Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Okay. We're going to get started. I'm Josh Jennings from the medical devices team here at Cowen. Thanks, everyone, in the audience for coming to this session, the first post-lunch fireside chat. And we're pleased to have Edwards Lifesciences here and the Corporate Vice President and Chief Financial Officer, Scott Ullem. Scott, thanks so much for joining us this year again, and looking forward to our discussion.

Yes. Our pleasure. Certainly, thanks, everyone, for coming.

Well, clearly, our front-burner issue clearly is COVID-19. And just wanted to maybe review, I mean, China's been the hardest hit, just Edwards' exposure to China to start with. And then maybe we can just ask a couple of more follow-up questions. I know it's a fluid situation in all regions, but maybe we could just start with China and Edwards' exposure and going on from there.

Sure. So I mean, our biggest concern, of course, is the patients that we're supporting and our employees in the region. And so we're watching that carefully. In terms of production, we don't have any real production directly in China. But you're right. It's a fluid situation. So we're watching this unfold.

And just in terms of there has been some spread into other regions, we're hearing about some cases in Europe and more and more diagnosis, some in the United States very early, but any sense of impact outside of China? And maybe not just to Edwards but just from a procedural standpoint, electroprocedures, per se? And maybe we can talk about the electiveness of TAVR in a summary.

Yes. So I think we're probably best positioned to talk about TAVR specifically rather than other sectors within health care, but it's something that we're watching carefully. For the diseases that we treat, such as severe aortic stenosis, this is not an elective procedure. It's a procedure that is time-sensitive, and patients need care as soon as they can get it. And so we're working with our hospital partners, with our physician partners to do everything we can to support cases and watching carefully as this disease starts to make its way into other geographies.

Understood. Maybe we can shift into this fourth quarter, just retrospective look because I think The Street had a little bit of a surprise after Medtronic's result just in terms of calculating share and looking at the growth of their U.S. TAVR franchise versus Edwards. Again, it's not a perfect match because they bleed into January, but can you just talk about maybe some of the drivers of Edwards' share gains, and maybe what you're seeing in the field from a perspective of Medtronic's sales force kind of being still growing to account for some of the new centers that are being added on? Sorry, there's 2 questions there. Maybe we could talk about fourth quarter trends first, then we can ask the second question after that.

Sure. So fourth quarter was very strong for us, obviously, and it reflected the fact that we saw a real step-up in demand after the results of the PARTNER III Trial were publicized at ACC last year. And that led to a broadening of the label to include patients, who are low-risk of an outcome -- of an adverse outcome from surgery. So we saw those results in that step-up benefit in the fourth quarter and a part of the third quarter. In terms of market share, it's tough to really get totally precise about market share. And you're right. With the difference in reporting periods, it's probably too early to read much into it. I'm not sure. We've observed the magnitude of whatever kind of share impact there was that Cowen did. But our biggest focus, of course, is just making sure that we're serving the hospitals and the sites where they are performing TAVR. And we haven't seen any unusual interruption or disruption to our sales force and attrition rates. And just the normal course of our field force has been stable. We haven't seen any real changes in that. And so overall, we're pleased with where we are. I think that we are expecting that we're going to lose some share in 2020 as the other 2 new entrants show up here in the United States. And so that will impact us to some degree.

So that share loss is baked into guidance? You guys revised guidance on the fourth quarter call at the end of January to the upper end of that 12% to 15% for global TAVR growth -- revenue growth. I think one of the concerns that came out of Medtronic's report was that they saw kind of a step down in January. Whether that was a read-through to the market, it seems like there's some implied -- or comments that implied the continued momentum through January at least by Mike on the fourth quarter call. I just wanted to try and sanity-check that and make sure we're thinking about it correctly in terms of what Edwards is experiencing or what you wanted to communicate versus what Medtronic was reporting in terms of the step down in their growth in January.

Yes. So it's -- we wouldn't be able to reconcile their comments with ours, but we -- what we said at the time of our fourth quarter earnings call in late January was that we felt like the trends coming out of year-end were even more favorable than we saw at our investor conference when we first gave guidance for 2020, which is why we increased our guidance to, say, it's probably around the top end of that 12% to 15% range for TAVR and around the top end of our range for a consolidated Edwards growth as well. Part of that was based upon fourth quarter, how it ended. Part of it was based upon how things seemed here at the beginning of the year. We always hesitate trying to extrapolate 1 month and say, "Well, this is the trend by quarter." But we can say that we feel confident in the way the business was trending.

And we do think about the share gains and what the drivers were there. Some checks, again, they're anecdotal in the fourth quarter and the first quarter here with clinicians. I mean there's some that would put on the table that there are some clinical advantages of SAPIEN 3 versus other platforms, maybe a little bit more enhanced in the low-risk population. And maybe I'll ask the question. So I mean, how -- what is Edwards' big marketing push? I think coronary access advantage is one for SAPIEN 3. Are there any other, I guess, design features or just potential advantages in these younger, lower-risk patients?

Yes. I think we first turned it as the results of this rigorous, large, randomized trial that we ran. We're very proud of the results that came out of PARTNER III. And the evidence that was generated, that just adds to an already positive body of evidence from the rest of the PARTNER series of clinical trials. And so we looked at that, first and foremost, when we're talking about the attributes of SAPIEN 3 and how we think it compares both the surgery and to other alternatives. Ultimately, what we're really competing against is this disease itself. And the fact that it is still massively undertreated, and increasing the rate of treatment by 1% is a lot more valuable to everyone than a shift in market share of 1%, one way or the other. So that's really our focus area and what we talk about when we're conferring with our physicians and what we're working on when we're considering other ways that we can help drive adoption for these therapies that treat severe AS.

And as you think about that pie and the underpenetration of TAVR and SAVR as well, surgical aortic valve replacement, I think you guys have said that this $1.2 million -- excuse me, 1.2 million patient number in terms of the prevalence in the United States or the prevalence pool. And that's a blend of asymptomatic and symptomatic patients. And it seems as if with low-risk approval, maybe some more and more of those asymptomatic patients are ruling in after maybe some more rigorous interrogation by clinicians during their history, who re stress testing on a treadmill. Is there any validity to that?

Yes, there is. We used to think that there's a pretty clear distinction between patients who had symptoms and patients who were asymptomatic. And years ago, we thought that maybe those patient populations were comparable. Now we think that they're -- that there are more patients who would qualify as symptomatic patients based upon greater awareness of the disease, based upon probably more sophistication in the way patients are evaluated and diagnosed and questioned about whether they have symptoms. So keep in mind, these symptoms are oftentimes confused for symptoms of just old age. They include loss of energy, shortness of breath, sometimes fainting. And for patients in their early 80s, which should be an average age patient for TAVR, those are the types of symptoms that need to be identified for treatment to be on guideline. So it's one of the reasons why we're running this EARLY-TAVR Trial and why we think it's so important to take on this question around, are symptoms really correlated or is there a causation between symptoms and benefits of getting treated?

And just to be clear on the EARLY-TAVR Trial, your latest update at the Investor Day in December was that it's on track to complete enrollment in 2021, and that's because you're still on that pace. And...

We are. So it's a 1,200-patient trial. It's an important trial, and it's been enrolling. What's happened is physicians have emerged as real advocates of testing this question. And at centers that have really adopted this clinical trial aggressively, we're seeing the biggest enrollment from those centers, relatively smaller enrollment from centers that -- where there hasn't -- where we just haven't gotten as much traction. So it's a little bit of a barbell enrollment pattern, but it's as we expected and talked about at our investor conference in December. And we're looking forward to getting it fully enrolled and starting the follow-up period to study these patients.

And just back to the kind of asymptomatic and symptomatic blend in the prevalence pool. I think since the low-risk data was presented at ACC and then approval hit, I think, in August of '19, I think your team has referenced just patients -- more and more patients coming off the sidelines. We've heard that from clinicians as well. I mean is part of that, these asymptomatic patients rolling in, is it -- I'm sure it's hard to break the -- parse this all out, but increased awareness that you talked about? But maybe if you could speak to that and then also talk about -- just tell me some of what types of patients have, since the low-risk approval have been treated? Because it seemed as if your team is implying that your seeing more inflow from intermediate-risk patients and even potentially high-risk patients as well.

Well, it's a good question, and it's one that's really hard to answer. If you break down the composition of more patients coming in and getting treated, it's difficult to identify who might be symptomatic or asymptomatic. It's almost impossible to identify what potential predicted risk score they would have in terms of risk versus traditional surgery. What we do know is that there's just been a dramatic increase in the patients who are coming into the system and getting treated. And it comes from all those different sources. Patients with a variety of symptoms, patients who have a variety of predicted mortality scores from the STS system. And so we're pleased to see a pretty broad-based approach and a broad-based acceptance of this awareness in this therapy. However, this is still a very underdiagnosed disease. And so we're working on a number of different fronts to try to improve awareness and improve diagnosis. And you get patients into a situation where they can make it through the referral chain from the primary care physician to a general cardiologist and, ultimately, to the heart team, where they get treated either with surgery or with TAVR. And so that's going to be a continued focus and emphasis of ours in the years ahead.

And just with that commentary and around just the underpenetration of the severe aortic stenosis population with any intervention, you've expressed some -- or have given guidance that the surgical franchise wasn't going to be impacted on a one-to-one basis by any means with TAVR now being approved on the risk. You didn't see that dramatic impact in the back half of the year. But I guess, that fuels your, I guess, guidance for 2020, where you could potentially see flat to down low single digits or up low single digits. And maybe just talk about that surgical valve business and the outlook there just with TAVR coming on strong.

Yes, sure. Well, we remain enthusiastic about surgery. And we've been innovating and introducing new tools and technologies for our cardiac surgeon partners. We're the -- in addition to being the largest TAVR provider, we're also the largest provider of surgical valves. And so while we did see an impact in the fourth quarter, and we saw aortic volumes decline in surgery, it wasn't terribly surprising. We saw the same impact after our PARTNER II intermediate-risk trial results were presented, where, for the first quarter or 2, we saw pressure on surgical aortic volumes. But then as we annualized around that period where there was a step-up, we saw volume growth return. So we're expecting during 2020 that surgical volumes are pressured in the beginning of the year and end up turning positive again as the year goes on, which leads us to this 0% to 3% guidance that we provided. TAVR, by the way, works directly the opposite, where you expect higher rates of growth early in the year and then a growth rate that declines as we get into those really high year-over-year comparisons in the third and fourth quarters. Overall, we expect that surgical is going to continue to grow, partly because of this return to the positive growth, partly because our product portfolio is evolving. And so the new technologies that we've introduced to cardiac surgeons are priced at a premium to the predecessor generations. We also have new products coming online. And we think that surgeons having those tools available to them will be able to treat even more patients. And there are more patients coming into the system. And a lot of these patients coming into the system will benefit from TAVR, but there will also be a lot of patients who are more aware of structural heart disease, who come in for treatment, and are better candidates for cardiac surgery. They have concomitant procedural needs or have other factors that lead they and their physicians to decide that cardiac surgery is a better alternative.

Great. Maybe flipping back to TAVR. Low-risk approval bicuspid represents a big chunk of the low risk segment. I think clinicians are trying to break it up now into surgical versus nonsurgical candidates. But using that historic nomenclature, can we just talk about the path forward in bicuspid? One, maybe the first question is, I mean, will there ever be a randomized controlled trial of TAVR versus surgery in low-risk bicuspid?

Yes, I think this question about bicuspid is an important one, but it's not as important as some of the other things we've talked about. Bicuspid is not contraindicated in the label for SAPIEN 3. And so patients, who have bicuspid valves, either congenital or otherwise, have been treated with balloon expandable valves regularly and continue to do so. So I can't give you a precise answer on what future data may be presented comparing surgical to TAVR or different valve systems that serve patients with bicuspid. But suffice it to say that we've been pleased with the performance of the valve in bicuspid patients over the years.

And I mean, I guess, I understand this could evolve, but the bicuspid registries that were part of the low-risk trials, both Edwards PARTNER III and Medtronics Evolut low risk. Those registries have been enrolled. We'll start to maybe see those data as we go through this year. And do you sense that low-risk bicuspid or physicians having comfort treating segments of the bicuspid low-risk population will play out similarly to what happened in intermediate risk?

Yes. I think it's premature to try to speculate. We'll wait until data get presented and then interpret it and hear how physicians are interpreting it. Again, I think we're confident in the ability of our SAPIEN 3 and SAPIEN 3 Ultra balloon expandable systems to treat patients who have bicuspid valves.

Excellent. Maybe one last question, get in there on TAVR. I was about to wrap it up, but just about one more. As we think out -- now that we have low risk in play, younger patients are going to get TAVR -- potentially TAVR first depending on what age they are. And then those patients will need probably second intervention, if you assume durability is in that kind of 10-year range for TAVR or SAVR. But just for TAVR first and then thinking about TAVR, and TAVR potentially may not be the right term, but replacement cycle for the TAVR industry, I guess, how is Edwards preparing for that? And then maybe what's the outlook, that $7 billion TAM, that you guys have put on the table for 2024? Is it a sizable piece that you guys account for in that of TAVR and TAVR?

Yes. It is a piece of that $7-plus billion forecasted TAM by 2024. And it's something that we think carefully about. In fact, have designed replacement valve and valve into, for example, our surgical valves. So INSPIRIS, just a case in point, has this feature called VFit, that along with RESILIA as a tissue treatment, we think both puts in place the building blocks for durability and as well building blocks for future TAVR and SAVR. Similarly, there's TAVR and TAVR. So it's happened with patients and will continue to happen. I think that durability is difficult to predict. And it's different by patient. And there's not a real ability to determine which patient is going to benefit from which therapy first. Whether it's SAVR first or TAVR first, that's a decision that patients and their physicians make. Our focus is on trying to make sure that we've got the tools in place that can benefit those patients, who need replacement valves down the road.

Great. I don't -- I'm not leaving enough time by any means for -- to transition over to mitral and tricuspid, but we'll try and whip through a couple of questions here. One of the, I guess, pressing issues or concerns with investor holders and potential investors is just on the litigation that's in play over in Europe and soon to be in the United States. There's not a lot of specifics you can give, but maybe from a high level, you can talk about how you feel Edwards is positioned. And any milestones that we should be looking for in the coming months and quarters?

Sure. So we're going to defend vigorously positions we have in our intellectual property. There are several different decisions that are going to come over the next several months, one of which can come any time as a decision on a U.K. proceeding. We've got 2 different hearings coming up in Germany. First one starts next month, and then there's a trial scheduled for the U.S. in May. And so our preference is always to try to solve these intellectual property disputes privately. But in the absence of that, there will be a number of different proceedings of both companies suing each other. So we have a lot of IP that we're going to be defending as well. And these cases will play out in various different venues. There will certainly be appeals in various different venues. And again, absent a settlement of some variety, we're prepared to go down that path again.

And maybe we can -- thanks for that. And maybe we can talk just about the PASCAL launch. I hear there was a little bit of disruption with the ship hold in Germany in Q4. But you guys are back on track. Just wanted to confirm that. I think that was your last messaging on the call, and it's only been a short period. And then also just maybe just some strategic rationale behind this, the limited launch, if you will, with PASCAL.

Yes. So I'm not sure if it's a limited launch. It's probably more just a disciplined launch, where our focus has been on excellent patient outcomes, acute procedural outcomes and a very positive experience from physicians. And we've heard positive feedback from physicians. The -- our strategy has been to provide a high level of support. And support includes diagnosis support, imaging support, case planning support, proctoring. And so that's part of the value equation and service model that we have in place for PASCAL in Europe. It takes time to get that service model and those contracts established with our customers and different hospital sites. The pricing strategy has been an influence on that timing as well. We're pricing PASCAL at a premium because we believe that the therapy provides a superior model, again, for both patient outcomes and operator experience. And so we're still very, very pleased with the technology. We're pleased with the progress we've made, although it was short of what we expected in 2019. And we've given guidance for 2020 of $50 million to $70 million in sales. Keep in mind, that does not include any potential disruption if there are any impacts of litigation. But overall, we're positive about the trajectory and the trend line in our PASCAL business. I'll also just add, PASCAL is one element of a multitherapy business. So we talk about our Transcatheter Mitral & Tricuspid Therapies that include solutions, both for repair and replacement. PASCAL is a very important one, but we've got other tools as well.

Understood. And -- but just to stick with edge-to-edge repair for one more question. And just thinking about European utilization, I think if you look at MitraClip numbers yet and the PASCAL revenues from '19, that edge-to-edge repair market internationally grew in the high teens off of a larger base than the U.S., but maybe some would say that maybe a little bit slower than expected, particularly after the grand slam COAPT data at the end of '18. Long-winded question. But I mean, are we still seeing impacts from the MITRA-FR versus COAPT debate over in Europe playing out? And how do they get resolved? Could it be with more -- another data set with another edge-to-edge repair system?

Sure. Yes, there's certainly a lot of discussion about both of those trials. And we think that it's one of the reasons why having additional clinical evidence can be such a benefit to the field as a whole. And the rates of treatment for mitral regurgitation are much, much lower than even the low rates of treatment for aortic stenosis. And so we're excited about our pivotal trials in the U.S., CLASP IID for primary mitral regurgitation patients, CLASP IIF for secondary or functional regurgitation patients in the U.S. And adding those clinical trial results, which we expect to be positive, to the body of evidence for leaflet coaptation for edge-to-edge repair, we think, is beneficial. Again, the objective is helping more patients come into the system and have treatment alternatives to address these very serious diseases.

And I think you guys have made public comments around CLASP IID and the degenerative mitral regurgitation trial that you've completed enrollment by the end of this year, CLASP IIF for functional mitral regurgitation. Any comments just in terms of enrollment pace or timing for enrollment completion?

So we haven't changed our guidance for CLASP IID to enroll in 2020. It's a 1-year follow-up, which takes us out to 2021. We'll evaluate the results of that trial and work through the regulatory process to hopefully get that therapy approved by 2022. For CLASP IIF, functional patient -- that clinical trial will continue to enroll beyond 2020, and we'll talk more about the timing as we get further along.

Understood. And thinking about the repair versus replacement, I guess, it's not a battle because they're both fighting the same fight. But it may be the phrase of question, looking at -- you guys have put $3 billion TAM by 2024 for transcatheter mitral and tricuspid therapies, right? If we're just thinking about the mitral side, is repair a bigger slice of the mitral revenue pie or market pie than -- or versus replacement at that point? And any comments in terms of the ultimate first choice down the line? And that's a tough crystal ball question, I know, but maybe answer the first part, and we can decide whether to answer the second part.

Well, it's the right question and one that we're going to be able to answer as we get further along in our experience here. Certainly, for the foreseeable future, repair revenue are going to significantly exceed revenue from potential replacement solutions. Right now, we've got the only transseptal replacement technology that's in a pivotal trial. And that's for our SAPIEN M3 system. And our hope and expectation is that as we get further along in those clinical trials, and ultimately get to a point where these therapies for replacement are commercialized, that there will be important contribution to the market opportunity from replacement that would complement the already important and sizable opportunity for repair. But too early to predict which one is going to be bigger or smaller than the other. Ultimately, we believe that operators and patients will benefit from having more of a toolbox approach with our multiple repair solutions, multiple replacement solutions. And that's the reason why we've made these pretty aggressive investments in multiple different areas for both mitral and tricuspid regurgitation.

And on the replacement side, SAPIEN M3, pivotal trials kicking off, either it has or is about to, that's the, I guess, first out of the gate within your replacement portfolio. EVOQUE is the other platform. Is there a favorite internally? Or is it both platforms have different design, I guess, features that could potentially provide different advantages, and then we'll see from here?

Well, you said it well. Both systems are very different. So SAPIEN M3 is based upon the proven SAPIEN 3 valve in combination with a new coil system to keep that valve in place in the mitral position. EVOQUE is a totally different design, different technology, and we're excited about seeing both of those and how they perform in patients. We'll decide further down the road how those 2 programs can complement each other. Again, our expectation is that there are patients with -- that have these different versions of mitral regurgitation that can benefit from different solutions. And so we'll see what the relative benefit is of both EVOQUE and SAPIEN M3 as we get more experience.

Excellent. I just wanted to take advantage of having a CFO here at the Cowen Conference and to ask at least one financial question. Thinking about -- I mean, I think you've been very clear about investment to continue to be a leader in structural heart segment, and R&D is going to trend where it's trending and potentially even, well, I don't want to put words in your mouth, but that's where you're laying it out. You've got some investments on the sales force side to build out the TMTT sales force and also continue to support the TAVR efforts. But we have seen in the last 5 years, I think you've delivered an EPS CAGR of 25%, which is stellar. And it's typically been a good 5 to 15 basis points higher than the guidance you said. And I guess, how do you -- I mean, is there a formula that you use in terms of top line outperformance and allowing the flow-through to the bottom line? I mean you have these parameters of how much you're going to invest for future growth. But anything you can share there? And I really appreciate you answering all these questions today.

Well, you know us well. So you've seen our performance over time, and we're very pleased with the fact that we've been able to grow earnings so rapidly along with growing the top line rapidly. There's a lot of opportunity for us, and we're trying to invest aggressively to pursue it. Our #1 objective is top line organic growth and really generating long-term sustainable growth on the top line that's also reflected in our earnings. And ultimately, the business has to be self-funding. And so we're going to be continuing to watch carefully how our expenses grow relative to our revenues. But right now, there are just so many opportunities that we're investing aggressively, both in SG&A and R&D, to do that. We had a lot of help from our tax rate over the last couple of years. And that was one of the reasons why we had such noticeable bottom line growth. I'm not sure that we're going to have that same help from our tax rate in the years ahead, but I'd say we're going to continue to run a profitable growth story at Edwards.

Excellent. I think it was perfect timing. Actually, I just saw the clock hit 0. So we'll wrap it up there. Scott, thanks so much for participating in the 40th Annual Cowen Health Care Conference.

My pleasure. Thanks, Josh.

Great to see you.