Edwards Lifesciences Corporation (EW) Earnings Call Transcript & Summary

Good morning. I'm Lawrence Biegelsen, the medical device analyst at Wells Fargo. It's my pleasure to host this session at our 2021 Healthcare Conference with Edwards Lifesciences. With us from the company, we have Scott Ullem, the CFO. Somewhere behind the scenes here is Mark Wilterding, Vice President of Investor Relations; and Oliver Moravcevic, also of Investor Relations. Apologize for mispronouncing your name, Oliver. In terms of the format, it's going to be a fireside chat. If anyone has a question they want me to ask on their behalf, please e-mail it to me. Scott, thanks so much for taking the time. I know it's quite early on the West Coast. So I really appreciate it.

Yes. We don't have the fire going yet here quite early in the morning in September, but we're happy to be here, Larry. And you and I talked before about how it'd be nice to do this in person, but this is a close second, and we're really pleased to be participating in the conference this year.

All right. It's our pleasure to host you. So Scott, unfortunately, we still have to start these calls with the -- a COVID question and people are interested to hear how the COVID resurgence has impacted demand and maybe if you can compare and contrast this to prior waves. I'm sure you heard Medtronic said they saw some softness in July and August, especially for procedures like TAVR that require an ICU stay. Any updates you can provide us?

Yes. I mean we're still -- we're observing the same trends that you are, and it's certainly a factor. It's a factor in some regions where hospitals are dealing with pretty sharp increases in ICU admissions. And it's a factor in terms of the patients and their confidence level and conditions in different regions. Vaccination certainly have helped inspire confidence and breakthrough cases are much less common than cases among unvaccinated people. But it's -- I guess it's certainly present and visible every day in the headlines, and it's a factor in our business as well.

Yes. I mean it looks like -- from the guidance, it looks like you incorporated a little bit some summer seasonality, some impact from COVID. By our math, it looks like you assumed some slightly lower growth in the second half than in the first half looking -- compared to 2019. So do you feel like you incorporated this into the guidance?

Well, we certainly incorporated what we thought back in July. And we're at a point now where we've seen this summer holiday season. You may be getting the same feedback I'm getting. Are you hearing that, Larry?

I am.

Okay. So we'll just keep talking, and maybe they'll fix it in the background. But no, look, we certainly saw the summer seasonality that we predicted we'd see, and we thought it would be a little bit more pronounced in 2021. And -- but what really we look at is right when you go back from Labor Day every year in the third quarter, we start seeing some really important weeks of the quarter. So this year is no exception. Now that people are back at work, kids back in school in most places, it makes -- you're sort of beyond the summer seasonality, and we'll see how that contributes to our ultimate third quarter results that we'll talk about next month.

That makes sense. So let's move on, Scott to TAVR. Where do you think you are in terms of penetration of low risk? How do you feel about being able to grow the TAVR business kind of at a -- an underlying double-digit rate beyond 2021?

Yes. No, we think we're still in the early innings, Larry. And keep in mind, we just got the low-risk approval in the second half of 2019. And then the world quickly got interrupted with COVID in the first quarter of 2020. And so we haven't really had a full runway here of treating patients at all risk categories, high, intermediate and low risk, and we're looking forward to being able to do that. It's one of the things that gives us confidence about the total addressable market growing to over $7 billion by 2024 and then continuing to grow beyond that. That gets you to something like a low double-digit CAGR between now and then, which is consistent with the way we've been growing. So we're really positive on the longer-term outlook.

And you received approval for a low risk in Japan in the second quarter, reimbursement, I think you expect in the third quarter. How should we think about growth in that market? And maybe can you tell us anything about how big Japan is today? I know you guys have been reluctant to really break out Japan.

No. We haven't broken out Japan by TAVR. Overall, it's probably 10% of Edwards' business. So it's meaningful for Edwards, and it's a meaningful opportunity for TAVR as well. There are just so many patients who are not treated. The treatment rate is still relatively low in Japan even compared to the U.S. and Europe. So it's a big opportunity. We did get low-risk approval. We did receive reimbursement for low risk in the third quarter. And so we're optimistic about where Japan is going over the long term.

And the reimbursement that you got there, it's consistent with like the prior reimbursement. So no change there?

No, consistent with our expectations, no different than what we've been planning. And again, this is so important, and we saw this in the U.S. as well where when there's this delineation based upon a patient surgical risk, it really limits patient access to the therapy to TAVR. And so removing that artificial distinction between high and intermediate and low risk and having all patients with access to TAVR and reimbursement is a really important shift, and we think it's going to help support long-term growth in Japan the same way it will in the U.S.

And Scott, the 10% number for Japan, that's overall Edwards, right?

That's total Edwards. Right.

Is it similar, do you think, for TAVR, like your total worldwide TAVR, Japan represents 10%?

Yes. We haven't gone that far. What I can tell you is that we think the treatment rate for patients with severe AS is lower in Japan than it is in the U.S. and in Europe.

Okay. That's helpful. I'll come back to TAVR in the pipeline, but I wanted to move on to TMTT. You've seen some good traction in the past few quarters despite the pandemic. What's driving the recent acceleration? And have you rolled out products like PASCAL ACE and PRECISION? And what's the reaction to those products been?

Yes. So let me answer the first -- the second part of your question first around PASCAL ACE and PRECISION. We're just in the early days of getting this introduced, and it's going to become the platform we use, both for treating commercial patients in Europe and treating patients in clinical trials in the U.S. But this PASCAL PRECISION system is really slick. It's a combination of an enhanced delivery system as well as both sizes of the PASCAL implant, the original PASCAL as well as PASCAL ACE. And altogether, it really is a nice offering for physicians to treat multiple different types of patients, multiple different sizes of patients with mitral and tricuspid regurgitation. So we're excited about that. In terms of clinical trial enrollment, it was really hampered in 2020. We really saw a negative impact. In fact, we paused enrollment for a while. You might remember back in the depths of COVID in the summer of 2020, that resumed in 2021. And so we were pleased to see patients coming back into the system to participate and get enrolled in these trials. There's a lot of support and interest in these clinical trials among the participating physicians and the clinical trial sites. Certainly, when there's interruption from COVID, then that impacts the clinical trials the same way it impacts our commercial treatment rates. And so we're watching that carefully and still working on trying to get these trials enrolled. It's a really important part of our future.

No. On the trials, people have been asking about PASCAL CLASP IID trial. You expect PASCAL approval in the U.S. in late '22, I believe. I mean it seems logical. We're going to see the data before approval. Any color? Is that first half, second half? Have you guys decided kind of what you're targeting for data release?

Well, we haven't announced yet when we think the data is going to be released. But yes, for sure, we'll see the data. You'll see the data before we get approval. And whether -- it's unclear whether that comes at ACC or EuroPCR, or TVT or some other interim event, but we're excited. And we're optimistic about the prospects of getting PASCAL, the first indication for treating patients with degenerative mitral regurgitation, and then we expect other indications to follow in the years ahead. But yes, next year will be a nice kick off to our practice in the United States.

Yes. And PASCAL ACE and PRECISION, you can roll that into that trial? Or will those be kind of supplements after approval?

No. PASCAL PRECISION System, including ACE will be part of the U.S. trials, both for IID, IIF and IITR.

Okay. And then tricuspid is an area, and I've told Mark, I think there's a lot of enthusiasm among physicians, especially for your EVOQUE product. And I guess my question is, do you still expect a late '22 or early 2023 approval in Europe for EVOQUE for tricuspid?

Yes. So that's probably the right time estimate, a little premature to pinpoint and historically have not been treated at least not for isolated tricuspid regurgitation. This is a real game changer. This is a real opportunity for physicians to be able to treat patients in a way that historically they just have not been able to.

And I know it's early, Scott, but what are some of the milestones we can look forward to next year? We already talked about the PASCAL CLASP IID data at some point in the year and EVOQUE approval. Any other milestones you'd highlight for 2022?

Yes. It's going to be a busy year. We've got other trials we'll continue to be enrolling. We'll have EARLY TAVR enrolled and will be in the follow-up period for those patients. We'll be in our progress trial for moderate risk patients, we'll be enrolling that, and as well as TRISCEND II, which is our EVOQUE tricuspid pivotal trial here in the U.S. in TMTT. We're still seeing a lot of really good support and tailwinds for our whole RESILIA suite of products in our Surgical Structural Heart business. And of course, a lot of activities going on in critical care with new technologies rolling out around that HemoSphere platform. So we're going to see a lot of new clinical trial data, clinical trial reports and just continued enrollment and growth in our business.

You touched upon one that I was going to ask about next EARLY TAVR. And I know Mark probably -- it probably bugs Mark, but I always look on ClinTrials.gov. And you guys have historically been very good about keeping those up to date. It's very helpful to us, obviously. And EARLY TAVR, it was recently updated and it says that the primary endpoint reads out December 2021. Doesn't sound like that's accurate because that would imply that we'd see the results next year. But you did mention a minute ago that it will be enrolled and in the follow-up period. So does that mean -- so enrollment ends this year, it sounds like and then it's a 2-year -- a minimum of 2-year follow-up. Is that the right way to think about it?

Yes. Let me be really clear about it. And we do keep ClinTrials updated whenever we have new information, we'll continue to do that. But we're still striving to get EARLY TAVR enrolled around the end of this year. There's a lot of alignment in our desire to do that and physicians interest in doing that. It's tough to predict exactly when we get the last patient in, but we're still intending to enroll that trial around the end of the year, and then we'll enter into that 2-year follow-up period. This trial is important, and we can talk more about that if you'd like, but that's the timing.

Okay. So no change, minimum of 2 years follow-up is what it says, I believe, online or what I've seen in slides. So it will take another 2 years for this to read out?

Yes.

Okay. Do you know offhand if there are like early stopping rules or interim analyses and things like that?

Yes. I mean it's -- the short answer is plan on a 2-year time line. And so if you just take -- say we get the trial enrolled by the end of this year and add 2 years, then you're talking about the end of '23. So at the earliest, you're talking about our ability to start treating asymptomatic patients by, call it, year-end 2024. So it's not really within that time line of the $7-plus billion TAM that we've talked about, which is one of the things that's exciting to us. As you get beyond the 2024 time period, we're looking at the prospects of being able to treat asymptomatic patients, with aortic stenosis and the whole moderate group of patients as well. So there's a lot of opportunity, and it's one of the reasons why we're so focused on getting this trial enrolled as soon as we can.

That makes sense. And the other ClinTrials.gov I'm going to ask -- posting I'm going to ask about only because it says it's a 2022 event is on the CLASP IITR. So that's for PASCAL pivotal trial for tricuspid regurgitation. I think I even checked the other day, it still says August 2022 for the primary endpoint time line. That sounds a little bit aggressive to me. Is that -- do you think -- is that possible that we might -- that trial might complete by August of 2022?

Yes. That's not -- we have not published the timing for TR or for CLASP IIF. So sometimes what gets put in clinical trials when you first post the trial ends up needing to get updated, and that one will get updated when the time comes. But no, we've not published timing yet for TR or IIF. They'll certainly trail completion and approval for degenerative mitral regurgitation.

Okay. And one other pipeline question, SAPIEN X4. I think you've said that you expect to launch the pivotal trial this year, at least I think that's what you said at the analyst meeting last year, and please correct me if I'm wrong. What's the status there? When might we see first-in-man data?

Yes. So you're right. We're still intending to start enrolling that trial in 2021. And that's another thing that's going to be happening in 2022 is seeing growth in enrollment in that trial for X4. You know how physicians are going to be really eager to talk about this. And so there won't necessarily be formal clinical trial results in 2022. But I wouldn't be surprised if we start seeing some case reports and some anecdotal discussion at major medical meetings in 2022 about that X4 trial.

I got it. Okay. That's helpful. And then turning to the P&L. 2022 question. Again, it's early, but obviously, Scott, it wouldn't be the Wells Fargo Healthcare Conference, if I didn't ask you about some of the puts and takes for 2022. And I don't know if it's -- maybe it's even more difficult this year because of the resurgence in COVID.

Yes. Well, this will be our annual tradition Larry of us buying some time until our investor conference in early December, we'll lay out all of our guidance for 2022. It's just premature at this point. It would be premature in a normal year, it's especially difficult in a COVID year to start talking about year-over-year growth rates for next year in light of the baseline now being interrupted as a result of COVID. But I mean, overall, we're really optimistic about where Edwards' prospects are. I mean even during COVID, we grew a little bit. And as we come out of COVID, we really think we'll get back on this growth trajectory that we've been on, where we're looking at $7 billion TAM for TAVR, a $3 billion TAM for TMTT by 2025. Surgical growing at somewhere in the mid-single digits through 2026 and then even more growth opportunities beyond that. So 2022 will be another year of growth we expect, and we'll talk more about the details in December.

How important is double-digit revenue growth for Edwards on an annual basis? I mean I think it was interrupted in 2020 by COVID. It seems like something that's pretty important to you and Mike.

I think it's just been a trend for over a decade now. We've ended up growing it double digits across the Edwards' portfolio. And we sort of like that track record. It's a little bit of an artificial metric, and it's not something that's really a formal goal or guidance. We grew 49% in the second quarter, but that's not really meaningful in light of the baseline from 2020. But no, it's something we think about. I mean overall, what we're really trying to do is deliver extraordinary growth relative to other companies in the medical device sector. And we think we've got all the capabilities and resources to do that with this portfolio of innovations that are already available and even more and broader indications that are going to become available in the years ahead. So we're pretty optimistic.

Anything -- putting COVID aside, anything on the gross margin, you could say. I think the gross -- FX has been a headwind this year. That rolls -- should hopefully roll off next year. Does that help your gross margin or the royalty to Abbott on PASCAL, do they kind of offset each other?

Yes. So well, let's dive in a little bit deeper. So everybody knows what you're talking about. So we've got these hedge contracts that work in an opposite direction of translation of sales outside of the U.S. So this year, we've had a benefit from FX in terms of OUS sales translated in at higher rates. It ends up impacting us negatively at the gross margin line because our hedge contracts are really at 100% profit. And so where there's less hedge income, even though there's more FX benefit on the sales line. We'll see how that washes out next year. We think it'll -- we'll still probably end up in the same range where we've been now like mid and moving up 70% range for gross margins. In terms of the rest of the P&L, we'll talk more about that in December as well.

I guess I'll push my luck a little bit here. On the operating margin, it's been about -- it's interesting when you look at the P&L, you see it's been about 30% since 2017, including the implied guidance for this year. That's a healthy operating margin. Do you see leverage? When can we see leverage? And what are your long-term goals?

Yes. We do expect that we'll see a gradually increasing gross margin rate. You're right. We've been around 30% for a while. There are no real structural impediments to an expanded EBIT margin, Larry. But what we found over the last several years is there are just so many good opportunities to continue to invest aggressively in R&D that we've been doing that. So our R&D as a percentage of sales has crept up to now 17% to 18% as we're enrolling these clinical trials across our TMTT and TAVR and even surgical and critical care franchises. And so we've prioritized investment for long-term top line organic growth over prioritizing, expanding our operating margin. And we think that's the right move, and we're going to continue to approach those decisions like that. Even with continuing aggressive investments and growth opportunities, we still expect we'll see some moderate expansion in that operating margin over time.

But you haven't given any long-term targets.

No. Other than just to say, incrementally, we expect to see it creep up over time. And the real reason is because we get some benefits of scale. So the back office, the administrative, the overhead type expenses we can control and toggle a lot more aggressively than we want to try to toggle other expenses where we're really investing in the long-term growth of Edwards.

And the tax rate, the same challenge every year. So we kind of have precedents to look at kind of how you've approached that in the last few years.

Yes. Well, tax rate is a different one just because of what's happening in Congress right now. So we get exposed to both the U.S. corporate income tax rate and the GILTI provision. And so we're hopeful that Congress ends up not taking aggressive action in this area. It's certainly impactful. We're a profitable company, both in the U.S. and outside of the U.S., and higher tax rate is not good. It can end up impacting our ability to hire new people to invest in growth platforms. And so we'd really like to be able to continue to do that. The other benefit to our tax rate has been this excess tax benefit, the accounting provision associated with the exercise of stock options by employees that's benefiting our tax rate by something like 5 percentage points just in 2021. And so that will continue to be a factor. It's less predictable because the amount of the benefit varies based upon the stock price and how many exercises there are but that's also been a contributor to this 11% to 15% tax rate range that we've been in. We'll be able to talk more about that at our investor conference depending upon what happens in Congress between now and December.

Not a lot of -- are you willing to say if the 28% domestic rate and the GILTI tax goes into effect, what Edwards' underlying rate would go up to? Not a lot of companies have been able -- willing to say it goes from X to Y.

Yes. I mean if you just kind of do an average right now, we're at 21%. If it goes up to 28%. And if GILTI goes up commensurate with what some of the discussions have been, it would be expensive, be something like 10 percentage points added to our tax rate. Based upon everything we're seeing from Washington, it seems unlikely that Congress is going to be so aggressive to jack up corporate tax rates that much. It would really impede growth across a lot of different sectors. But it's probably too early to give you a specific guidance, Larry, on how you can model that through our P&L. We really need to see more about what the impact is going to be what Congress decides to do.

The 10%, the base for that is your -- the reported tax rate that you have for this year, like that 11%, 12-ish or is it that underlying 14% to 17%?

No. It's the 11% or 12-ish. Yes.

11% or 12%.

Yes.

I appreciate that. I mean it's just good to understand directionally what that means, and I agree with your comments. I mean if you look Critical Care has done well under Katie Szyman, who's been in charge of that business now. Probably for 5 years, Scott, I can't remember how long, but it's done really well, high single digit kind of underlying growth. Is that how you see this long term?

Well, we haven't given long-term guidance for Critical Care, but you're right, we've had a really nice run in Critical Care where the business is growing meaningfully faster than other average medtech companies. And it oftentimes just gets overlooked within the Edwards portfolio with so much going on in TMTT and TAVR and the RESILIA platform in surgical. But we're optimistic about the technologies in Critical Care because bringing things like HemoSphere, our monitoring platform and all the related new technologies to physicians who are operating on patients and physicians who are treating patients in the ICU is really beneficial. And so we're going to continue to be investing in that business. We're continuing to run clinical trials for Critical Care now, which will also help adoption over time. But it's been a really cool story.

Yes. No, it's done well. And then one last question for the CFO, capital allocation. Any changes to the focus beyond structural heart. I think -- if I think back a few years ago, Mike used to talk about heart failure. It feels like based on the public commentary at the analyst meetings recently, I haven't heard heart failure devices as an area of focus.

Yes. Look, our key areas of focus are in our 4 business units. And the reason for that is because we think the growth opportunities are so large. And so just executing the playbook, implementing our strategic plans is, we think, going to be really impactful and generate substantial and impressive growth for the next decade plus. At the same time, we are always looking at adjacencies and areas where we can bring our valvular disease and our structural heart expertise to bear in other areas. We've made investments in other very early-stage companies. We've purchased options to buy other companies based upon their progress in developing new technologies and their progress in early clinical trials. And so we'll talk more about that. And as those investments end up coming to pass. But our big focus is really on our key current businesses.

That's helpful. One minute left, Scott. I'll give you the last word. Anything you want to highlight that emphasize or highlight that we didn't cover?

Well, we covered a lot. I just -- let me finish the answer to your question, though, about capital allocation because I think it's one of the real strengths of Edwards. We finished the second quarter with $2.6 billion in cash. We already bought back $400 million of stock in the first half, and we're going to continue to be very disciplined about making good use of capital, first in investing in our new growth platforms in R&D, then in making external investments and ultimately continuing to buy back stock along the way.

Perfect. Scott, really appreciate you getting up early to spend some time with us. Nice to see you.

No. It's our pleasure. Great to see you, too, Larry. Thanks, everyone else. Yes.

Bye. Have a great day.