Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Okay. Thank you, everybody. Bob Hopkins from Bank of America, along with my associate, Clay DeMarcus. I want to welcome you to the next fireside chat as part of the Bank of America Virtual Vegas Healthcare Conference. We're really happy to have Scott Ullem from Edwards Lifesciences. He's the company's Chief Financial Officer, here to participate on behalf of Edwards. So Scott, thanks very much for joining us this afternoon. We appreciate it.

My pleasure. Good to see you, Bob.

Yes, absolutely. So I don't know, Scott, if you have any kind of high-level comments you want to make, or we could just jump right into the Q&A? Entirely up to you. Happy to do it either way.

Yes. I mean I'm happy just to jump right in. We've been having some good one-on-one meetings today. We've got more coming up this afternoon. I think people are all aware of the results of our first quarter. We announced our earnings a few weeks ago. So I'm happy just to dive right in, Bob.

Okay. That's great. So there's a couple of quick topics I wanted to hit on, and then we can get into a broader list of questions. But Scott, one of the things that obviously stuck out from the last quarter was you guys did well in Japan, you did well in Europe. And I wanted to just kind of get your take on that. How much of that was true momentum in the business versus some easier comps? Just wanted to get your take on what's going on in those geographies from an Edwards perspective.

Yes, sure. So you're right, we try not to read too much into a 90-day snapshot of results, but [Audio Gap] them one at a time. In Japan, we feel good about the performance in the first quarter. Now part of it was a little bit of help from easier year-over-year comparison. But really, we saw signs of strength in Japan. And as you know, that's a country where we've got high hopes for longer-term opportunities for an even bigger market. And it just got started slowly, back from when we originally got approved and launched in 2014. And so it's nice to see some signs of strength, even despite the fact that vaccination rates are low in Japan. Again, I don't want to read that too far in advance, but we've got reason for confidence. In Europe, it's a little bit a tale of multiple different cities. Countries that were less penetrated in the first quarter ended up growing faster than countries that historically have had deeper TAVR penetration. And so it was nice to see that we still had pretty broad-based contribution to growth across the continent.

Can we dig a little bit deeper on Japan? Because one of the discussion points throughout our conference so far with management teams is they're feeling much better about things generally. A couple of people have pointed out Japan has, like you said, low vaccination rates and a little choppiness from a COVID perspective. And so folks have maybe -- I think they're still seeing good things, but have kind of said, "Look, that's just something you're going to have to keep an eye on as far as Japan goes." Maybe you could just elaborate a little bit more -- in a little bit more detail what you're seeing specifically in that country?

Sure. Yes. So we've seen -- certainly, there are headwinds as a result of COVID. Our people in Japan don't expect that we're going to see a more normalized environment until late this year, largely driven by just availability and application of vaccines. But what we've seen in our business, both TAVR and SAVR and Critical Care, is just a lot of interest in the therapies. And so we think that as the headwinds from COVID abate, that is going to free up a more normalized operating environment. One of the things that we're most excited about in Japan is the recent approval to treat patients at low risk [ in ] open-heart surgery with TAVR. And so this last indication expansion to include low-risk patients is an opportunity for Japan to catch up with where we are in the U.S. and in Europe. And we're just now awaiting for reimbursement to be confirmed in Japan, which will happen sometime later this year.

Do you have a specific expectation on that, Scott, in terms of when that low-risk reimbursement will become available -- will be available for all fourth quarter potentially?

We don't have great visibility into that, Bob. I don't know. But as soon as we get reimbursement, we'll certainly communicate that.

Yes. And on the status of COVID in Japan and how hospitals are able to deal with it now, what's your view on kind of -- if you look across the country in terms of countries that you're watching closely, what's your level of confidence as to the pace of the recovery in Japan right now relative to other countries?

It's tough to tell. I mean I'm not sure that our crystal ball is any clearer than yours and others. Like I say, we're optimistic about Japan weathering the storm, being able to ultimately get vaccines distributed, but until they make further progress on that path, we have limited visibility.

Yes, yes. Okay. And then are there any countries in Europe right now, from your perspective, that are going in the wrong direction? Or are things either stable or improving?

I wouldn't say that anyone has really gone in the wrong directions. There are certainly hotspots that have come up over the last year, as you know, and continue to raise concerns at various points in time. But overall, we're feeling more optimistic by just some of the words and commentary that are coming out of the health officials in various countries in Europe, and we're optimistic that that region overall will be more accessible, and ultimately patients will have more confidence in going into the hospital and getting treated.

Okay. Okay. And then also, Scott, one other -- it's been interesting to watch this pace of the recovery because it's been so difficult to predict. But kind of early on in the recovery, it felt like orthopedic procedures were coming back a little bit quicker. Maybe that has to do with the elective nature of it versus cardio being more elderly patients. But now in this wave of the recovery, it seems like cardio procedures are maybe seeing a little bit more of a steady improvement at this point. How would you characterize kind of what you have seen in TAVR, say, call it from maybe January through where we are now? Has it been kind of a steady improvement from the lows in January? Or has it been a bit more disjointed?

Are you still talking Europe, Bob, or just generally?

I'm talking about generally now.

So it's interesting. We were -- we -- in our fourth quarter earnings call, in late January, we had real concerns about the guidance that we had put out in our December investor conference. And so we were watching carefully what that rate of recovery is going to look like. It turns out that our expectations ended up coming to pass. So we expected that COVID was going to continue to impact us pretty heavily during the winter months, and that as vaccinations got more widespread, that would benefit the systems and ultimately result in a stronger recovery. So by the time we got to our first quarter earnings call, a few weeks ago, we had the chance to see a first quarter that really did show improvement during the course of the quarter. Now that said, it was choppy, and it wasn't as -- it wasn't just straight and up to the right. Instead, we saw February better than January, March better than February. But even in March, we saw a little bit of a spring break effect. And so it's too early to call it as a perfect trend with perfect predictability now as we look out through the rest of this year. So overall, we feel confident though. We feel like our expectations of a stronger second half are still realistic, and that's how we've been planning our year and continue to.

One last question on this theme. Any kind of parts of the United States that are going in the wrong direction right now? I know Michigan had had some issues. Just curious if, kind of from your perspective, most geographies are now kind of moving forward?

Yes, you're right. Everybody had eyes on Michigan for a while. And really it's -- a lot of this is specific to individual hospital sites and hospital systems where they may have different regional effects or hospital-specific issues that they're trying to manage as it relates to COVID. But overall, we're seeing pretty consistent signals of recovery that give us confidence for the rest of the year.

Okay. And then one other topic I wanted to get your kind of most updated views on is just the low-risk -- so-called low-risk patient population in the United States, that's -- now been approved and reimbursed for a period of time. And I know the old definitions are not the way we talk about market penetration today. But just top-down, what's your sense for where we are in that low-risk adaptation curve?

Yes. Well, we think that the low-risk adoption continues to represent a significant opportunity. And remember, we had just gotten this label expansion back in August of 2019. And so we had not even been treating patients under that new broader label for long before COVID hit in late March of 2020. And so we're still in very early days of being able to offer this therapy to patients of all risk indications who have severe aortic stenosis. And that's where the real opportunity is. Remember, for a long time, this procedure has been viewed as experimental, or risky, or early stage, because the label said it was. And so now for the first time, we've got a label that says if a patient has severe symptomatic aortic stenosis, they are eligible for either surgical aortic valve replacement or transcatheter aortic valve replacement. And so that's a -- that alone is a different position and environment that we've ever been in before. And then you back that up the with really stunning results from the PARTNER 3 clinical trial, where not only did TAVR show well versus surgery, it was actually statistically superior to surgical aortic valve replacement. So we think we're still early in the days of being able to treat all patients with this therapy and we're really enthusiastic about the ability to do it.

And where are you spending your dollars right now from a market development perspective? Is it focused on kind of new diagnostic tools like you showed us a couple of Analyst Days ago? Is it outreach to physicians and referring doctors? Where is that spend going right now? And how has that changed?

Yes, I'd say we're kind of taking a shotgun approach in some ways, and in other ways we're being very targeted. Shotgun, if you include some of the examples you gave, Bob, where we've made some seed capital investments and early-stage investments in some companies that are working on different diagnostic tools and different ways of evaluating imaging and screening results. So we'll continue to do that. From our perspective, any tools that can help identify patients and get them in system and ultimately get them treated is great for patients, it's great for the system and we'll benefit as well. In other areas, we are out trying to provide education and information directly to referring physicians and to patients and their families, and we do it through various different ways. We've got, obviously, a presence on the web. Just -- you may -- if you type in TAVR and land on a website, you may very well include content provided by Edwards; not to promote Edwards, but to promote awareness and understanding of the disease and of the treatment alternatives. And so we're spending time just -- through those outreach efforts -- trying to provide availability and perspective for referring physicians, general cardiologists, patients and their families, so that they get into the referral pathway and ultimately get the treatment that they need.

Okay. That's helpful. There's a few other topics I wanted to touch on. So I'll shift gears for a quick second and just -- kind of pure CFO-type questions, because there's some questions we're trying to ask all of the senior management teams that are presenting at this conference. And one of these definitely relates to Edwards, I'm not sure the other one does. But the one that might not is we've been talking a lot about inflation, input costs, higher supply costs, labor, things of that nature. Can you just talk about pressures that you might be seeing at Edwards and your ability to kind of work through those? What are you seeing out there on that front?

Yes. So we've certainly seen a lot of different pressures. I think our biggest focus has been making sure that we have a global supply chain that is strong and has redundancy. And so we now have production facilities in multiple different regions around the world, and we've got confidence that we can meet demand, and we're seeing, as you know, pretty significant growth in our business. And so we feel good about the resiliency of our global supply chain. There was a lot of -- there was a lot of disruption early on in COVID, and we really worked hard to protect our employees and make sure that they were financially secure and able to get to work and able to be productive, whether they were in the field, or going into hospitals every day, or in a manufacturing environment, or for employees who also work in office environments. So those are some of the biggest areas of focus for us.

Okay. So it sounds like -- generally, like this general notion of inflation, which clearly is happening to some degree, isn't really putting a lot of pressure on your ability to deliver gross margins. It's still the traditional factors that will be the main drivers of margin going forward?

I think so. We've seen pockets of inflation, but it's not the biggest driver of our margin profile at this point.

Yes, yes. Okay. Now I did want to also just ask, because, again, we're trying to ask everybody, on the potential for tax reform, which I guess is likely in some form going forward. Just generally, what would you say to investors on that topic? I mean we know there's uncertainty. We know we don't have specifics right now. But just generally, what would you say to investors in terms of what's within the realm of the possible based on what you know today?

Yes. Well, certainly there's more upside risk to tax rates than downside risk for sure. [ And that ] applies to Edwards as well, both for earnings in the U.S. and earnings outside the U.S. that would be impacted by any changes to the GILTI or BEAT provisions. So we're watching the dialogues in Congress, and the Green Book comes out later this month, and that will help quantify a little bit what the impact could look like of the Biden tax proposal. And so we'll watch that and decide how we're going to make adjustments and address any kinds of changes as they come to pass.

Are there specific adjustments that are possible that may reduce the impact? Or by adjustments, do you mean perhaps cutting back on other investments that you've made?

Well, it depends on what the legislative changes may look like. I mean if they're as aggressive as originally floated by the administration, then it's going to impact all companies, including Edwards, potentially significantly. So if you just add 10 points to our tax rate, which is what it would look like for most companies, it gets to be a big number. I'm not sure that that's really -- I think it's probably premature to be making that assumption. And -- but at the same time, all these changes have implications. And ultimately, we're a growth company. We're investing aggressively in new technologies. We're investing in fixed infrastructure. We're investing in people. And so tax rate changes that negatively impact our ability to invest in that growth isn't a good thing. And as a result, we're hoping that whatever kind of changes come about are minimal and things that we can try to address over time.

Okay. On another topic, I just wonder if you could kind of take us through where we sit here today in mid-May through the rest of the year from kind of a milestone perspective? What are the things that we should be looking at, either in terms of data presentations, product launches or things that you think are most important to have on our radar screen between now and the end of the year?

Yes. Well, you've seen a couple of them. So we announced earlier that we've now got an approval to launch a moderate risk -- or excuse me, a moderate stage trial studying patients with aortic stenosis. And so we're working on getting ready to launch that IDE, which is pretty exciting. We already announced and discussed the approval for low risk in Japan. We'll get reimbursement later this year. That will be another milestone because it triggers some additional commercial opportunity for us in Japan. We started now treating patients with our newest generation mitral valve replacement program called EVOQUE Eos. And so we've got a study that we're -- that is now underway that we're going to be watching carefully and are excited about. Similarly, we've started enrolling patients in our TRISCEND II clinical trial for patients who are suffering from tricuspid regurgitation. So that new replacement technology in the tricuspid position has gotten a lot of focus among clinicians, and there's a lot of enthusiasm about it. There's also clinical trial data that's being presented, both at ACC and at EuroPCR, and in fact we saw just recently, the EuroPCR schedule came out, and there are going to be some late-breaking announcements involving Edwards, including 30-day information on TRISCEND, which is the study for our EVOQUE tricuspid replacement valve. There will be some longer-term follow-up, 2-year follow-up, for CLASP, the trial for our PASCAL mitral valve repair technology, and some early data around CLASP in the tricuspid position from our early feasibility study, a 6-month trial data there. So there's a lot of information coming. There are some exciting new technology introductions that we've got. So we'll look forward to getting those communicated as soon as we're ready.

Great. And then a question on PASCAL and mitral. What I've heard from some physicians in Europe is that, look at the -- it looks like a great device, but doesn't quite have as much clinical evidence right now as MitraClip. I mean that will happen over time. So as you look at the outlook for PASCAL this year, I mean you guys have some specific guidance out there for mitral broadly, do you kind of buy into the fact -- or buy into that line of thinking that this probably isn't the year for a lot of upside potential to that guidance you laid out until you have a broader data set available for physicians? Does that resonate with you? Or do you think there's upside potentially for this -- for that product category this year?

Yes. It's a good question. I mean we're enthusiastic just about the prospect of doubling our growth in PASCAL and in TMTT overall in 2021. So that alone, we think, is pretty significant and an indicator that we're on the right path, both with the technology and the clinical trial data that does exist. So you're right, this is -- it's a much smaller data set than the competitor, but we've got more data coming and we're optimistic that it's going to be very positive data. The first -- next pivotal drop comes next year is the presentation of the CLASP IID study that we think leads to approval for the first time -- or first indication for PASCAL in the U.S. by the end of next year. So that will certainly help bolster this body of clinical evidence that we're just starting to develop. Overall, we like PASCAL a lot, and we like this new PRECISION system that we announced at our fourth -- excuse me, in our first quarter earnings call a few weeks ago. And PRECISION includes delivery system and the availability of both PASCAL and PASCAL Ace, which has a narrower profile than PASCAL. And so it's -- we're really poised, I think, for growth in PASCAL and, as well, the other therapies in our portfolio in TMTT.

And speaking of that, on the tricuspid side of things, just would love to get your latest take there, because Abbott, with their TriClip, we get to see those numbers, and they're kind of already on a $60 million, $70 million run rate after only a few quarters. So really exciting for -- kind of set of numbers for the market, I think. So I just would kind of like to get your updated thoughts on tricuspid and how your thoughts are evolving there.

Yes, we're positive about tricuspid because tricuspid is so massively undertreated right now relative to even mitral, certainly relative to aortic, but these patients who are suffering from tricuspid regurgitation really have a very poor quality of life. They are in and out of the hospital regularly. And now here, we've got the prospect of a catheter-based portfolio of treatment alternatives that can help address this disease. And so whether it's PASCAL in the tricuspid position or EVOQUE or tricuspid replacement technology, we think that we'll be able to bring solutions to these patients and to their treating physicians that will really be game changers.

Okay. We only have a couple of minutes left, but I wanted to ask on margins a little bit. From time to time, we've talked about your level of R&D spend. And obviously, it's -- given, like you said, you're a growth company and innovating in a lot of different areas, it's quite high relative to peers. At some point, I assume that R&D rate will be a bit more normalized, probably double-digit for as far as the eye can see, but at least a bit more normalized relative to where you are today. Is it too early to even be talking about a time when it's maybe low double digits instead of high double digits given all the trials that you guys have talked about? Or is the sheer dollar amount of spending at a level where R&D starts to be kind of leverageable a little bit over the next couple of years?

Right. So we do think that the spend in R&D will be leverageable. But certainly, right now, we sort of like where we are. And we're a couple 300 basis point premium to where our R&D was as a percentage of sales 4 or 5 years ago. But the reason is for a really good reason, and that is we've seen such good results from our technologies that we've been investing in, especially in the catheter-based area, so TAVR and TMTT, that we just keep investing because we think the prospects for positive results are there. And we think that bringing a portfolio approach to treat these different diseases is a strategic formula that is going to be successful, and it takes research and development investments to make that happen. About 1/3 of our R&D spend is in developing clinical evidence that really is fundamental to and instrumental to our ability to grow these technologies and these therapies once they get introduced. 2/3 of our spend is in just doing a lot of early stage research and development. So I start not with the arithmetic, but with the substance in the results that we're seeing from these strategic R&D programs that we're running.

Okay. And then just on any of the portfolio areas for you, is there anything kind of interesting or worth commenting on from a pricing perspective? Maybe on the surgical valve side? On the TAVR side? In different geographies? Anything changing on that front?

So in TAVR, not so much. We've got a pretty stable pricing globally in TAVR for quite a while. In surgical, pricing is changing because we're bringing to market new innovations that come at a higher price point. So if you look at technologies like our new INSPIRIS valve, which is really exciting, it's now the leading surgical valve in the world. We've introduced [ MISCEND ], now our new mitral valve surgery, into Japan. We're excited about that. And we're just beginning to introduce KONECT, the first-ever tissue -- fully-assembled tissue conduit, which includes the aortic valve, the root and the ascending aorta. So lots of great innovations and technologies coming in surgical as well. And that price point is at a premium to our historical products.

Okay. Great. Well, Scott, we're out of time, but I really appreciate your participation in our conference. Thank you very much, and we look forward to seeing you again live sometime soon hopefully.

Sure. It's our pleasure. Thanks a lot. Talk to you later.

Okay. Thank you. Bye-bye.