Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Good morning, everyone. I'm Robbie Marcus, the med tech analyst here at JPMorgan. I'm very happy to introduce our next speaker, Chairman and CEO of Edwards, Mike Mussallem.

Thanks, Robbie. All right. Thanks, Robbie. Thanks all of you for being here, another JPMorgan conference. I hope you enjoy it. We're going to be making some forward-looking statements that have risks associated with that. If you're interested in our risks, they're filed with the SEC on our website, you can take a look. And we also use non-GAAP financial measures to help provide clarity, and those are also available on our website and in our SEC filings. So when our company was founded, and really spun out 20 years ago now, we did it on the basis of our credo. And our credo talks about several things, things like being a trusted partner, there's much of what we do, we just cannot do alone. But we talked about this multi-stakeholder model that it's become popular to talk about today, back then. We were sort of born with this notion that a company that's really doing this thing well is all about patients and customers and our employees and our shareholders, and we continue to take that seriously. And we also take seriously the idea that we're going to boldly innovate for the future and that's part of who we are. But how we close our credo is most important, and that is the reason that we exist is helping patients. That's our life's work. We take that very, very serious at Edwards and have a sense of urgency around that. Our company has grown. We're nearly 14,000 employees at this point. I'm proud to say there are a lot of people with great experience inside the company. But also more than 50% millennial and Gen Z. So a whole next-generation of value creators. A lot of things. We're obviously very global and we're a leader in what we do. But the one that I'm most pleased about is that in a recent survey when we ask our employees about, "Do you think about patients when you're making decisions?" 9 out of 10 employees say, "Yes." And that's the thing that makes me feel like we're always going to be on the right track. If our employees are always thinking about doing the right thing for patients, we're going to be well aligned in terms of delivering value. Our strategy is differentiated. At a time when many folks in med tech have decided that diversification is the best strategy, and it should get larger and become more diversified and spread your costs. We've decided on the opposite. We've continued to feel this way, and to be laser-focused and singularly focused on just structural heart disease in critical care. Our belief is that this is a greatly underserved population. How well are they served compared to our parents and grandparents? Well, they're served great, but compared to how well they could be served with technology, they're not served well at all. And we think we can do a lot for these patients over time. And it allows us to focus our resources, focus our capital, focus our people, understand the patient journey, focus does a lot for us. Also a key part of our strategy is innovation. And everyone says that. But we talk about not just innovation, but big, bold, breakthrough innovations, change-the-practice-of-medicine kind of innovations. And that's what we go for. It obviously means that there's risks associated with that and we're prepared to take those. And we know that there will be failures along the way but we also know that those opportunities are large. It also means that we're in for a long run game. Even if we have a great innovation, we have to back it up with evidence. So when we embark on something, we do it with an idea that we have a horizon of many years in front of us because we will create the kind of evidence that really causes medicine to practice. And that's a key part of our strategy. And finally, is leadership. And again, many folks say that, but we like to go first. First is actually kind of a risky thing to do because you don't have anybody to learn from when you're going down the road and then its roads that don't exist that no one has gone down before. But it also puts you in a position to be the fastest learner, it puts you in a position to be in the room with the thought leaders, whether they're the thought-leading clinicians or the regulators or the payers to really craft the pathway for how the new medicine will be practiced. And when we get that all right, then we can really transform care. And when we transform care, that's how value gets created. We're proud to say that this has worked pretty well for us. We've had more than 10 consecutive years of double-digit growth. It's because we're fortunate enough to be in a position where patient demand is significant. We've had some triple wins, and that's always our goal. When you could have great clinical evidence and improved quality of life and do it cost effectively so that it costs the system less, then you have a real winner. And again, almost everything we do is long-term in nature. When we deliver our 2019 results, it's rarely just because of our efforts in 2019. It's a lot about the seeds that were planted years ago, and we know that, that holds true today in terms of looking at the future. I'll walk through the businesses pretty quickly. The biggest business inside Edwards is transcatheter aortic valve replacement. This -- for those of you that aren't close to this has turned out to be a truly spectacular procedure. In the past, to replace somebody's aortic valve was opening their chest, stopping their heart and cutting out a diseased heart valve and sewing in a new one. Now in a repeatable procedure that's done routinely in under an hour, most patients don't even go through general anesthetic. They just have the site deadened where there's a small hole in their upper thigh, that you can have a catheter replace your aortic valve. You go home often in just a couple of days. Recovery time is very quickly. It's quite cost-effective and people are able to get really great results. And this has been demonstrated. And what we do, this is what's really caused us to grow. There's a threefold strategy that we execute. One, is we continue to innovate because there's opportunities for this to be better. Two, is we expand indication with really groundbreaking trials. And three, is we try and improve treatment rates because even as great as this procedure is the treatment of patients with severe aortic stenosis were relatively low, even in sophisticated countries like the United States. We think that double-digit growth -- kind of a double-digit CAGR. We'll continue in this for the foreseeable future. And a matter of fact, we say that this will be more than a $7 billion opportunity by 2024, and it won't be over then. There'll be still more growth. And kind of our blessing and our curse is the practice of medicine is pretty slow to change. And as great as this new technology is that's still been quite a deliberate change, which is our opportunity to do even more. Maybe the single most important thing that happened in 2019 was when we reported our PARTNER III results. This is comparing a transcatheter replacement to open heart surgery in a group of patients that are really quite healthy and could withstand surgery just great and do well in surgery. The trial that was powered to be a non-inferiority trial just because we wanted to get it through it and get access to the U.S. as soon as possible, actually demonstrated superiority, which was unexpected by us and the results were really compelling. Maybe one of the most compelling results is for these patients that got the transcatheter, SAPIEN 3. At the end of 1 year, there were only 1% of patients that had died or had a severe stroke, so 99%. And this is the group of people that average age is 74, I think most 74 year olds probably don't have a 1% mortality or stroke risk, even higher than that. So we're really pleased with that. And it kind of concludes this series of trials in which we are evaluating patients based on surgical risk. And this was a regulatory scheme that the regulators felt comfortable with, which is let's just do the -- let's just first treat patients that were at high-risk, that go through surgery, then intermediate risk, then low risk. So now all of that is over. And now we think about more anatomy and other conditions. Another thing important that happened in 2019 as we have a new national coverage determination in the U.S. So this is a careful look. It's been a number of years, more than 5, 6 years since CMS had put in a hard look at payment and this was updated. When they updated it, it turned out what we thought to be fair and thoughtful and positive for patients with aortic stenosis. And it means that there would be new sites that would be available to do TAVR in the future. Today, we're running a little more than 650 sites. This would probably increase to 850 sites sometime in the near future. One of the things that we've seen that's interesting is even though many patients might not be that far away from TAVR site. Because of the referral patterns, because of patient preferences, often, they don't get treated if they don't have somebody within their network. And maybe it's a narrow network or maybe it's just some narrow thinking, but we've consistently seen when new centers are added new patients come off the sidelines and actually seek treatment. So we're pleased with that. Our next groundbreaking trial, which we're in the middle of right now and about 50% enrolled is called Early TAVR. The way that the guidelines are written today and procedures happen today is the indication says, if you have severe aortic stenosis. So that means your aortic valve is closed down, the jet velocity is high, the pressure gradient is high and you have symptoms, you should be treated. We believe that is an outdated notion that doesn't make sense, and this trial is designed to prove that. So you have patients that have no symptoms and 50% get a transcatheter aortic valve, 50% get the watchful waiting that today's medicine calls for, and we're going to see how each group of patient looks at the end of 2 years. And so we think this will be compelling. It's actually -- we think one of the key reasons why aortic stenosis not treated more often because physicians have a tough time associating those symptoms with the disease because they might say, "Oh, yes, well, of course, they've lost energy and they can't do the things that they used to do, they are older now." And often, when their aortic stenosis is treated, they have dramatically different quality of life. So we look forward to this trial and what might come next beyond that. Just so you get a sense of what Edwards does is we do a lot in terms of supporting these cases. We put all of our energy to make sure every time patient goes in for a case, they get a great result. So this includes our involvement in patient screening, planning the case, we provide proctoring any time there's something new. We obviously help during the case and manage inventory. It's a whole pre- and post-procedure support package. We think that's really valuable. It's one of the reasons why we get great results, and it's one of the things that gives us a tremendous amount of insight about what we can do to continue to improve the procedure. One of the things that we've also learned is that in the past, we were probably being narrow to only focus on having a great procedure. We just sort of assumed, if you had a great procedure, patients would show up. And what we find is that it's not the case at all, that many patients -- and maybe 9 out of 10 in a recent data set that we analyzed in the U.S. don't even get to treatment. Now why is that? They don't get diagnosed. Maybe they don't get referred. Even when they get referred to a general cardiologist, they often don't find their way to a heart team and there's a multitude of reasons. And so we've started now an effort to focus on the entire continuum of care to better understand that, to help patients get a better understanding of their conditions of what they can do, to help educate general practitioners that might not see us very often, to educate general cardiologists that maybe aren't keeping current with practices and understand what's possible and also make sure that the post procedure care. And I won't go into the details here, but it's a multifaceted effort that we expect to have results over time. In typical Edwards fashion, we have a very aggressive pipeline. We continue to have multiple teams involved in generating next generation, whether it's the next-generation Ultra that we're introducing right now, which we think has an opportunity to have improved leak performance over what's the best-in-class today. There's a group of patients with congenital disease that often don't have great solution, and with our SAPIEN 3 pulmonic and Alterra system. Even though it's a smaller group of patients and not probably likely to mean a lot in the numbers, it's going to be very meaningful to this group of patients. And our SAPIEN X4, which frankly we're not talking a lot about. We said we will start a pivotal trial probably within 18 months or so, but a next-generation system that we think can be even better yet and get even better results for patients. So that's the general picture on transcatheter aortic valves. So again, we think there's going to be a lot of growth. We've embarked in this field that we call transcatheter, mitral and tricuspid therapies. For -- you think of all these patients that have aortic stenosis, there's even more that have leaking, mitral and tricuspid valves. And we think that we have the ability to help physicians treat this group of patients. There's nothing easy about it. This is a very large group of patients, a very diverse disease, complex patient populations but we believe with a portfolio of products that we can make a big difference. And we think this opportunity, which is still small today, will be more than $3 billion by 2024 and just getting going. This is likely to be much larger beyond that. Just to talk about this group of patients a little bit. There's not one flavor of disease. Aortic stenosis by comparison is relatively simple and a pretty predictable process for those that have leaky mitral and tricuspid valves offer in heart failure and have a multitude of reasons, and we just don't see many patients that are alike. The prevalence is larger than aortic stenosis. So there's a lot of patients, like 10% of people in the U.S., over 65, and patients die from this. This is deadly. And so if we can do something about this, it's very meaningful. And the treatment rates -- and often there's surgery that's available today. People just do not choose that option. The results haven't been good enough. The idea of open-heart surgery is not that attractive. And so the treatment rate is low. So if you -- the idea is, if you could have a catheter-based solution where you could do a simple, safe, repeatable procedure that you could have a very important therapy for these patients. And that's why we're excited about it. And even while there's little sales, we have made a big investment in this place. We have a very large team that's focused on this, more than 700 people in Edwards today. We're pursuing several alternatives, which include: leaflet repair; reducing the annulus of this valve, which is a different kind of repair; and a whole valve replacement. We're pursuing all of those with the idea that you could do it with a catheter, and we're pursuing it both in the tricuspid valve and the mitral valve. And so this is one that is really in the future for us. And we're at the very beginning of this. The sales of this is very low at this point, but we think this is a big opportunity and we're excited about what Edwards might do for this group of patients in the future. We know that if we're going to change the way that medicine is practiced, we need to do it with big evidence, and we're involved in 4 big pivotal studies already. Our PASCAL device in the tricuspid position, it --for patients with degenerative mitral regurgitation and functional mitral regurgitation. And the -- using the SAPIEN 3 valve with the M3 modification for a mitral valve replacement. So these are big pivotal trials that are designed to generate big evidence and also lead to approval in the United States. Separate from that, we have some of our technology that are involved in our early feasibility studies. We just announced last month that we have a valve for tricuspid patients, in which we're going into early feasibility studies. We have cardioband in tricuspid and our EVOQUE valve and mitral valves, all at early feasibility studies. And then, obviously, we're committed to long-term follow-up in post-market studies. And so we know that it's evidence that really makes the difference. And to us, getting great evidence is even more important a value creator than the early sales. Switching gears. Edwards was born 60 years ago with open-heart surgery in those valves, and we're the market leader in that space. It has been impacted in a pretty big way by transcatheter aortic valve replacement. I mean, this was the biggest part of that sales. But even in the face of that, we have continued to grow. And that's because we've evolved this technology, and we're continuing to innovate. At the same time, while most companies have looked away from heart surgeons and say, "Oh, there's no future for heart surgeons." We actually think they have a vital future but it's just going to be different. Isolated aortic valves are going to be done with TAVR, but there's important things that surgeons are going to do. And so we are innovating for them, and really have a strategy to be their best friend for the future and help them innovate. And we think that positions us well. The product that's having the most growth and impact right now is called our INSPIRIS valve. So think about the fact, if you're an active, maybe younger patient and what's clearly indicated, they say, "Hey, for you, TAVR, we don't know how long TAVR's going to last. You still ought to get a surgical valve." We have a surgical valve with a new tissue called RESILIA, which we think has great promise there. In our hands, it looks like it's much more durable than anything that's been available in the past. And we have a technology built into the design of the valve that's actually intended to accommodate valve-in-valve for the future. So think about the fact that you're going to replace it of a valve that's likely to be more durable than ever in the past. And then if you ever do need replacement valve, which if you live long enough is likely to be the case. Here's a valve that's designed to accommodate valve-in-valve in the future and actually expand the orifice so you can still have great blood flow, great hemodynamics. And this is growing rapidly for us. So we have a portfolio of new technologies for the surgeon that are -- many are actually going to be rolled out in 2020, Harpoon; Physio Flex, which is a repair product; KONECT, which is a device that has a graft and valve combined for those patients that might have a diseased aorta; and something called SUTRAFIX, which is an automatic suturing device. And beyond that, a new surgical mitral valve. So we're excited about what lies ahead in surgery. Our business that is really going through quite a transformation is critical care. We have a long history of being the leader in doing what we call hemodynamic monitoring. So for a patient that's very ill in an ICU or going through a big surgery, how is their heart performing? How -- what is their hemodynamics? How much blood flow am I actually getting and why? We're really the best at that. But there are only a limited number of patients that were treated with this great technology. And often, people wouldn't invest to $200, $300, $400 during a procedure, for example, to get a better outcome. With the advent of technology, we've been able to introduce more artificial intelligence, such that we can move this to the next realm and actually help clinicians be better decision-makers than ever before. So for example, there's a low blood pressure condition that when your blood pressure goes below 65 millimeters of mercury, often the outcomes will be demonstrated to be worse, even if it's only for a period of 10 or 15 minutes. Through some creative algorithm work, actually we find that we get with high probability predict whether that's going to happen before it happens. So that the anesthesiologists can react 10, 15 minutes before the event and avoid that from happening. This is really becoming transformational. The hospital of the future is going to be those patients that are critically ill and having these tools that are noninvasive, data-enabled, AI-enabled and connected are going to be so important. And we're really growing today because of what's going on with this platform. We have a platform called HemoSphere, where we're getting all of the Edwards monitoring technology on an easy-to-use, very visual, very intuitive platform. And this is driving our growth this year and for some time in the future and there'll be more launches associated with this as we move ahead. So just to get into the financial highlights, we have not updated guidance. So this is still our guidance from Q3, and we talked about them when we were at our Investor Conference that many of you may have attended in December. But 2019, we think, is shaping up to be a very nice year of sales growth. So that it's going to be in the -- and again, not updating this 14%, 15% range and even more EPS. We think each one of our businesses is exiting the year stronger than it entered the year. We are pleased that we have some brand new breakthrough technology that we did first in humans in 2019. And at a time when we generated good earnings, we were also very aggressive investors in the future. You can see we -- we're on track to spend 17% to 18% of our sales in R&D because we know it's the seeds that we're planting today that are going to pay off in '23, '25 and 2030. Looking forward to 2020, we think it's going to be another very exciting year of growth. We're predicting another year of double-digit sales growth, another year of aggressive investment in R&D. And again, no update to guidance. But this will be a fun one. And at the same time that we're generating sales, you'll continue to see new data come from Edwards and our update on our newest technology. So just in summary, I feel very confident about our long-term growth prospects. Why do I? Number one, I love our patient-focused culture. We've got a group of people that are really focused on doing the right thing. We have this highly differentiated strategy that's about focus and bold innovation. We have an incredible group of innovative R&D. We have so many engineers within the company that are extremely talented at this point, more than we've ever had in the past. We're fortunate that we have built credibility and trust with the physicians we serve, with the regulators that we're involved in, that allows us to be well positioned to be able to do this pioneering work in the future. And finally, I'd like to think that we're still small, nimble and agile. We know that the world is going to throw a lot of big changes at us in the future, but given the fact that what we do is of critical importance to these patients. And we are small enough to actually stay in touch and be focused. We think that we're very well positioned in the long term. So thanks to all of you very much for your interest in Edwards Life Sciences, and look forward to seeing some of you in the breakout.