of $170 million to $200 million. In Surgical Structural Heart, 13% constant currency sales growth in the quarter was driven by the adoption of Edwards' premium products as well as strength in valve surgery procedures as hospital staffing levels have continued to improve. Based on positive year-to-date performance, we now expect that our full-year sales will be in the range of $960 million to $1.02 billion versus previous guidance of $870 million to $970 million. This revised range implies low double-digit constant currency growth in 2023. Finally, turning to Critical Care. We continue to expect full-year 2023 sales of $870 million to $940 million. For total Edwards, based on the strong first half of the year, we now forecast full-year 2023 sales to be in the range of $5.9 billion to $6.1 billion versus prior guidance of the high-end of $5.6 billion to $6.0 billion. We now expect full-year total company sales growth to be in the 10% to 13% range on a constant currency basis versus previous guidance of 10% to 12%. Lastly, we now expect our full-year adjusted earnings per share to be between $2.50 and $2.60. We are projecting third quarter sales to be between $1.44 billion and $1.52 billion. We are also projecting third quarter adjusted EPS of $0.55 to $0.61. I'll now cover additional details of our P&L. For the second quarter, our adjusted gross profit margin was 77.7% as expected, compared to 80.5% in the same period last year. This reduction was driven by a less favorable impact from foreign exchange. We continue to expect our full-year 2023 adjusted gross profit margin to be between 76% and 78%. Selling, general and administrative expenses in the quarter were $469 million or 30.6% of sales compared to $409 million in the prior year. This increase was driven by performance-based compensation and investments in transcatheter field-based personnel in support of our growth strategy. We continue to expect full-year 2023 SG&A as a percent of sales to be 29% to 30% as we invest in field-based personnel and our therapy adoption initiatives. Research and development expenses in the second quarter grew 8% over the prior year to $270 million or 17.7% of sales. This increase was primarily the result of continued investments in our transcatheter aortic valve innovations, including increased clinical trial activity. For the full year 2023, we continue to expect R&D to be 17% to 18% of sales as we invest in developing new technologies and generating evidence to support TAVR and TMTT. During the second quarter, we recorded a $27 million reduction in the fair value of our contingent consideration liabilities, which benefited earnings per share by $0.04. This benefit was excluded from our adjusted earnings per share of $0.66. This reflects an adjustment of assumptions regarding potential milestone payments for a previous acquisition. Turning to taxes, our reported tax rate this quarter was 9.7% or 13.1% excluding the impact of special items. Our rate benefited from higher R&D tax credits and a 200 basis point excess tax benefit from stock-based compensation. We continue to expect our full-year tax rate, excluding special items, to be 13% to 17%. Foreign exchange rates decreased second-quarter reported sales growth by 70 basis points or $8 million compared to 2022. At current rates, we continue to expect an approximately flat year-over-year impact to full-year 2023 sales compared to 2022. Foreign exchange rates negatively impacted our second-quarter gross profit margin by 220 basis points compared to the prior year. Relative to our April guidance, FX rates had a minimal impact on second-quarter earnings per share. Adjusted free cash flow for the second quarter was $286 million, defined as cash flow from operating activities of $34 million, less capital spending of $48 million, and excluding a $300 million payment related to the Medtronic Intellectual Property Agreement I mentioned earlier. We continue to expect full-year 2023 adjusted free cash flow will be between $1.0 billion and $1.4 billion. Before turning the call back over to Bernard, I'll finish with an update on our balance sheet and share repurchase activities. We continue to maintain a solid and flexible balance sheet with approximately $1.5 billion in cash, cash equivalents, and short-term investments as of June 30th. We continue to expect average diluted shares outstanding for 2023 to be between 610 million and 615 million. We have approximately $650 million remaining under our current share repurchase authorization. And with that, I'll hand it back over to you, Bernard.

Thank you, Scott. So based on our strong first half result, we have increased confidence that 2023 will be an important year for Edwards and we expect to deliver 10% to 15% sales growth while making meaningful progress on our innovations to improve care for many more patients. Longer-term, I have great confidence in our team to further extend our leadership position by bringing our differentiated technologies to patients globally. In closing, we are well-positioned for success. With that, I'll pass it back to Mark to open up Q&A.

Thanks a lot, Bernard. With that, 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 re-enter the queue and Management will answer as many participants as possible during the remainder of the call. Operator, please go ahead with additional details on accessing the Q&A portion of the call.

Okay. Great. Thanks for taking the questions and congrats on a nice quarter. Maybe to start, global TAVR growth around 10%, a little weak in Japan. Where do you think we are in the recovery process in terms of stabilizing the system, stabilizing timelines, and staffing in the system? And when do you think we'll get to a new normal in TAVR procedures and diagnosis and treatment?

Yes. Robbie, this is Bernard here. Thank you for the question. We are pleased with our global TAVR result in Q2. The 10% constant currency growth is comparable for U.S. and OUS, driven by continued strong demand for our leading SAPIEN platform. What we have experienced is improvement in hospital staffing levels in the U.S. and globally, but I'm going to let Larry add some comments here.

Hi, Robbie. Yes, deciding what the new normal is probably a little tricky, but I feel like the system has continued to improve. When we track staffing, we're not where we should be, and we're not where we would have projected to be in the absence of the pandemic. But patients are certainly coming in and they're getting their visits, and when we look at some of the leading indicators, diagnoses are up, and patients are moving through the system. We still feel constrained somewhat at the Cath Lab level, which is still a place that we struggle. Centers have made tremendous strides, but it's still an adjustment coming out of COVID, and we're not back to pre-COVID normal levels. I think we still have a little ways to go. I think we see that a little bit globally. It varies a lot across Europe and we see it a little bit in Japan, depending on some ongoing COVID impacts. The encouraging thing is we're at 10% globally, and we know we haven't fully recovered yet, so I think there's still some opportunity for us to continue to do better, and we know the under-treatment remains significant, which presents many growth opportunities over the long term.

Great. Thanks for that. And maybe just kind of a similar question. TMTT, you beat in the quarter. That seems like it was even a bit more imperative over the past few years than the whole TAVR complex. Maybe just talk about mitral and tricuspid, particularly the launch of PASCAL in the U.S., how you think adoption is going versus plan, how you're seeing the competitive situation play out, and just your thoughts in TMTT in general relative to TAVR normalization. Thanks a lot.

Yes. So, let me start, Robbie, and then I will ask Daveen to add some comments here. We are pleased about Q2, as you see globally. The mitral market has performed well in Q2, nearing double-digit growth. Adoption of PASCAL Precision is progressing positively both in the U.S. and globally, and we are activating new centers across the U.S. and Europe. We are experiencing great momentum from the PASCAL Precision launch, which is reflected in our strong performance. But Daveen, would you like to add anything here?

Yes, definitely. Thanks, Bernard. As Larry and Bernard mentioned, we're seeing continued recovery from the staffing challenges, and I agree that we've been impacted a bit more on the staffing side during COVID. However, the market is strong, with a significant number of patients seeking new therapies. We continue to open new centers in both the U.S. and Europe. Specifically in the U.S., we're getting positive feedback from physicians about the differentiated features and benefits of the PASCAL system. We’re actively ramping up our team and are focusing on the biggest accounts in the U.S. for expansion. Regarding Europe, we're opening centers and see robust growth in the tricuspid space, which is a newer therapy with strong adoption.

Thank you. The financial implications of everything Bernard and Daveen just discussed reflect our positive outlook for TMTT's development in 2023. Our original sales guidance was $160 million to $200 million, and we raised the bottom of this range by $10 million last quarter and another $10 million this quarter, indicating our optimism about our progress this year.

Hi guys. Thanks for taking my question. I wanted to ask about the margins, as you had nice gross margins here in Q2. I know you're making a lot of ongoing investments, so what are kind of the key puts and takes to consider regarding gross margins and OpEx in the second half of the year?

Yes, thanks for the questions. I'll start with gross margin. We're seeing some benefit from mix in 2023, but it's more than offset by the impact of foreign exchange that hit us last year and is flowing into our 2023 income statement. The phasing is something we're expecting to increase negatively in Q3 and Q4 based on current exchange rates, barring any changes. Overall, we expect to end up where we forecasted for gross margin guidance in 2023. In terms of operating expenses, we have been ramping up investments, particularly in field personnel, both in Europe and the U.S., which has an impact. This is part of a strategic initiative to drive growth by ensuring the right people are in place to support our clinician partners and deliver optimal care as we introduce new products. Regarding operating margin progression over the next few years, we see opportunities for gradual expansion but are primarily focused on investing for long-term growth.

Thank you, Scott.

Hi guys. Thanks for taking my question. Bernard, my first one on the TAVR guidance here. I think the underlying was raised at the high end to 13%. The first half TAVR underlying has been 10% to 11%. I'm curious why the high end was raised. Was there something during the quarter that you saw or some phasing or is there something expected in the back half that gives you this confidence?

Yes. Vijay, the change in guidance, expanding the top-end of the range, largely reflects better-than-expected performance in Q2 and the first half results compared to what we originally expected. Since we overachieved in the first half, we are introducing this higher top-end of the range to accommodate a potentially faster growth scenario.

Understood. And maybe one sort of related question here. First half, we've seen TAVR grow mid-teens, how much of that is volume versus price? Why are we still seeing SAVR outgrow TAVR? Is there something structural in the market that’s shifting that balance?

Yes. Both our SAVR and TAVR businesses are growing nicely, and SAVR growth has exceeded TAVR because of a combination of market growth and the premium pricing of our innovative technologies. We see a number of dynamics impacting the SAVR side. For TAVR, it's mainly positive growth. But Larry, you want to add any insight here?

I think that's right. Overall, we have three components contributing to growth. For TAVR, it is overwhelmingly driven by procedures. For SAVR, we are seeing a slight prioritization of surgical programs as hospitals address patient acuity, and this has likely contributed to seeing more patients being treated sooner. Compared to TAVR, this means that the cath lab recovery might lag behind surgical recovery.

Yes, good afternoon and thanks for taking my question. Two on the pipeline and the TCT updates on this call. Let me start with the TRISCEND II comments; it's big news here. Is the trial stopped yet? What would success look like for you?

Thank you, Larry. Yes, indeed, we completed the enrollment of the full cohort of TRISCEND II. We need to wait one year for the follow-up and then compile the data to present to the FDA. It takes time, so that’s why we still believe around 2024 for approval in the U.S. We do think the quality of life is significant for patients, so we will have to see the results, but I am confident in our study. Daveen, do you want to add anything here?

Yes, for us, the interim analysis was included in our statistical plan, and we're excited to share these results. I believe the previous TRILUMINATE results showed quality of life improvements which categorically support our PASCAL device outcomes. We look forward to seeing the results of the TRISCEND II interim analysis.

That’s helpful. Just for my follow-up, on the PARTNER 3 five-year data, what do you think physicians will be focused on here?

I can't speak to the specific data or what's going to be presented. People are looking at what the trial was powered for; those primary endpoints of death, stroke, and rehospitalization are going to be the focus.

Hi, thanks for taking the question. I wanted to follow up on U.S. TAVR growth. Can you break down how much of the 10% growth in the U.S. came from price versus the contribution of the RESILIA platform?

The price contribution to the U.S. growth number is pretty small; it's overwhelmingly driven by procedure growth. The RESILIA launch is still early, and while we raised prices slightly, it accounted for a smaller percentage of total device costs.

Great. That's helpful. And regarding the raised TAVR guidance for the full year, is there anything you’re seeing in July that gives you more confidence to raise the full year guide?

Yes. The raised guidance reflects our stronger-than-expected first half performance and potential overachievement in the second half, while still modeling the midpoint of that range. We won't get into specifics on monthly performance at this stage.

Just two TAVR questions. First, on the Japan recovery trajectory, what factors are limiting recovery there, and how do you see that shaping up in the back half of the year?

In Japan, we experienced sequential and year-over-year growth in the quarter. It was below our expectations, but we believe it is transient due to ongoing COVID impacts. We are pleased with the launch of SAPIEN 3 Ultra RESILIA in Japan.

Indeed, Japan was more impacted during COVID, and as it stabilizes, we believe that this will help foster improvement. We've seen sequential growth and remain optimistic for the back half of the year.

The second question concerns the PROGRESS trial. Any updates on the enrollment pace?

We don't have any updates on enrollment right now. Overall, we've been pleased with the trial's progress. We'll likely provide more detailed information at future investor conferences.

Scott, the Q3 EPS guidance is a bit lower than the Street's expectations. Can you discuss any specific margin drivers contributing to that dip?

The Q3 impact mainly arises from seasonal challenges affecting the top line while expenses remain consistent, just reflecting typical summer seasonality.

Regarding Critical Care guidance, there seems to be a noticeable deceleration. Is it tougher comps or something more specific?

Yes, exactly. We had strong performance in Q2 and Q1, and the guidance considers tougher year-over-year comparisons in the latter part of the year.

I wanted to follow up on strong performances in SAVR and TAVR. Can you discuss any differences in staffing proficiency affecting TAVR procedures and if that impacts overall growth?

The biggest turnover we observed during COVID was among valve clinic coordinators, which is a challenging role due to its demands. We see less turnover in operators, but it does impact patient processing times, particularly in TAVR due to the more complex work-up required.

Are you at a stage where you've got the necessary technologies to address TMTT markets or are you still looking for additional innovations?

Our vision in TMTT is to unlock a large patient market for mitral and tricuspid therapies. We are focused on building a comprehensive portfolio, with ongoing investments in innovation, as well as creating strong clinical evidence to support our technologies.

Bernard or Larry, on TAVR, is there potential backlog impacting growth? Have you seen any reduction in the backlog in Q2?

As we move through COVID, we see some backlog building, but the early signals of growth in TAVR are positive. We are pleased with the incoming patient flow currently.

What about trends between high-volume and low-volume centers? Any specific insights there?

During COVID, we saw that smaller centers were growing faster due to localized care patterns. As restrictions dissipated, larger centers have started to see more patients returning, reflecting a shift towards centers of excellence.

On the TAVR guidance, do you need Japan to improve to hit the midpoint of your guidance? Can Japan's performance impact your overall forecasts?

Yes, we are expecting Japan to perform better in Q3 and Q4, which is a contributor to our midpoint assumptions. If Japan exceeds expectations, it could push us toward the higher end of the range.

As we think about the U.S. TAVR market with 10% growth now, should we see this growth settling into high single digits as we think about normalized levels?

We do not see any slowing growth in TAVR; we believe there is still strong long-term growth potential. We don't anticipate reaching a population growth equilibrium anytime soon, as the market remains significantly under-treated.

Our confidence in a $10 billion total addressable market remains unchanged. While COVID disrupted our growth trajectory, we believe we have significant growth opportunities moving forward with current and new technologies.

For the U.S. markets, is there any geographical spread for large centers that have grown? Or is it relatively uniform across regions?

Most COVID-related variation has normalized, with a return to more consistent operations across the U.S. However, we do see some regional variations based on localized healthcare policies.

What about the mitral market, how has it grown, and what’s your view on market share and long-term growth?

We've observed a positive recovery in the mitral market in the U.S. and globally. We see strong growth in U.S. mitral approaching double digits, which is consistent with global trends.

Globally, we are seeing close to 20% growth in the TMTT market, and while U.S. growth is supporting this, we are also launching these technologies in many new countries, further driving our market expansion.

A couple of TAVR-related questions: can you discuss the ALLIANCE study restart and remind us of the current enrollment status?

Regarding changes to X4, the adjustments were all delivery system-related and did not alter the valve itself. We expect enrollment to resume shortly as many centers are returning to normal operations.

What is the status of S3 Ultra RESILIA technology in Europe?

We are currently working with regulatory bodies in Europe. However, the new MDR process and bottleneck are delaying approvals. We do have approvals in Japan and the U.S., and both launches are progressing well.

Thanks, Diego. Let me close this meeting by saying I am excited about our performance so far in 2023 and confident in our outlook for the rest of the year. In addition, beyond the numbers, I am pleased with our progress on pipeline development, clinical trials, and confidence in our long-term strategy to help even more patients. Thank you for your continued interest in Edwards; Mark, Oliver, Scott, and I welcome any additional questions by phone.