Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Okay. Good afternoon, everybody, and welcome to the last fireside chat of the day, at least from a medical technology perspective. This is Bob Hopkins from Bank of America. Very excited to have our next discussion with management team from Edwards Lifesciences. On the line with me, we have Scott Ullem, who everybody knows is the company's Chief Financial Officer; also Mark Wilterding and Oliver from Investor Relations. And thank you for joining us today. We really appreciate your time, and we're going to kind of do entirely a fireside chat. So Scott, Mark, Oliver, thanks so much for joining me today.

Yes, it's our pleasure. Thanks for having us, Bob. We've been looking forward to this.

Yes, absolutely. And so maybe we'll just sort of jump right in. And Scott, just would love to get kind of any sense for just maybe what you're seeing in the marketplace today. I know you don't want to be specific, but just generally, directionally, have things continued to improve over the course of the last month? And the reason I asked the question is that that's kind of what we're hearing from most players, a slight improvement off of a low base. And just wanted to make sure that from a TAVR perspective, that's kind of the same thing, or perhaps it's not. And if it's not, we'd love to know it.

Yes. Sure. No, it's kind of what we've been hearing as well. It feels like in many regions in the U.S. and outside of the U.S. that COVID cases are plateauing. And to combine that with -- it seems like more of a positive tone and tenor of our conversations with hospitals and hospital systems and physicians. We've got TAVR centers and TAVR programs that are thinking more seriously about preparing for a recovery. And then we've got some support from regulators as well. So state governors, like in California, local government officials around the world are being more vocal about reengaging on procedures. So there's room for optimism. There are all kinds of ifs and buts and potential issues that could emerge, but we're feeling like there are more tailwinds than headwinds at this point.

So that -- would that include also on kind of the demand side? Because it sounds like some of those were data points on doctor readiness, hospital readiness, states opening up. Do you have any anecdotes that are worth sharing from kind of a patient perspective? And we kind of know, or at least we think we know it will happen long term. But here in the short and intermediate term, any anecdotes worth sharing on the demand side and the willingness of patients to kind of come back in and reengage?

Well, there are anecdotes, but in some cases, they lead you to different conclusions. And so I don't think we've got anything that's really applicable universally. We've got some patients in regions where they have not been as affected by COVID. And in fact, TAVR volumes just, for example, have not been as impacted as they have in other places. And in those cases, patients are more apt to come in and get a procedure, obviously, with the support and guidance of their physicians. And you've got other cases where, especially because most of the patients we're treating are older patients, they don't want to go to the hospital. And so like you said, even if the hospital is open for business and performing electric procedures, there may be cases where patients just say, I'm not ready yet. So I think time will help on that score. And I think that there are a lot of hospitals having good success here despite the COVID interruption, and we hope that, that continues.

And I've heard some physicians and this may be just kind of anecdotes that aren't worth a lot, but talk about how TAVR may be perhaps not the quickest thing to come back from a general comment perspective that sort of other emergency procedures will be first and then TAVR might be in more of a second wave because you just can't wait too long. Do you think that's kind of representative from an entire country perspective? Or should I look at that as more of just anecdotes?

I think more than anecdotes. I mean it's tough to apply a label to TAVR as elective or nonelective. And it's hard to predict how patients and their physicians are going to want to proceed based upon that patients' individual needs. But because of these delays, I think some patients are going to get worse and some may not survive the delay. Some will not survive the delay given that this is a deadly disease and you've got patients with comorbidities. But we also believe there are going to be patients who do come in and try to make sure they get treated just because they're aware of the fact that this is such a debilitating and deadly disease, and time is not the friend of a patient.

Do you guys have -- what's your confidence level that of the procedures that are being delayed because of COVID right now that you can recapture a lot of those and reschedule a lot of those given that these patients are older, there are logistical challenges? Just curious, like with orthopedics, for example, there's high confidence that, that stuff is just ultimately going to be rescheduled at some point. I know TAVR is a different type of disease, but what's your confidence that the majority of these things that have been delayed can be -- you can keep a hold of the patient and reschedule those?

Yes. We've got a pretty low confidence level of the ability to predict or quantify that, Bob. It's hard to know. It's impossible to know really how many patients have been delayed. We've got regions like New York City and Italy, where we experienced a dramatic deferral of patient cases. And you've got other parts of the U.S. and Japan, for example, where procedure delays in the first quarter were minimal. And so to answer your question, it starts with how many procedures have been delayed, and we're not sure. And then the question is, okay, are those that have been delayed, how many will get rescheduled. We'd like to think that a lot of patients will have a chance to get treated. A lot of patients will come into the system. And then you've also got patients whose diagnosis and pathway from referral to procedure has been delayed. And it's another area where we know that physicians and hospitals are looking at very carefully because to get the procedure volumes back to where they were pre-COVID, patients also have to get screened and lined up and ready for operations.

And maybe one concrete way of asking the question is, do you guys have a sense for how many of the 600, 700 cath labs in the U.S. that do TAVR procedures are now actively doing cases and how that compares to maybe a month ago or 2 months ago?

Yes. It's hard to say the exact number of centers that are actively doing cases right now. We did mention on the earnings call 3 weeks ago that since COVID hit, we have stopped doing the training at new NCD accounts. So after the NCD, we've talked about being able to broaden the number of centers. And we've paused on training those new centers. We really focused on supporting the existing sites. But it's tough to quantify how many of those 700 are actively doing cases right now.

Do you have any thoughts on when that training might kick back in?

Well, I think it's going to be site by site. I mean we're ready to go as soon as it's safe for our employees and safe for the hospitals to be able to accommodate the work that goes into getting trained up to launch a TAVR program that is safe and effective. And I think some hospitals and sites are going to be ready sooner than others. It's going to be one where it's based upon regional trends and physician bandwidth, and we'll be able to support that and respond to it. Our people in the field have been just absolutely incredible. I've been so impressed with the level of commitment, dedication and support that all of our field clinical specialists and our salespeople and all the people in the field have shown to the customers. In fact, interestingly, in the month of March alone, we had Edwards full-time employees providing clinical support for TAVR cases in all 50 states and in about 60 countries. So it just gives you a sense of how dedicated our people are, ready to support existing programs and help bring online new programs when they're ready to go.

Yes. No, it's impressive. And I realize that long term is what matters. What the business looks like in 2021 and beyond is what matters. But the kind of the pacing for this year is not unimportant, and you guys did talk about a couple of things. You did talk about the fourth quarter, and there is an expectation that you'd grow in the fourth quarter if you just look at consensus estimates. And just kind of wanted to understand, Scott, knowing how detailed a model you are, what are the things and data points that you heard that gave you that confidence to say we can grow year-over-year in the fourth quarter or at least that's a scenario that we want to put out there? And I asked the question obviously because there's just unprecedented number of uncertainties out there. So I just realized, I just kind of wonder why that would be presented as sort of a base case or a case to consider.

Sure. Yes, there are a lot of uncertainties. And it's important to note that one of the fundamental assumptions, which may be incorrect, of our guidance was that there is not any kind of a big second wave in any of our major regions. And so if that ends up happening, then the basis of our guidance ended up being wrong. So one way we got comfortable with our model was just to say, all right, let's limit the variables and limit all the myriad scenarios and just say, if we have the continued recovery, then what would our financial prospects look like for 2020. And when we did that, it starts with really doing a bottoms-up analysis of our center growth and our center volumes. Obviously, everything changed in the last several weeks of March. We went from having a really good, strong first quarter, even a little bit better than our expectations, especially in Europe TAVR, to one where, obviously, we came in well below what we expected. That slowness and softness continued into April as we started the second quarter. And as a result, we had assumed in our guidance that the second quarter was going to end up being weak. We think it's our toughest quarter of the year. And at the same time, we've seen enough positive signs that we felt comfortable saying that we expect the third quarter to show recovery and the fourth quarter will be back to what we had originally expected in terms of fourth quarter performance. So all of that said, we do have, obviously, all kinds of models, but we also just felt like it was a responsible thing to do to share our perspective, recognizing that we'll be wrong, either on the upside or the downside, but to tell everyone on the sell side, the buy side, what we think is going to happen if, if and if, right?

Yes. Just also in that assumption that you put out there for the fourth quarter, does that assume that basically all of the demand is sort of de novo new demand versus kind of rescheduled procedures? So like how much of that fourth quarter comment is just the thought that you're going to reschedule a bunch of lost procedures versus just sort of normal trends, normal demands?

It's probably a combination of both. I mean we know that many of the patients that might have been treated in those last couple of weeks in March and in the second quarter might get deferred until Q3 or Q4. And we know that patients who would have otherwise gotten screened in later March and in April may not have started that screening process because they didn't want to go to the hospital or weren't invited to come into the hospital or wherever they're seeing in their physician. And so the screening is also going to cause sort of a delayed ramp back to what we expected for fourth quarter growth rates. But if you assume that the combination of those 2 things happens, then we're likely to be in a more typical volume situation in the fourth quarter.

Okay. All right. That's helpful. I appreciate that. And as you were just commenting on what was going on in the quarter globally before COVID hit, I did want to follow up. Do you have a sense as to why your growth in Europe for TAVR was doing so well in the first quarter? Like what was the dynamic driving that? Was it share gain? Market acceleration? Just any kind of thoughts there.

Well, we think it was a combination of things. Our market position stabilized, you will recall, I don't know, 18 months or so ago, when we were losing share consistently quarter-over-quarter. That's all stabilized and we'd like to think behind us. I think more importantly, you've got the other drivers of just general therapeutic growth, including the trial data from PARTNER III. And this is a kind of data where the combination of the actual clinical results being circulated plus New England Journal of Medicine plus local press and societal discussions have all conspired to the benefit of patients as treatment rates have increased. I think also in Europe, what we've seen is good performance from countries that are less penetrated with TAVR. So Germany, for example, which has the relatively high penetration rate. I don't mean overall but relative to other countries. And for the countries that are earlier in their TAVR journey, we're still seeing good growth. And that's part of what's lifting the growth rate and maybe a little bit more than what we expected in Q1 up until March.

Right. Okay. And -- all right. That's helpful. And maybe one other follow-up on that, too, as well. Like in terms of new technology, Ultra, is that also -- do you think something that -- like I just want to maybe get your perspective on Ultra and put that in context for us. Is that sort of a nice feature that makes your current user base kind of more comfortable? Or is this really a tool for share gain off of a high base? Just kind of curious like how powerful you think that launch once it's kind of fully out there and there's full training might be.

Yes. No, we think Ultra is positive, and not just for market share. But any technology advancement that can give operators more comfort and more confidence in the therapy is a good thing. And in the first quarter, Ultra accounted for more than 30% of our U.S. and European TAVR volumes. And so there's a lot of good momentum with that platform. We've gotten really positive feedback from physicians who have used it. And at the same time, we decided to pause proctoring at centers that were not already trained on SAPIEN 3 Ultra. So we'll resume that as the situation stabilizes and as the COVID disruption declines.

And Scott, I was wondering if you could also just give us any update on time lines for the litigation in Germany as it relates to PASCAL and any updates on time lines for the U.S. litigation. I know there's some uncertainty there. But just curious if we could kind of get our arms around when we should expect rulings from a timing perspective.

Yes. Sure. So let's shift over to our transcatheter mitral and tricuspid business. There is litigation scheduled or, I should say, rescheduled now in Germany and in the U.S. Both those trials were supposed to be a little bit earlier in the year. But as a result of the interruption of COVID, they've been pushed back. So yes, we are gearing up for that, planning for it. It's difficult to estimate what the outcome would be. Certainly, we didn't have any litigation risk in our most recent $30 million to $45 million guidance for TMTT. So if there were an adverse outcome of that litigation, say, an interruption in Germany, then that would have a negative impact to our 2020 TMTT sales.

And are there any specific dates available for when you think things will happen in Germany and when you would expect a ruling?

Yes. Germany is in July and the U.S. is August for now. I can't predict when exactly the ruling would come out or when any adverse ruling would be effective.

Okay. Okay. And when investors ask you the question on like how should they be thinking about that because mitral, and especially mitral repair, is one of the major growth opportunities for the company as you look forward over the next couple of years, and so this litigation, especially in as big a country as Germany, isn't unimportant, so how do you frame that for people? How do you get new investors sort of comfortable with that risk? Or how do you address it?

Yes. That's a fair question. Well, first of all, look, we are really positive in our technology, and we're positive in our IP position as well. So we're going to defend that position aggressively. And at the same time, one of the questions people ask is, what's the downside, what are the risks. And the risk is that there's an injunction in Germany and potentially other areas in Europe and that we're not able to offer that therapy to patients. That's obviously the worst part of an adverse outcome, is that patients would suffer. But bigger picture, we like PASCAL a lot. We think it's a really important therapeutic alternative for patients. We think that the early clinical results from our European CLASP study were impressive, differentiated level of performance and a differentiated offering from what currently exists. So we're positive about the prospects of continuing to introduce PASCAL, both in Europe and in the U.S. And at the same time, PASCAL is just one element of our overall TMTT strategy. So while leaflet repair, leaflet coaptation is an alternative for patients who suffer from mitral regurgitation or tricuspid regurgitation, we've also got programs aimed at annular repair. And specifically, our Cardioband technology, which we are currently redesigning, could be a really important alternative for patients who have regurgitation of physicians who want to treat it using transcatheter-based annular dilatation. And then of course, we've got mitral valve replacement projects as well and tricuspid. So we've got a pivotal trial that's going to be starting for our SAPIEN M3 mitral valve replacement as well as with our EVOQUE mitral and tricuspid replacement devices. So PASCAL is important, but it's part of an overall bigger offering that we think is going to be important over the next -- as time unfolds here.

Is there any way to provide investors any comfort on the ultimate outcome of this litigation? And perhaps the answer is no, but again, it is an important product. And is there -- just trying to gauge Edwards' confidence that you'll be able to continue to sell this device in these important markets.

Yes. No, it's really difficult to predict. There are always risks with litigation, and there is a risk, as I mentioned before, that there's an injunction that prevents us from being able to offer PASCAL to patients. And I don't want to minimize that risk. At the same time, we'd like to think that we'll be able to continue to offer PASCAL and that we'll get through this. Oftentimes, these proceedings take different twists and turns. There are -- typically, whoever loses is going to appeal, and there are various different solutions for trying to get through that. But I don't want to minimalize at all the risk that this could go against us and that would impact our 2020 sales forecast.

One other -- one financial question I wanted to ask is it -- is there -- given the stock volatility, is there anything that we should be thinking about from a tax rate perspective and stock-based compensation that's worth calling out at this point? Just sort of wanted to check that box. And then the other kind of quick financial question I wanted to ask is, we're obviously in this unprecedented environment. As we think about 2021 and life beyond COVID, if revenues do return to normal levels, should we assume that operating margins will follow without a lag? Or is there some reason to expect that there could be pressure on margins that lags a little bit after a recovery in revenues?

Well, why don't I take that one first, and then I'll come back to the tax rate question. In terms of margins, this is going to be a short-lived exercise, assuming that we get beyond COVID. And what I mean by that is losing something like $0.5 billion in sales in 2020 is going to result in our bottom line also looking very different. Originally, we expected earnings per share of -- well, not originally, back in January, when we increased our guidance for EPS, we were thinking $6.15 to $6.40. Our guidance 3 weeks ago was $4.75 to $5.25. So a big hit on bottom line. As revenues recover and as the top line grows, I think we're going to be able to grow back into our margin profile pretty quickly. At our cost of sales line, we've got a fair bit of variable cost, more so than companies or industries where there's more property, plant and equipment at play. Ours is more variable just because our products are oftentimes made by hand. The fixed costs are more visible when you look at SG&A and research and development. And so we're intentionally taking actions that make sense short term but not taking actions that would disable our longer-term strategy. And so we're going to continue to invest through this downturn. And I think as a result, when revenues come back, you'll see a pretty quick recovery of our margin profile, at least that's the expectation. In terms of the tax rate, you mentioned the stock-based compensation. Just for everybody's refresher, a good contribution to our tax rate is the excess tax benefit that we get for deducting the difference between the strike price and the exercise price of employee options. And in fact, in the first quarter, that generated almost 300 basis points of benefit to our tax rate. That said, it was over 300 basis points lower than the tax benefit we got in the first quarter of 2019. And so Bob, you are right that because of that accounting convention, it can really cause our tax rate to swing. We widened the guidance range for our tax rate to 11% to 15%, but it didn't change the midpoint of 13% for full year 2020.

Okay. Is there any kind of -- could there be a lingering effect of that? I guess it will just depend on stock price as we think beyond 2020. Anything worth calling out at this point? Or we'll just have to wait and see?

Yes. This excess tax benefit element is frustrating because it's totally unpredictable. It's based upon how our stock price trades. And it's just -- it's tough to call it, especially in a given period. I mean we've had some periods where our tax rate is extremely low because of ETB, and I'm sure that we'll have year-over-year comparisons where there's a big delta between those tax rates. But I think longer term, our expectation is that there's probably more upward pressure on our tax rate than there is downward pressure. So for the full year 2019, our all-in tax rate was 11.5%. For the full year 2020, we're expecting 13%. And again, that's benefiting from a lot of excess tax benefit. So again, I think there's probably more upside risk on the tax rate than downside risk, but it's also not something that I think changes our fundamental outlook of very strong earnings growth opportunity driven by really strong organic top line growth.

Great. That's a fair summary. We've only got a couple of minutes left. And Scott, I wanted to end, if okay, with a question on just kind of the stock price and the outlook over the next 12 months. There's been some concern voiced out there that after a pretty extraordinary last 2 to 3 years in terms of major data sets and readouts and new indications coming online and immediate market acceleration that maybe in the next 12 months, there's -- it will be kind of relatively quiet for Edwards and then maybe a period where the stock has less upside as a result. I think a lot of people do totally believe that the long-term outlook for Edwards is quite positive. But maybe there's a thought that the next 12 to 18 months could be pretty quiet. So I'd just love to kind of get your reaction to that. And are there things that you would point us to over the course of the next 12 to 18 months that could be maybe overlooked events that we should be paying attention to?

Yes. It's a good question, and we've heard about this. So it may be a feature of where the stock is today. We're excited about a lot of things that are going to happen over the next 12 months. And we do see several opportunities that will likely drive an opportunity for increased shareholder value. We appreciate that those milestones are important to the way investors think about value on the stock. But there are -- it's tough to keep up with things like PARTNER III last year at ACC. There's just not a pivotal clinical trial result that's coming in 2021. That said, there are a lot of different things that are coming. And they're across all 4 of the Edwards businesses. You've got the continued introduction of SAPIEN 3 Ultra in the U.S. and Europe, where we've got some early momentum, but there's a lot more to come. In our surgical business, we're continuing to roll out INSPIRIS, which is now the largest surgical aortic valve in the U.S. and Japan. It's a pretty exciting growth opportunity for surgical structural heart. We're also planning to launch Harpoon, which is our mitral valve repair system for surgeons, followed by launches of Physio Flex, KONECT, SUTRAFIX. So there's a lot of new product activity coming out of surgical. In our transcatheter mitral and tricuspid therapies operations, we're just continuing to build important clinical evidence. And investors are going to have a chance to see that at medical meetings, hopefully in-person medical meetings, when we get back to that in 2021. But regardless, there is data coming. And then, of course, Critical Care, where we're expecting the 2020 launch of ClearSight, and this continued shift towards our smart recovery suite to continue to benefit growth prospects for Critical Care. So that's sort of the next 12 months. But I'm also excited just about the longer-term outlook for Edwards. And despite all the growth we've seen over the last several years, we know we're just scratching the surface, especially in TAVR and in TMTT, where the treatment rates are so low that there's just a lot of room for upside if we can continue to help the market develop. So we're positive on the outlook, both in the next 12 months and beyond.

Well, Scott, Mark, Oliver, thank you very much for your time. We're unfortunately out of time. But you guys are great to participate in this virtual conference of ours. We really appreciate it. I just wanted to say again, thank you. And that concludes our fireside chat with Edwards Lifesciences. Thank you so much for being here.

Thanks a lot, Bob. Take care.

Thank you. You too.

Bye.