Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary
February 25, 2021
Earnings Call Speaker Segments
Danielle Antalffy
analystGood afternoon, everyone. Thanks so much for joining us for our Annual SVB Leerink Global Healthcare Conference. We are very lucky to have with us today, Edwards' CFO, Scott Ullem. I believe, also Head of IR, Mark Wilterding, is on the line as well. So Scott, thank you so much for being here.
Scott Ullem
executiveIt's my pleasure. Good to see you, Danielle, and thanks, everyone, for your interest in Edwards.
Danielle Antalffy
analystSo Scott, maybe a good place to start. It's been a few weeks Edwards reported Q4 earnings and provided, actually, reiterated 2021 guidance. Maybe give us a quick snapshot of where we are today or as of the end of Q4 with Edwards. And then obviously, I'm going to press you on how things may or may not have changed since we spoke in late January.
Scott Ullem
executiveYes, sure. No, we're in a pretty good position, all things considered. Looking back at 2020, it was a disappointing year financially. It was a disappointing year in terms of the number of patients who should have gotten treated with our therapies, who are not able to get treated with our therapies. But it was a really good year in the form of really testing the strength of our franchise and demonstrating that the therapies we provide, that the relationships that we have in hospitals around the world and the technologies that we have under development are all critically important, and that we're really well positioned to lead. So coming out of the fourth quarter of 2020, we felt like we were still going to be facing a lot of headwinds from COVID through the winter months. That has not changed. We still feel the same way. We started 2021 with the same headwinds that we finished 2020. And as excited we are -- as we are about the prospects of vaccination, it's going to take a while to really get through populations that we serve around the world. So we're hunkered down. We're continuing to push forward as well as we can, given the circumstances, but we think the second half is going to be a more normalized environment than we're in right now in the first quarter and as we're growing out of this in the second quarter.
Danielle Antalffy
analystOkay. I think you guys did provide guidance in late January. It does feel like things have gotten a little bit better. I'm going to go ahead and knock on wood there because any time you say anything in this pandemic, it feels like then something gets worse. So it does, though, feel like cases -- or COVID cases are easing, vaccination rates are ramping. I mean in the context of the guidance you gave, are things a little better or worse, as you would -- in line with what you think for the midpoint of the range? Any way you can frame that?
Scott Ullem
executiveYes. Again, nothing's really noteworthy enough since our fourth quarter call to be worth mentioning. I will say that things got worse from the time we had our investor conference to the time when we finished out the fourth quarter. And in fact, as you look at the guidance that we provided, we're still in those ranges. But we said back last month, we're probably more to the left of the -- within those ranges than we were when we gave them at the December investor conference. Again, not enough more to the left to really change guidance formally, but we're trying not to overreact either positively or negatively to the week-by-week headlines that we're all seeing. But generally, we've got more confidence now that our expectations for 2021 were the right expectations. And again, it's coming through the winter months, things will get better. As more of the populations get vaccinated around the world, that will improve access to health care. And that will come out of -- as we get into the second half of 2021, things will look like a more normalized growth environment for Edwards Lifesciences.
Danielle Antalffy
analystOkay. And can we talk about -- this is hard to parse out, but, I guess, what is the more normalized growth environment at this point? You're a few years into a low-risk indication. And how should we think about underlying TAVR growth ex-COVID? Or maybe if you didn't have COVID, what would you have grown in 2020? Anything new you can say around that.
Scott Ullem
executiveYes. No, I mean, it was interesting. Last year, 2020, would have been the first full year when we had a low-risk indication for SAPIEN 3 in the United States. So it's still pretty early on in that journey and in that new expanded opportunity. As we look forward into the next several years, we think TAVR has got a continuing very strong growth opportunity. And we've speculated and believed that the total addressable market for TAVR looks something like $7-plus billion in 2024, which would imply a low double-digit growth rate from where we are today. So we're optimistic about what that growth trajectory looks like, both in the short-term and over the next several years. We can talk about TMTT and our other business units when you're ready.
Danielle Antalffy
analystYes, yes, sure. Let me stick with TAVR for a second. And just to confirm, the low double-digit growth to get to that $7 billion, that is just in the existing indication, and Edwards would be characterized as probably, I think, some market share leader globally. So if the market is growing low double-digits, right to assume Edwards is growing basically in line with that? Or can you grow faster than that?
Scott Ullem
executiveYes. We've intentionally not given an indication about what our position would be within that overall total addressable market growth. Suffice it to say, we've been the leader, and we intend to continue to be the leader, driven by the robust body of clinical evidence that we've developed over the last decade, driven by new technologies and driven by the expansion of our global footprint, where we're now active with TAVR in over 60 countries around the world, and that list is continuing to grow. So that gives you a sense of our level of confidence in participating in that overall market growth.
Danielle Antalffy
analystSure. Yes. Okay. And maybe this was just me, but I do feel like now that we have your main competitor in the U.S., their earnings results as well, it feels like the TAVR market actually was impacted a little bit more in Q4 relative to other med tech markets and more than I had expected, given the acute nature of the disease. Am I wrong in characterizing it that way? Or is there anything you can say that was different this time around with this recent resurgence as it relates to TAVR? Is it something tied to the referral funnel? Is there anything weird going on there? Or am I overthinking this, which I do often.
Scott Ullem
executiveNo, it's -- you're right to ask. Keep in mind, in the fourth quarter of 2019, we had a really big growth surge in the U.S. in particular, where we grew 40% year-over-year in Q4 2019. And so for Q4 2020, to go backwards in the U.S. by about mid-single digits still wasn't a huge move in light of the difficult year-over-year comparison. So we were down mid-single digits in the U.S. By contrast, we were up mid-single digits in Europe and up high single digits overall outside of the U.S. in the fourth quarter. So I know you mentioned Medtronic and our quarters don't overlap, but that's how we performed in the fourth quarter. Again, not a whole lot has changed as we've moved into the first quarter just in terms of the overall environment, but we do expect our growth rates are going to recover as we get further into 2021.
Danielle Antalffy
analystYes. Okay. All right. That's fair. And one more question around this and COVID and all that. As you look at the referral funnel, so there is a referral component, a big referral component to TAVR procedure volumes. And what visibility do you have into the referral funnel? And I guess that's the number of patients that are getting imaged and sent on for a procedure. Some companies have been characterizing this as like we're back to 80% of pre-COVID levels, 90% of pre-COVID levels. I don't know, whatever -- I don't want to put words in your mouth. But where do you think we are in the referral funnel? Or do you guys just not have that visibility at this point?
Scott Ullem
executiveWell, we've got some visibility, but it's limited. And at the same time, we have conversations regularly with health care providers and our clinician partners out on the front lines, and that gives us some perspective. The recovery of our surgical structural heart business and our transcatheter heart business is going to be influenced by a lot of factors, and it's going to be tempered by the time it takes for patients to seek and get diagnosed and referred through the channel to ultimately get treated. That can oftentimes take, on average, 2 to 3 months. Now hospitals have gotten a lot more sophisticated about managing these patients. So in some cases, hospitals are getting patients through those referral pathways much faster. In other cases, it's still a long slog for these patients. But our assumptions about refilling that patient pipeline are baked into the guidance that I mentioned before about how we think this year is going to unfold.
Danielle Antalffy
analystOkay. All right. And then just as it relates to the market opportunity. So you mentioned the $7 billion TAM previously. I think a big portion of that is the number of patients that suffer from severe aortic stenosis that aren't diagnosed and aren't treated today. And I guess my question is sort of -- or not sort of. My question is, what does Edwards need to do -- how confident -- first of all, how confident are you in the undiagnosed patient number? Because that's sort of a black box, right? I mean, like we don't actually know -- they're not diagnosed. So where do you get the confidence in that number which, I think, is a meaningful number? And how is the paradigm and care shifting to ultimately capture the untreated and undiagnosed patient population?
Scott Ullem
executiveYes. You asked a couple of questions in there, and they're all good ones. Let me try to piece it apart. There is a disconnect in the number of patients who have the disease and the number of patients who get diagnosed. And there's a significant amount of underdiagnosis, misdiagnosis. And then even after you get to the percentage of the population that is properly identified and diagnosed, the actual treatment rates are extremely low. So if you look at the overall population of patients with severe symptomatic aortic stenosis just in the United States, for example, there's a penetration rate, a treatment rate of about 10%. We don't have data on that in Europe, but it's probably similar on a per capita basis, and it's even lower than that in Japan, which is our third major geography today. So these are -- this treatment rate is unusually low relative to other diseases that have comparably high mortality rates, especially considering the fact that TAVR is a proven technology; tremendous amount of clinical evidence; it's a safe, effective therapy; and it's reimbursed in these major geographies where the therapy is provided. So it's a real opportunity that we're trying to so pursue right now in terms of working up that treatment rate from 10% to something higher. You asked about the paradigm shift. And certainly, the paradigm has shifted to include earlier and more accurate diagnosis of patients. The ability for primary care physicians, general practitioners, general cardiologists is still limited, but there's more and more awareness, and that's helping diagnose these patients and, ultimately, get them referred for treatment. We're doing a lot in that area as well. We're trying to provide educational information, both to caregivers as well as to patients, as well as to their families who oftentimes become the caregiver because these are typically elderly patients. We're also up in hospitals to improve their ability to make sure patients don't get lost in the system, to make sure the patients who have been diagnosed with severe aortic stenosis ultimately get consults with a heart team and ultimately get treatment, either with TAVR or with SAVR.
Danielle Antalffy
analystOkay. Got it. And actually, I think you just answered the question. Of the 90% of patients that aren't getting treated, that's not -- those patients aren't getting treated at all, right? Like they're not even getting surgical valve?
Scott Ullem
executiveRight. Yes, this is just -- this is overall disease state with any treatment, right? Now TAVR has technology...
Danielle Antalffy
analystAnd they're...
Scott Ullem
executiveYes, go ahead.
Danielle Antalffy
analystI was just going to ask, they're just being managed medically? Or what's happening with those patients? Or not managed at all?
Scott Ullem
executiveYes, many are not diagnosed. The treatment rates for diagnosed patients have improved. But it's still far from what it should be and what it is in other, like I say, comparably dangerous diseases.
Danielle Antalffy
analystOkay. Okay. Got it. I do want to ask a question about TAVR competitive dynamics. You did have Boston Scientific exit the market, at least with their LOTUS valve, they do still have Acurate in Europe. So with a competitor now off the market, but you do have another likely to enter the U.S. market, that will be Abbott with their Portico, which I acknowledge is an older generation valve. But can you talk about how competitive share dynamics, and let's focus on the U.S. maybe, have changed over the last 3 to 6 months? Sort of how much you've been able to capture of the LOTUS share that seems to be a low-hanging fruit, and how you're thinking about another entrant here over the next, call it, 6 to 12 months?
Scott Ullem
executiveYes, sure. So the punchline is the competitive positions haven't changed a lot over the last couple of quarters. It's been fairly stable. Certainly, Boston left the market, but they had not -- they didn't represent a big piece of the market anyway. And so Medtronic picked up some of that share. We probably picked up some of that position as well. But overall, the positions haven't changed a whole lot. We know Abbott's plan is to enter the market. And we're certainly watching them and aware of their intentions. Our expectation is that we can continue to maintain a leadership position in the U.S.
Danielle Antalffy
analystOkay. What about -- and one other question, and this is probably a longer-term question, but I think it's important. When you think about pricing here, and historically, when markets become more competitive, pricing does come down. How should we be thinking about pricing over the next 3 to 5 years, given that this will be, presumably, at least have more competitors in the market?
Scott Ullem
executiveYes. We're expecting pricing to come down, and it's part of the guidance that we've provided about the size of the total addressable market over the next several years. It's going to come down because of higher volumes. So as hospitals reach higher volume thresholds, they earn incentives and rebates, but then ends up reducing the average selling price. But we don't have any intention to do anything on the pricing front different than what we've been doing historically, which is, as the market leader, to maintain discipline and to make sure that we're being rewarded fairly for the technology and the benefits that these therapies provide to patients.
Danielle Antalffy
analystOkay. All right. Got it. Let's shift gears then to another big growth driver, actually probably a bigger growth driver now since we're just on the precipice of opening up these markets, and that's TMTT. So you are guiding for 2021 for sales to nearly double. Maybe you can help us understand where the confidence is coming from there, particularly given the fact that we had this recent resurgence in COVID and right now, this is really a European market for you guys.
Scott Ullem
executiveYes. No, you're -- it's a good question. We're confident in our ability to grow off of this small base in our transcatheter and mitral and tricuspid therapies for a couple of reasons. One, we've already had some very good early experience and very positive feedback from our clinician partners and hospitals where we're active in Europe today. And that positive feedback comes from both real-world experience as well as from some of the data that's already been made available. So we've released some data around 1,200 patients who have been treated commercially last year at the virtual PCR conference. At TCT Connect last year in -- late in 2020, we showed very favorable roll-in data from patients who were treated prior to the initiation of our class trials here in the U.S. And it just -- it's an early indicator of what we think our clinical evidence will demonstrate as it becomes more available as these trials get completed over the next couple of years. We also have excellent technology. And so we've been innovating in our different repair and replacement technologies to support patients suffering from mitral and tricuspid regurgitation. And I'll give you one specific example, where with our PASCAL system, first, we introduced PASCAL ACE as a second-generation spacer. Now we're introducing, in 2021, what we're calling PASCAL PRECISION, which is a brand-new delivery system that can deliver both PASCAL and PASCAL ACE for mitral and tricuspid patients. And so we're excited about that latest generation technology. But it's the next technology, not the last technology. There are more developments and new platforms in the pipeline that we're actively developing right now.
Danielle Antalffy
analystOkay. Can you -- so you mentioned, PASCAL, that's the lion's share, I think, of your 2021 TMTT guidance, right? You're rolling that out in Europe. There is a predicate product or a legacy product that's out in the market, MitraClip. And I think they're on their, I don't -- I think, fourth -- third or fourth generation device. So can you talk about how you're seeing PASCAL adopted? Are centers -- is it primarily centers that already have MitraClip experience and you're displacing MitraClip, or you're being added to the shelf, or you're you opening new centers entirely?
Scott Ullem
executiveWell, it's both. So there is overlap in the centers where Edwards has initiated practice areas, and we're also going out to new centers around Europe. We're still early on in our experience. So Abbott certainly has a definitive leadership position today. And our plan and our expectation is that, over time, we'll be able to work ourselves into a leadership position, again, driven by technologies, clinical trial data, service and support that we offer to our hospital partners and that's what we're really looking at as we look down the road into the future.
Danielle Antalffy
analystOkay. All right. Got it. Shifting gears, I want to make sure I cover your other 2 businesses. So surgical valve. How resilient has the surgical valve business been in the face of COVID? And also on top of COVID, you have ramping TAVR adoption in the low-risk patient population. And what are the growth opportunities we need to be aware of in this business going forward?
Scott Ullem
executiveYes. Despite all the COVID headwinds in 2020, we were really encouraged by the adoption and the procedures that got done for patients who had surgical aortic valve replacements. We still think there are lots of patients who are more suitable for surgery. They are often younger patients and they are patients with concomitant diseases, and surgery remains an excellent treatment alternative for those patients. It's one of the reasons why we've been aggressively investing in new technologies in our surgical platform. And it's an unconventional approach. There hasn't been as much -- we don't have a whole lot of company in terms of investments in surgical technologies. But last year, alone, we introduced 3 new surgical innovations, and we continued the rollout of what is now the world's leading surgical aortic valve, which we call INSPIRIS. So there are still many emerging markets where open heart surgery is still prevalent. We're looking forward to increasing penetration in these markets. We think there's a real opportunity to migrate patients who historically would have gotten a mechanical valve to a better premium surgical valve. And again, for a lot of these surgical patients, they are very sick and have no other treatment option. So we think there's a good opportunity ahead. In fact, we expect that growth in surgery will be in the mid-single digits through 2026 despite expected growth in TAVR.
Danielle Antalffy
analystYes. And is it right to think about maybe emerging markets growing much faster than that, whereas developed markets might be growing a little bit below that mid-single-digit range?
Scott Ullem
executiveYes. That's our expectation. Yes.
Danielle Antalffy
analystYes, yes. Okay. All right. And then within critical care, what are Edwards' aspirations for artificial intelligence technologies and smart recovery? And I have one -- I'll ask my second question later.
Scott Ullem
executiveYes, sure. We think there's a real opportunity to leverage artificial intelligence and machine learning to help physicians improve decision-making. And our latest acumen, IQ sensor, is an excellent example of that, where it enables our artificial intelligence algorithms. Ultimately, what this results in is better ability for physicians to make predictive analytic-driven decisions, so knowing when a patient is trending towards a dangerously low blood pressure or a hypotensive event and being able to take action before that happens. So this is the only predictive parameter for hypotension that's available today. It gives physicians much more information on root causes of hypotension and helps them make better decisions about what to do for patients to help them ultimately recover from surgeries faster and better.
Danielle Antalffy
analystYes. Okay. How -- with COVID, it feels like things like -- I don't know if I go so far yet as to say AI, but like just digital -- you're hearing digital, technology and solutions around health care thrown about a lot more. And I guess, as we look at the critical care market, how will it evolve? And how has COVID actually accelerated the evolution?
Scott Ullem
executiveYes. I'm not sure that COVID has had as much of an acceleration effect as has just the overall investments that we've been making in our technology platform over the last several years. Certainly, COVID tested those technologies, and we were really pleased that in 2020, we helped over 15 million patients globally with our critical care monitoring and over 1 million patients who were COVID patients. And so it's a demonstration of the importance of these technologies. It gives us confidence and commitment to continuing to invest in this business. And it's a great business. It's one where we think we can really have a positive impact on patient care while, at the same time, it's a business that we know well. It's not terribly capital intensive, and we're in an attractive leadership position.
Danielle Antalffy
analystYes. Okay. All right. That's helpful. Just a follow-up question on the -- there is a capital component here, though, and that did impact you guys, I think, during the COVID pandemic. We actually heard earlier this week, another large-cap med tech company call out -- actually improving a capital equipment purchasing environment. And I'm curious if you can comment on that. I know we're talking about different types of capital equipment here, but anything you could say about what you're seeing out there?
Scott Ullem
executiveYes. It feels like there's less pressure on capital equipment budgets than there was at the depths of COVID last year. Clearly, hospital budgets and endowments were seriously affected by COVID, and that impacted capital purchasing decisions as well. But these technologies that are available now to hospitals are so beneficial to patients that they become a priority, and we're hopeful that, that will be the case with our HemoSphere monitoring platform as well. But you're right, in 2020, HemoSphere sales were negatively impacted by COVID.
Danielle Antalffy
analystYes. Okay. And then on the topic of AI and -- we've talked about how undiagnosed patients are a big issue in TAVR adoption. Is there -- if I recall correctly, a few years ago, at one of your analyst meetings, you had a room with a bunch of sort of venture investments and the technologies around the venture investments, and a lot of it was aimed at leveraging, I think, if I'm remembering correctly, leveraging things like AI and remote capabilities for better diagnosis and earlier diagnosis and things like that. Can you talk a little bit about how those types of things have advanced? And how is Edwards going to sort of help break down that barrier of the large undiagnosed patient population or be a player there?
Scott Ullem
executiveWell, it's a great question, and this is the #1 opportunity and what we expect to be the #1 growth driver of TAVR for multiple years to come. The good news is that there are new technologies being developed to diagnose and to screen patients. And the diagnosis -- the tools for diagnostics can range from technologies to give early indications of whether a patient might have aortic stenosis. So maybe something shorter than an echocardiogram, but better than just a traditional stethoscope. There are also screening technologies where hospitals can take echocardiogram results and then have them read and compared using artificial intelligence to a library, a universe of other similar patient records and have a better determination of whether those patients need intervention. Edwards is supporting those efforts by investing in early-stage companies, encouraging technology development, not because it's a business that we're planning to acquire but because we think it's beneficial to the overall field and beneficial to the patient population getting diagnosed and ultimately treated.
Danielle Antalffy
analystOkay. Okay. That's helpful. Okay. I think we only have a few minutes left. I definitely want to touch on operating leverage with you. It feels to me like Edwards has significant potential for positive leverage, and it feels like you can always deliver more than you actually do. And I guess the offset there is you're ramping investment in future growth around TAVR and TMTT and the rest of your businesses. So can you talk about how you're balancing ramping investment in future growth? What's driving the positive leverage and how we should think about the margin expansion story unfolding? Not just this year but over the next few years.
Scott Ullem
executiveYes. Well, balance is exactly the right way to think about it, Danielle. We're balancing, continuing to invest aggressively for long-term organic top line growth, with also expanding, over time, our operating margin. Now we've got flexibility to move our operating margin either direction, and so we think carefully about the right thing to do. But with the investments that we make, we've got a sizable budget that we can flex as we need to. And what we've decided to do recently is to keep pushing and keeping the pedal to the metal on R&D investments because we've had such good results, especially in TAVR and TMTT, with what we have in the R&D pipeline. So we're excited about the opportunity. We do expect that we'll be able to demonstrate margin expansion over time. But the #1 priority is not margin expansion. The #1 priority is investing for long-term sustainable, profitable organic growth.
Danielle Antalffy
analystYes. Understood. All right. Well, with that, we are out of time. So thank you so much, Scott, for giving us this opportunity. Thank you, everyone, for joining us. And hopefully, next time I see you in person and not on a screen.
Scott Ullem
executiveAll right. You, too. All right. Our pleasure. Thank you, Danielle. Bye.
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