Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Yes. That's definitely true. And I think, particularly for a company like Olympus, which has got a really strong R&D heritage, so there's always going to be that really kind of strong need to make the make case very, very cogent -- sorry, the buy case very, very cogent against the make case. That's absolutely going to be the case. And I think bankers, of course, will always find a way to justify the valuation, no matter what it is, right? It's still a steal and that's where that kind of internal discipline really, really matters. And I think particularly also when we're looking at areas which represent new trends, new things, it's the future. Yes, it may be the future, but then we've got to factor in is it the future next year? Or is it the future in 5 years? Or is it the future in 20 years? Or in fact, if we all got it wrong, and we're looking at something that -- which would not be the first time, right? In the medtech or the pharma or the life science industry generally, these mistakes do happen.

Well, so that's a good point. I mean, just looking at Charity at Medtronic, some of the deals that you referred to earlier, I think, are in spaces like robotics and in other digital-enabled areas, it's hard to imagine finding value in a lot of these spaces right now in 2021. And so I think you have to be willing, to Rupert's point, to put more into the synergies and then you sort of betting a bit on the comm. And I think that's the --it's like how much of that do you have to end up disclosing. And if you make a big acquisition in the space, people want to understand how you're going to justify that kind of value. And then you have to make some kind of statement, right? You're talking about synergies and targets. And then analysts get to ask you on every phone call, how are you doing against those. So it's just going to be really delicate to answer, I think, as people try to, as we've said, sort of reinvent different pieces of their business because they're going to be bold bets. There will be some bold bets, and then it's like how much do you go out there on a limp and commit. But I think my view, again, just speaking for me, as I approach, I think we're going to try to be really disciplined to. I really do. I don't think we can -- I don't think you can play the game of trying to change your corporate standards. And if you had these targets last year, well, now it's 2021, we're going to have these targets instead. I think that's probably not the game you want to start playing. So we'll just have to see a little bit of how it unfolds, but it's going to be really -- it's going to be interesting to watch.

I mean disciplines are clearly very important, but is there a case where in some situations, companies can't afford to stay away from these kinds of deals. I mean there's a huge impetus there. Xavier, perhaps you have some thoughts?

Yes, you can always afford not to do by choice. So I think valuation is super important. So even you cannot -- yes, you cannot afford to have the wrong valuation, nobody can, I think, especially in these times. So I don't think that will change dramatically. And back to what Finn just said, to me, it's not like you had this list of company last year, and then you just completed a different one this year. It cannot be that dramatic. And the last deal we did, by the way, the deal is not closed. But the -- we have been inventing -- investing in Preventice 2 years ago. So it was not a new one to the list as far as we are concerned. So I don't think we'll see a dramatic change of logic and back to all of my colleagues just said, I think the valuation is key. And I mean, nobody can afford the wrong valuation. I mean why would that change?

Okay. And one of the trends we've seen over the past year is the increasing involvement of special purpose acquisition companies. They are sort of flush with cash and very keen to do deals. How is this going to affect the merger market in 2021? Charity, perhaps if you have an idea on that?

Sure. And I'll let my colleagues chime in afterwards. So I mean I think they are very U.S. concept, right, these entities that have created the IPO to raise significant amounts of money, blank checks to then go out and acquire assets in certain spaces, right? But they have raised a lot of money. And I think seems, it's something like $17 billion just in -- kind of in the life science space has been raised in the past, say, 15 months, right? And they have to look for assets, and they need to buy them within 2 years or else they have to dissolve and hand the money back to the investors. So they're obviously going to be an additional competitor going after assets. I think they'll be looking more at well-established, mature companies that already have cash flow, which is different to a lot of what we have got to be honest. As a medical device company, we are looking for earlier-stage technologies that will then add into our existing commercial infrastructure and roll it out. We will look at them slightly earlier stage. But I think it does just further muddy the waters and create more competition potentially around some of the assets. But Finn, I can see you nodding, so maybe you want to add?

Yes. I just think it's an interesting phenomenon, and we had the chance to talk earlier as a group. And I think Rupert made the comment that these are -- this construct has been around. For some reason, right now, it's -- they're having their moment, right? There's a lot of these coming out. And there are a number that are backed by some fairly -- I wish it's not fairly, very smart investment groups. So that's maybe one of the thing I would distinguish is we've seen a lot of these. I can't remember in the past how much what we call smart money was in them. But today, there is a lot. And they are, they tend -- I have the same view, Charity that they -- I think they're going to be focused on later-stage companies, I hope because we tend to focus on a little earlier stage like you do, being so focused on structural heart disease and heart failure. So I hope they don't come waiting too much in our waters. But I think it remains to be seen because, again, they have that ticking clock. So we're going to be watching to see how these play out. We saw -- there's a lot of buzz in the market around Butterfly Network and their ultrasound imaging technologies. They have the Gates Foundation in that and Larry Robbins' Glenview Capital. These are interesting folks who are going to be -- who are looking at these spaces that we're all talking about, these telehealth, imaging, data -- data-enabled health care. I think I see it the same way you do. It's one more party that could show up to the table with a lot of cash. I mean these things end up de-SPACing with a ton of cash. So it just remains to be seen. I think they're going to -- I think it will be another factor that will probably mean '21 has a flurry of deal-making in these same spaces.

And Rupert?

Yes. I'll just have one comment to that as well because [indiscernible] right, it's someone else around the table, another player around the table. I mean let's be perfectly counted. When you're in an auction situation, anyway, you've got that sort of heightened risk of prices getting a little bit out of control. That's the purpose of the auction. I think what's going to be interesting as well in relation to SPACs is any acquirers got to have a sort of clear thesis. Private equity will -- typically, what they're very good at is hacking out cost, right? And sometimes buy and build, taking smaller entities and bashing them together cutting out costs, but the larger corporates not so good at because it's very time-consuming and intensive to do. And companies like us usually have a sort of more commercial synergistic value, which is something that's in the portfolio or rounds it out or whatever. And it will be interesting to see where these SPACs capitalize on that. Because otherwise, there's a risk that this is just a pool for money. This is somewhere -- there's a lot of capital going around with not so many places for a good return in the current environment. So I think we'll probably see a mix of smart ones and maybe some less smart ones. But it's going to come to the same thing as far as we're concerned and what that does to the bidding process.

So telehealth was a focus and particularly cardiac -- remote cardiac monitoring. Are there any other kind of hot areas that might be worth pursuing in the year ahead? I'm particularly aware that there have been several high-profile liquid biopsy deals, both investments and then sometimes very rapidly acquisitions. Is that an area to keep an eye on in the future? Xavier, perhaps?

I mean there are multiple -- I would not specifically comment on this one, but I mean there are multiple areas of interest. As usual, I would say, there is so much uncertainty. As we say, we are in the third wave of this COVID crisis that creates new needs and there are so many uncertainties that yes, there will be new opportunities and new areas of focus going beyond what we just discussed about telehealth, et cetera. This one has proven itself. I mean now it's a question of how much you make in the business model. But there are a few others that, yes, are of high interest. I mean depending on where your core is, I mean, this interest will be different. It will probably be different from all of us here because we have a slightly different core. So I'm not trying to escape the question, although I'm trying a little bit. But I think it depends really on what you -- again, what your core is and why do you want to expand.

I wonder if -- of course, Elizabeth, you mentioned liquid biopsy, which might get some slightly blank looks because although diagnostics is usually grouped under medtech, liquid biopsy is pure Dx. And let's be honest, they're slightly different beasts. It is obviously relevant to us at Olympus. I think we had consultants telling us 20 years ago, this is imminently going to destroy your GI business, and it didn't. But these are the things, of course, we have to be very alive to and that one in particular, and see how -- what our exposure to it would be both positively and negatively. And the other one, I think Finn talked about earlier -- I mean there's a few, and Charity, and surgical robotics is one. And AI, of course, is the other, and telemedicine is one that was talked about earlier. So I think there's a number of sort of potential megatrends that it sort of behooves us to work out what's the sort of -- what's the underlying reality of some of these, piercing through all the kind of buzzwords and working out what the real commercial models are and which direction things really are moving in. And it's difficult because there's a bit of crystal ball gazing involved in that.

And to this point, maybe just to come back on the question, I would agree also that you always tend to look at the new stuff that -- because it's kind of a new entrant or it's going to jeopardize your core business, like the one you just took as an example, I don't think that's a good rationale for the deal. I mean just avoiding to be is sort -- because we just spoke about valuation. This is most of the time an assumption of an assumption or on assumption and the ROI in this type of valuation is very inaccurate, let's put it this way. So you rather invest where you think you are going to improve, augment, accelerate your core value rather than trying to avoid something bad to happen to your core value. From a valuation standpoint, at least in my experience, it's always a lot better.

Okay. And there was some discussion earlier about the sort of different environments on the other side of the Atlantic. SPACs a bit more active in the U.S., but it seems like an awful lot of other aspects of business developments are happening more in the states than in Europe. The IPO market is more alive there. I mean is -- perhaps do you view companies differently based on where their headquarters are will be more interested in companies based in particular areas, Finn?

In short, no. We don't -- we currently don't set out. I think right now, we're not targeting certain regions for any reason. I guess the reasons you might would be, are there pockets of value somewhere around the world that maybe you don't see in the U.S.? I think my view is that we should largely be agnostic, and when we -- where we spend time is where the innovation is happening. So I think some of my colleagues mentioned earlier that they -- that we all come from businesses that are fairly innovative and pride ourselves on a robust -- having robust innovation engines to begin with. So we're all technology-focused to some degree, I think, when I look across this panel and think about the products and solutions we have. And so we go to where the innovation is. I'm sure most of us have some presence, for example, in Israel, just because a ton of medical device innovation happens in Israel. There are pockets all across Europe that we spend a lot of time, and we try to have people on the ground basically feeding all that information back. We are fairly agnostic right now. And when I think through the projects we have going, it's fairly spread across the globe. I mean there's maybe a slight bias to the U.S., but it's not that meaningful. So I think that we're going to approach it from -- and this was something that Xavier said, we all have to look at what we're good at. And I think it's true that, in my experience, Edwards has been -- one of the things I think we've been very disciplined about is maintaining a focus, and we want to play in sectors where we believe we have a path to leadership. I'm sure most of us on this panel feel that way. If you don't have a path to leadership, you probably shouldn't be going in some place. And so we want to identify what technologies we believe enable that. And when you find something that makes sense and you've done the work and you say, listen, if we put this, if we marry this with visibility we have or this internal R&D project we have, we think we have a path to be the first, second in the market, I think then you'll see companies continue to be aggressive, right? But I don't think we're going to say things are expensive in the U.S. Everyone's doing AI. Let me go find an AI company in Europe. I know that no one is suggesting that, but I don't think we're going to be playing that game. We're going to be like, what's the best technology for the space we want to be in. And wherever it is, let's go find it and see if we can make something happen. That's the way we think about it.

And I think...

Charity, with digital surgery because it's in Europe or because it's U.S.

And Medicrea as well. I completely agree with Finn, and I'm sure all my colleagues, right, we go where the technology is. The one exception that I will throw up, and I'm curious to hear that perspective is certain countries, we're starting to see some more protectionist moves. They are, from a commercial perspective, giving business advantage to local companies. That tends to be in the well-established medical devices. If I look at China or if I look at Russia, they're all now in their tenders bringing forward these systems which give preference, additional points if you are a local manufacturer. So I think that -- those are the situations where we might contemplate, thinking about the geographic location or potential acquisition target because it gives us that commercial opportunity.

Yes, I fully agree. But when it comes back to valuation, I mean if you -- and the valuation has to stick basically to the -- to be in sync of the market you're targeting. If it's just for a given region, if we speak of Russia, great country, but I mean that's just Russia. I mean that your -- if you're localizing, it has to go with the potential. So that's kind of a give and take, I guess, right? The -- maybe just one word is that I think I completely agree with my colleagues here on the deal -- I was just summarizing that M&A will remain global. Wherever good technology is located is not really the problem of the opportunity. I mean you just take it where it is. I think we'll probably see more local or regional partnerships because here, we've been talking about M&A only, but I mean, I also believe that with what we are going through, I mean, all of us, I'm sure, are looking at partnerships. And probably here, we'll see some more regionalization to actually deal with the agility and the speed of change that is somewhat different by region. So probably something to keep in mind as well. It's not all M&A.

Sure. I mean the medtech has traditionally been sort of more into M&A, less licensing and partnerships than biopharma, but is that something that's going to change in the year ahead? And is COVID playing into that? Or was that kind of trend always going to appear?

Speaking just for me, and just by the way, to expand on Xavier's last point and Charity's as well, I think when we talk about geography and M&A, if we're talking about technology, then I think we can all agree, it's pretty agnostic, whether it's Israel, as Finn said, is a good hub or a lot of European countries or the United States. Obviously, if you're looking for sorts of regional channel in Latin America, then it's going to be very site-specific to give another example where geography does matter. But I would also add, where I do think, for example, in Israel, it's very common to find good technology. It's very rare to find really mature commercial-stage businesses that have really proven out on that ramp. And I'd say it's much more common to find that sort of business in the U.S. than it is anywhere else in the world. So I do think that's a bias in favor of the U.S. In answer to your question about other types of deal, I don't know how many of my colleagues do stuff other than M&A within their teams. I know Finn said you do all of it. And I guess, we do, and I'm sure it's true for the others as well. I think there are reasons that licensing lends itself well for biopharma products in a way that often it doesn't lend itself so well to medtech products. Having said that, sometimes, a distribution deal can almost have the characteristics of a licensing depending on how it's structured, depending on what sort of protections and breaks are put in place. So it can get a little bit semantic, but I think we agree the point that distribution is fundamentally a different thing to licensing. Where I think medtech companies probably will need to get a lot more used to licensing in the way that biopharma and pharma companies are is, of course, is in the technology stuff around software and things like that. And as you move maybe from a model that sells widgets to a model which sells subscriptions, then I think the deal shape has to change with that. I mean if you're talking about a company that you want to partner with, whose fundamental model is to place some capital and have a subscription where software, AI, for example, is continually upgraded, then obviously, a classic distribution with minimums and all of that doesn't necessarily fit that model so easily. So I think it is relevant there.

Okay. We are pretty much out of time. So perhaps another quick comment from Finn very briefly?

I'm not sure. I was just going to say, I completely agree with everything Rupert said, and I think we're going to see a lot more creativity. And I was going to give a little tip of my cap to Charity and the team at Medtronic because I know they had done some creative structure around -- with Blackstone around R&D funding for their diabetes platform. And I think we're going to see all sorts of creative ways to unlock value beyond traditional M&A that our teams in strategy, business development and corporate development are going to be tasked to do going forward. So I could -- if we had more time, I'd love Charity's view, but maybe she and I will talk about that at a later time because I thought that was a really interesting transaction.

Okay. Well, thank you all very much. That was fascinating, as always, and perhaps ended a little too soon. But thank you all. Thanks, everyone.

Thank you.

Thank you so much, Elizabeth, and thank you to everyone on the panel. I mean, as Elizabeth said, 45 minutes always goes so quickly. And Finn, Charity, yes, please do chat about anything out of today's discussion and everyone watching the panel, please do connect with the panelists, connect with each other on the platform. That is, after all, the reason that we're here at World Congress today. A brief sort of break now for sort of 10 or so minutes before we come back for our next session at 12'o clock. We have a case study around making digital therapeutics work, 10 principles to drive patient engagement. So I will see you back here very shortly for that. But in the meantime, have a break, enjoy yourselves, and I'll see you back here soon.