Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Thanks everyone, again, for joining us at the Jefferies Virtual Healthcare Conference. Again, I'm Raj Denhoy with the medical device research team. Up next, we have Edwards Lifesciences. From the company, we have the company's CFO, Scott Ullem. So Scott, thank you for joining us today.

My pleasure. Good to see you, Raj.

Scott, you might be muted.

No. I'm on. Can you hear me okay? Raj, can you hear me?

Great. Well, I'm unfortunately not able to hear you, Scott, but I guess other people can. So this could be a little bit difficult. Can you -- I might be able to hear you now, Scott.

I can hear you fine. Can you hear me? Now we've gone from I could hear you, now I can't hear you at all.

[indiscernible] several weeks in. I don't want to pepper you for an update on how the business is tracking. But maybe at a very high level, you could just offer whether the recovery you're seeing kind of after the COVID trough has proven to be as you expected, perhaps better or perhaps worse. Maybe just some commentary around how things are unfolding as things open up again.

Yes. I just want to check volume. Can you hear me okay now, Raj? Raj, can you hear me? Or is everyone else hearing me, if you and I aren't connected? Well, I'm going to go ahead and speak and hopefully -- okay. Good. I got a message here that others can hear me. So let me just dive into Raj's question.

I can hear you.

Okay. Good. I'm going to keep going here. So look, I mean, we were encouraged by recent news of just plateauing infection rates from COVID-19. And it feels like there are...

Okay. Yes, I can hear you fine.

Okay. Good. It feels like there are tailwinds, maybe even more so than headwinds as we had our first quarter earnings call in late April. So that was encouraging, and we've seen a lot of interest among sites that we support in resuming a more normal level of procedures, and we're prepared to help them do that. So our expectation was that April was going to be a tough month, extending from the tough latter part of March and that the second quarter was going to be the low quarter of the rest of the year, ramping to an improvement in the third quarter and ultimately, a fourth quarter that maybe looked something like we had originally expected for the fourth quarter of 2020.

Understood. As you think about the -- other than looking at kind of daily sales volumes, are there other trends or signs you look for in the marketplace that things are getting better, whether it's surgery schedules or TAVR centers starting to extend kind of recruitment efforts and reach out to interventional cardiologists? Really just some evidence that things are starting to gear back up again. Is there anything you can point to in the marketplace?

Yes. Well, again, not getting into kind of a month-by-month report, but suffice it to say that what we look for is both day-to-day case volume, but also the volume of patients who are getting into the system and getting evaluated. And while we don't have perfect visibility into those screenings and preclinical imaging that gets done with patients who are going to get treated, we do hear anecdotally what's going on. And like I say, we were pleased that there are more tailwinds than there were in the depths of March, and that gives us confidence that we'll be able to recover from this COVID disruption, absent a second wave, which we have not forecasted.

Understood. One question that also comes up is that TAVR is primarily a disease of the aged, right? So a lot of elderly folks getting the procedure. What has your data shown or your survey work shown in terms of that population's willingness to go back into the hospitals to receive procedures? Does that represent a potential hurdle to a full recovery?

It sure does. And it varies by patient, by physician, by site and by hospital system. So in some cases, systems were very affected by COVID, and in other cases, less so. And ultimately, what it comes down to is a patient's level of comfort driven by their dialogue with their physician that they go into a hospital site and get treated safely and effectively, and then be able to leave the hospital and go back home. And so that dialogue between the patient and the physician is really what's driving what will be a return to something more like what we expected in 2020.

Understood. Maybe just one last question on this period, and I'll get to some of the more sensitive questions on TAVR and the other parts of the business. One of the interesting kind of nuances amongst the various companies is that some had chosen to cut expenses in this period, pull back a little bit, some have not chosen to, some have actually accelerated investment. I think I'd put you probably in that latter camp of not really taking your foot off the gas at all. And so I'm curious what you're seeing kind of competitively. Is there anything in this kind of current period that could potentially be a positive outcome for you? Are you spending more or trying to kind of take advantage of the situation at all?

I'd say maybe the better way to think about it is we're trying to minimize the negatives. Certainly, our sales have been impacted significantly as a result of COVID. What we decided to do -- it was a strategic and deliberate decision, was not to slow down investments in our longer-term growth platforms and to not impact employees and their security and financial security. And so we are effectively sacrificing earnings for a short period of time in order to not derail our longer-term strategic execution. And I can't comment as well on what other companies are doing, but that's certainly the way we're thinking about it. And so far, it's worked well. We're continuing to keep pace with a lot of our different internal development programs, not all. Some had been interrupted just by nature of different government intervention and other limitations on our ability to get people to work, whether their work is in the field or in a plant or in an office. But generally, people are focused. They're feeling motivated, and I think our esprit de corps and culture has been very, very strong throughout this.

Understood. Maybe I could segue a little bit away from kind of the near term to maybe some of the longer-term sort of trends and themes at the company. One of the fundamental beliefs, I think, that people need to have if they want to be positive on your stock and you as a company is that the burden of AS is perhaps bigger than people appreciate and that you guys will be successful in unlocking that potential, getting those patients into the clinic and getting treated. And so I wonder if you could maybe comment on both those. What is your view on the extent of the burden of AS? I mean do you think people appreciate how pervasive it is, that this disease state is? And the follow-up question is, the efforts that you as a company are doing to sort of unlock that and bring these patients in, maybe you could ground us in some of what those initiatives are.

Sure. Yes. I mean, certainly, practitioners and operators who are interventional cardiologists and treating patients absolutely appreciate the deadliness of this disease, the severity of this disease and the importance of treating this disease real time. There's less of a recognition and an acknowledgment of that as you get earlier and, well, consider the referral chain. So primary care physicians, some are aware of some of the symptoms generally, many are not. Referring cardiologists, general cardiologists, similar story. Some are familiar with TAVR and refer patients regularly to get their valves replaced. Others almost never refer a patient to get a valve procedure, surgically or through a catheter. And so there's this spectrum of understanding the disease, awareness of the disease, willingness to treat the disease that we're trying to take on, and we're doing it in a couple of ways. One is we are trying to enable technologies that can help identify the disease and image the disease in a way that flags patients who need care. And historically, this has all been just by the human eye. If a patient is fortunate enough to get an echocardiogram, hopefully, when it gets read, it gets read accurately. It doesn't happen all the time. So one of the things we're doing is looking at ways that we can enable technologies to improve those diagnoses. We're also providing educational information and trying to work directly with referring physicians to say, here are the things you should look out for. And when you do see these signs, here's the right protocol for referring these patients to a heart team. Not necessarily a specific physician, but to a heart team at a center that really offers comprehensive care for patients with aortic stenosis. And then we're also doing some things with patients. Very early days. This isn't something that Edwards has done historically, but we are dipping our toe in the water of communicating with patients in the form of providing education and awareness. So if you were to type in -- into your search bar TAVR or aortic stenosis, you might well end up on a site that we're there supporting or providing content for, again, as a way to educate patients.

So I think one of the comments you've made, maybe just to myself as we were traveling at one point, was that with the PARTNER III data last year, it's showing the superiority of TAVR over surgery in the low-risk population that, that had an effect of more than just unlocking the low-risk population. That it actually led to a perhaps broader belief amongst cardiologists about the value of this technology. And so maybe you could expound upon that. I mean, has that taken place? Do you find that there's a broader acceptance now in the clinical community beyond the interventionalists or the surgeon to actually accept this therapy?

Well, certainly not universally. There's more and more understanding and education and a universe of physicians and patients who are aware of the disease. But still, you're talking about a disease that has something like a 10% treatment rate. And if you compare that to any other diseases that have a very high mortality rate and proven therapies, it's extremely low on a relative basis and on an absolute basis. And so we're hopeful that this latest data from our PARTNER III low-risk trial will help address that to a certain extent. Maybe what you and I have talked about, Raj, is the fact that forever, this has been a therapy that has been reserved for patients who are so sick, they are not allowed to get the other treatment. And it's sort of an unusual extension of the way we designed the original PARTNER series of clinical trials. But it's pretty unusual to be able to tell patients up until our approval last August, you're not sick enough to get TAVR. And yet, that's the way it was portrayed. And as a result, referring physicians said, yes, this is a high-risk, new therapy. And in fact, it's not a new therapy. And it's lower risk than other alternatives and certainly lower risk than not getting treated at all. So we're going to keep working on this and really promote awareness of this disease and try to drive the 10% treatment rate higher.

And so you've talked a bit about some of the tools and things you're offering to improve the diagnosis. But what about just broad awareness, right? So when one thinks about things like advertising, making patients aware of the therapy, how do those efforts look on your part?

I'd say early days. We've experimented with some things. We've done some beta tests around advertising and direct outreach to patients. Again, it's something that we're being very careful about as we learn more about how to communicate with patients and what really resonates. This is a population of patients who is generally older. And so we're learning about the best ways to try to communicate with them as are hospitals and society. So for example, we funded a project with the American Heart Association, started late last year, beginning of this year, that we are hopeful will help move the needle a little bit and bend the curve in terms of number of patients who are familiar with this disease and can have access to the care that they really need.

Understood. You're also doing a couple of studies, right? Well, one study you're sponsoring is also some work being done outside of your -- outside of Edwards in terms of looking at both undiagnosed aortic stenosis patients and also moderate severity patients. And so maybe you could just talk a bit about those opportunities and where you are in sort of unlocking those 2 potential pools of patients?

Sure. So we're midway through enrolling what we've called our early TAVR clinical trial, which is studying patients who have severe aortic stenosis as measured in the anatomy of the heart but do not demonstrate or are not aware of symptoms of the disease. It's an unusual clinical trial, especially because symptoms are qualitative. And oftentimes, these symptoms are confused with just patients getting older. And so enrolling this trial has been pretty thorough and disciplined effort among participating physicians. But we are midway through enrollment. We're very optimistic about the prospects for demonstrating through evidence that this is a deadly disease that needs to be treated regardless of whether a patient acknowledges symptoms. So that's a potentially significant opportunity because it changes the paradigm and the approach that physicians have had and learned from the early days of their training that says if the patient doesn't have symptoms, they shouldn't be -- there should no be -- there should not be any intervention. The other thing that we're looking at, and not started a trial yet, it's something that is in the design stages is, right now, the only patients who get treated through a catheter are patients who have severe aortic stenosis. This is a progressive disease. It starts with mild, progresses to moderate and ultimately matures to severe AS. But there's some discussion among physicians, including Dr. Geoff Strange in Australia, who spoke at our investor conference in December, around whether earlier intervention is beneficial. So before the heart starts to remodel as a result of aortic stenosis, replace the valve. And so that's something that we're going to investigate over time and it could be another opportunity. We've said that the total addressable market for TAVR grows to about $7 billion plus by 2024. Early TAVR in potentially moderate ANS (sic) [ AS ] could propel us to numbers that are bigger than that $7 plus billion TAM.

Understood. Maybe I could hit a little bit on some of the recent data on TAVR. So the 1- to 2-year data on the PARTNER III study was recently presented and showed a little bit of a tightening of the curves between TAVR and surgery. In terms of the outcomes, TAVR is still equivalent, if not better, in most indications. But yes, has there been any impact of that in the marketplace? Have you heard anything from physicians or surgeons about that recent data set?

Not so much. I mean, obviously, everyone was very focused on it because PARTNER III was such a high-profile clinical trial. Keep in mind, this is a 1-year trial. And so we're committed that we're going to follow these patients for the next 10 years. And you'll see, if not annual reports, then every couple of year reports of these patients, but it was a 1-year trial that was successful. Even the 2-year data showed statistical superiority of our composite primary end point, although the curves shifted versus where they were in -- at the 1-year trial evaluation. And so look, overall, we're still really enthusiastic about the results of this trial. We're enthusiastic about the whole body of clinical evidence that has been generated over the years for balloon-expandable valves. And we're still very confident that there is technology and investment behind that technology to continue to invest in the field.

Good. That's actually a good segue to the next group of questions, which is really around the competitive landscape. So also at that same meeting recently, we know one of your competitors talked a bit about some of the data they were showing in the bicuspid space, whether they had a superior valve for that particular indication and also around leaflet mobility as well. And so kind of a broader question just in terms of how you think about the competitive landscape. Do you think there still is between yourself and your other primary competitor differentiation between the performance of your 2 valves?

We do. We spend less time thinking about market share than we do about market growth. As it relates to bicuspid data, we've got a tremendous amount of experience and there's data around bicuspid. We think that the continued body of evidence from both Edwards and Medtronic is going to continue to outgrow the patient populations. And so yes, there's certainly day-to-day conversations about which valve has performed in different ways in clinical trials, and there are certainly a range of opinions among treating physicians. We're proud that Edwards is the leader around the world. But like you say, we're also less focused on market share than we are in market development.

Understood. In Europe, you have several other competitors. You have competitors coming into the United States, along with yourself and Medtronic. Just perhaps you could maybe comment on that competitive landscape. How do you think -- Boston's has been here now for the better part of 1.5 years, I believe. They've had some impact but not really much yet. But how do you think about the market playing out as you get a fourth competitor and then even perhaps another valve from one of your other competitors and things kind of open up? What's the long-term kind of prospect for the competitive dynamic in the United States as it gets more crowded?

Sure. Well, we've got experience in this just because of the way Europe unfolded. We had approval in Europe 4 or 5 years before we did in the U.S. And at one point, there were 7 different competitors in Europe. During that time, the top 2 competitors represented about 85% of total procedures. So it's difficult to predict how the U.S. is going to unfold. We do believe that Boston and Abbott will be successful in carving out a position in the market. The question, of course, is how big a position is that. Again, we go back to -- it's difficult to isolate the impact of new entrants in the market. And like in the fourth quarter of last year where the U.S. grew 40%. So we're relatively less concerned about new entrants and more concerned about making sure that all of these procedures are safe and effective and that the overall therapeutic area continues to grow where there's confidence that if you go on to get treated by a heart team, that patients are going to be treated safely and effectively. So we're not worried about competition. We're hugely confident in our technology, our clinical trial data. We're really proud of the therapy that we've built, and we continue upon -- to execute our strategy going forward.

One of the dynamics, though, that has taken place in Europe, if you could talk to some centers in Germany and some of the more developed segments of that market is that there is pricing pressure now, pricing competition amongst the various players. I mean not -- it might not necessarily lead to them capturing significant market share, but you do hear about pricing being under some pressure. And you also hear about bundling strategies, some of the larger companies trying to put not just TAVR, but perhaps see REM and other products together. How do you view that dynamic playing out? Could pricing start to become an issue in the United States? And then how do you answer the bundling question being focused mostly on TAVR and not having other products?

Sure. Well, in general, just on pricing, global pricing has been stable. And the first quarter of 2020 was no different. We're not expecting or anticipating any dramatic departures from historical prices. But we do expect to lose some share, and we do expect that there are going to be compression, that there's going to be compression on our average selling price as centers hit higher volume thresholds and earn rebates and incentives to bring the ASP down. Europe has always been a more price-sensitive market. And our expectation is that, that will continue. We're going to remain very disciplined in pricing. As the market leader, we're going to make sure that the therapies we offer come with a price that reflects the value that comes with them. And we're going to continue to work with our customers to provide the very best solutions to meet their needs and the needs of patients.

Good. Well we have about 4.5, 5 minutes left. And I want to segue to the mitral space. So before we get to some of the competitive dynamics there as well, perhaps you can update us in terms of the timing of when we might see a valve from you or should I say, a replacement device, the PASCAL device in the U.S.? What is the current thinking on your first approval for the U.S. market?

Yes. So we're expecting to complete the CLASP series of trials, or at least CLASP IID, and hopefully get into the market in a partial way in 2022. Recall, we've got 3 separate clinical trials for PASCAL: trials for patient suffering from degenerative mitral regurgitation, functional mitral regurgitation and tricuspid regurgitation. And so all 3 of those trials were put on hold in the depths of the COVID crisis. As centers start to free up bandwidth and have capacity to start reenrolling patients in those clinical trials, then those trials will get restarted again. We're enthusiastic about that happening. So there's a lot of opportunity here. We've got a lot of momentum that we're excited about, and it's a big population of patients with unmet needs that we think is going to look like a $3 billion total addressable market in 2024. And then continuing to grow beyond that as you see replacement devices and other technology improvements come to play.

One of the interesting nuance of that market, there was the litigation between you and Abbott, the major competitor there. Is there anything you could offer in terms of what's happening on that front? There was the case in the U.K., which was decided. Have you seen any impact in the market? And what are the next events do you think we should look for?

Well, as it relates to litigation with Abbott, we believe in our intellectual property positions, and we're prepared to defend them vigorously. We don't think that litigation is in the best interest of patients. We don't think that restricting the ability of physicians to diagnose and treat patients is appropriate or valuable to anybody. As it relates to the U.K. trial, we're disappointed that the court ruled in favor of Abbott. And we've appealed that. That will probably take a year or so. Our U.K. revenue is not expected to be meaningful in 2020, and it's not going to affect our disciplined commercial launch in other parts of Europe. Now certainly, there's risk. There's a trial coming up in Germany. The worst-case scenario is that Abbott would seek to enforce an injunction in an area where they would win. We don't think that's in the best interest of patients, but just as it relates to our $30 million to $45 million guidance in revenue for 2020, that would certainly be impacted if there were an adjunction.

Great. Just last question, we have about a minute left. But -- so you guys have a very healthy balance sheet. I think $1 billion in cash, another $1 billion or so in credit, no maturities due until 2028 in your debt. What are your plans? Do you have any updated views? Has COVID changed any of your plans in terms of whether you could potentially put that to work sooner rather than later from a strategic standpoint? Just any high-level thoughts on how we should view that.

Yes. We're going to stick to our disciplined strategy. Our consideration for different acquisitions has not changed. We're very focused on the areas that we're currently invested in. And so yes, we've got a strong balance sheet, but it doesn't mean we're going to change our priorities and widen our strategic aperture. We have put more capital to work. We bought back over $600 million worth of stock in Q1 during the dislocation. So we took advantage of that. We're going to continue to look for opportunistic times to keep our share count in control and hopefully coming down over time. And so really, we're in a beneficial position of having maintained a conservative balance sheet, and it affords us the ability to do acquisitions as we find deals that make sense and fit with our portfolio. And in the meantime, we'll also continue to manage the share count.

Great. Well, we are out of time, Scott. So thank you very much and stay safe and healthy.

Will do. You too, Raj. Thanks a lot. Take care.